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Library of ParliamentBibliothque du ParlementTHE CANADA SOCIAL TRANSFER: RETROSPECT AND PROSPECTJames GauthierSocial, Health and Cultural Affairs Section Parliamentary Information and Research Service14 July 2011NOT TO BE PUBLISHEDProjects prepared by the Parliamentary Information and Research Service are designed in accordance with the requirements and instructions of parliamentarians making the request. The views expressed should not therefore be regarded as those of the Parliamentary Information and Research Service nor of the individual preparing the project. cash transfer by provincial/territorial governments and stakeholders, the federal government instituted a cash floor of $11 billion for 1997. In 1998, the cash floor was raised to $12.5 billion and extended until 2002-2003.Despite the added flexibility for provinces/territories introduced through the CHST block fund, the consolidation efforts of the federal government were met by provincial/territorial governments by strong opposition. Many saw the reductions in federal support as exacerbating issues related to the sustainability of health and social programs.D. Renewal of Federal Support for Health and Social ProgramsAlong with the elimination of annual federal budget deficits in the latter part of the 1990s and in part to respond to stakeholder concerns, the 1999 federal budget announced that over the subsequent five years an additional $11.5 billion would be injected in the CHST, specifically targeted for health care, and allocated on an equal per capita basis. Of the $11.5 billion, $8 billion would be paid through future increases in the CHST and the additional $3.5 billion would be provided as an immediate one-time supplement for CHST from funds available that fiscal year. By 2001-2002, due to these funding increases, the level of federal support for health care would have returned to its level before the application of fiscal restraint measures in previous years.Following the 1999 budget were a series of First Ministers meetings primarily on the subject of health care, but which also included provisions for PSE and support for children. Provinces and territories were concerned with both the rising costs of providing public health insurance in Canada as well as the effect of the reduced levels of cash transfer payments under the CHST that had been a result of the federal fiscal restraint of the early 1990s. At each of the meetings, FPT governments came to agreements that increased the level of federal cash transfers for health care, and to a lesser extent PSE and support for children, in return for provincial/territorial commitments on renewal and reform of their existing systems. 2000 Agreement on Health Renewal and Early Childhood Development $18.9 billion over five years would be injected into the cash component of CHST transfers;- $2.2 billion would be allotted to early childhood development; and$2.3 billion would be invested in the following three targeted priorities: $1 billion was placed into a Medical Equipment Fund; $800 million over four years was allocated to a Health Transition Fund; and $500 was invested immediately to fund the development and adoption of health information technology. 2003 Accord on Health Care Renewal7 Based mainly on recommendations provided in various major studies on the need for health care reform in Canada,Department of Finance Canada, Federal Transfers in Support of the 2000/2003/2004 First Ministers' Accords. Based mainly on recommendations provided in various major studies on the need for health care reform in Canada,Department of Finance Canada, Federal Transfers in Support of the 2000/2003/2004 First Ministers' Accords. Ibid.; and Department of Health Canada, 2003 First Ministers' Accord on Health Care Renewal. Although not related to federal support for PSE and other social programs, the federal government decided to hold another First Ministers meeting focused solely on health care, which built on the agreements reached in 2000 and 2003. Federal transfers to the provinces and territories in support of health care were further increased as a result of the 4 10-Year Plan to Strenathen Health Care. This initiative committed the Government of Canada to an additional $41.3 billion over 10 years in funding to provinces and territories for health care, including $35.3 billion in increases to the CHT, $5.5 billion in wait times reduction funding, and $500 million in support of diagnostic and medical equipment. Most notably: State of the Health Care System in Canada: Final Report of the Standing Senate Committee on Social Affairs, Science and Technology (Kirby Report, 2002); and Commission on the Future of Health Care in Canada: Building on Values: The Future of Health Care in Canada (Romanow Report, 2002). and building on the September 2000 agreement, in February 2003First Ministers reached a new Accord on Health Care Renewal. To meet its commitments under the new Accord the federal government invested $34.8 billion over the subsequent five years. The CST was first proposed in the 2003 Accord, effective 1 April 2004, when the CHST was divided into two separate transfers: one specifically for health care, the CHT; and one for social programs, the CST. In that year, the CHT accounted for 62% of the value of the former CHST, with the CST making up the remaining 38%.EVOLUTION OF ACCOUNTABILITY FOR MAJOR FEDERAL TRANSFERSMajor federal transfers to provinces and territories are deemed by the Auditor General of Canada to be largely unconditional, insofar as recipient provinces and territories can spend these payments according to their own priorities, and are not obligated to report to the federal government on how they spent the transferred funds or what effect that spending had.Auditor General of Canada, "A Study of Federal Transfers to Provinces and Territories； Chapter 1 of 2008 Report of the Auditor General of Canada to the House of Commons, December 2008.Major federal transfers to provinces and territories are deemed by the Auditor General of Canada to be largely unconditional, insofar as recipient provinces and territories can spend these payments according to their own priorities, and are not obligated to report to the federal government on how they spent the transferred funds or what effect that spending had.Auditor General of Canada, "A Study of Federal Transfers to Provinces and Territories； Chapter 1 of 2008 Report of the Auditor General of Canada to the House of Commons, December 2008.As major federal transfer arrangements have evolved, so too have reporting and accountability frameworks. Over time, more emphasis has been put on public accountability. It is the federal government's position that provinces and territories are best placed to determine program priorities and implement programs in response to them. As a result, the federal government notes that provinces and territories are directly accountable to their residents for their use of federal transfer funding. In relation to the CST, as with other major federal transfers, three fundamental accountability relationships exist:1. Accountability of FPT legislatures to citizens for the implementation of its programs.2. Accountability of the executive branch to the elected legislature for the expenditure of public funds according to the purposes approved by the FPT legislatures.3. Mutual accountability between the executive branches at the FPT levels.It can also be observed that the various accountability relationships that have existed between orders of government have differed in their configuration, depending on the regime in place. These include: Administrative accountability, typical of cost-shared conditional grants, in which the monitoring, reporting and some of the enforcement activities are mainly located in the bureaucracies of the FPT governments. The primary instruments of accountability are statutes enacted by FPT legislatures and bilateral intergovernmental agreements, in which the provincial/territorial governments commit to enacting legislation that conforms to the criteria (i.e., standards or conditions) in the federal statute and to respect its reporting requirements, and the federal government commits to transferring money once the provincial/territorial legislation is in place. Political accountability, such as through block transfers for health care and the associated criteria and conditions of the Canada Health Act, in which administrative monitoring, such as with the regime noted previously, is replaced with monitoring and enforcement by the political executive.The standard setting process is a unilateral one in that the criteria are set out in federal legislation with no requirement of a minimum consensus among provinces/territories. In cases where a province/territory is found to be in violation of the terms stated in the federal legislation, enforcement is carried out through a withholding of federal funds.19 Public reporting accountability, typified by the multilateral intergovernmental agreements covering health care and programs for children concluded in the era of the Social Union Framework Agreement. The emphasis is on the accountability of the executive branch at both levels to their respective publics, although the primary relationship is between the executive (Cabinet) branches at the FPT levels. These types of agreements often include enforcement through a formal dispute resolution process. Multilateral framework agreements set out the mutual obligations of the governments to each other and to their publics, with annual public reporting as the mechanism for monitoring performance, although funding is not tied to meeting the reporting requirements.KEY ISSUES FOR RENEWAL OF THE CST IN 2014During a Council of the Federation meeting held in Winnipeg in August 2010, Canada's provincial/territorial premiers reached a consensus that was meant in part to help guide the renewal of major federal transfers. They agreed that: ''Ongoing, stable and predictable federal transfers are necessary to sustain economic growth. Premiers support the federal governmenfs commitment to protect major transfers to other levels of government in support of health care, social services and equalization. Premiers encourage the federal government to work with the provinces and territories in renewing these arrangements which are due to expire in 2014."2° The Council of the Federation, “Premiers Workina to Sustain Economic Recovery,” News release, August 2010.During a Council of the Federation meeting held in Winnipeg in August 2010, Canada's provincial/territorial premiers reached a consensus that was meant in part to help guide the renewal of major federal transfers. They agreed that: ''Ongoing, stable and predictable federal transfers are necessary to sustain economic growth. Premiers support the federal governmenfs commitment to protect major transfers to other levels of government in support of health care, social services and equalization. Premiers encourage the federal government to work with the provinces and territories in renewing these arrangements which are due to expire in 2014."2° The Council of the Federation, “Premiers Workina to Sustain Economic Recovery,” News release, August 2010.That provincial/territorial position is roughly in line with the latest known position of the Government of Canada, under the leadership of Prime Minister Harper, as articulated through Budget 2007. As explained in Budget 2007, the CST was put on a long-term, predictable path, and made more transparent and fair, by:Finance Canada, 丁he Budaet Plan 2007、19 March 2007, pp. 120-121. Extending legislated funding to 2013-2014, putting it on the same long-term legislative track as the CHT, as well as for Equalization and Territorial Formula Financing (TFF). Increasing cash payments under the CST through an annual 3% escalator, starting in 2009-2010, to ensure predictable and sustainable increases broadly in line with population growth and inflation.As well, Budget 2007 modified the CST in the following ways: Federal transfer support within the CST was notionally allocated based on current provincial and territorial spending patterns and existing agreements, for each priority area - post-secondary education, social programs and support for children - to enhance the transparency of federal support for shared priorities. The cash component of the CST was allocated on an equal per capita basis, starting in 2007-2008.Although the federal principles established through Budget 2007 for allocating CST funding to provinces and territories are likely to be maintained in upcoming FPT discussions for renewal of the CST and other major federal transfers beyond 2013-2014, the federal government may be open to discussions in relation to unfulfilled platform pledges of the Conservative Party of Canada (CPC). In particular, both the CPC and several provincial/territorial governments agree on the need for the following:See Conservative Party of Canada, Policy Floor Resolutions: Stream 人 一 Canada's Social Fabric、2011 Convention, Resolutions A-046 and A-047, 10 June 2011. See also, for example, Finances Quebec, 2009 Budget Plan, Section G, 19 March 2009, pp.G17-G18. FPT negotiation on the creation of an independent major federal transfer targeted to PSE, through the reallocation of existing CST funding notionally allocated to PSE; anddistributing the CST cash transfer to provinces and territories on the basis of need(e.g., the numbers of enrolled students), rather than on the existing equal per capita basis.A. Targeted Federal Support to Provinces and Territories for PSEAs mentioned above, through Budget 2007 the federal government created notional allocations for PSE support within the CST. By 2013-2014, roughly one-third of the CST will be provided to provinces and territories in support of their PSE programs.Although the identification of federal transfer support for PSE has been welcomed by stakeholders, as federal funding remains notional, provinces and territories are free to allocate total CST funding according to their own priorities. As such, accountability mechanisms among FPT governments remain limited as provinces and territories are not required to report on how they use CST funding to support their priorities for PSE. Forthcoming discussions among FPT governments may therefore include considerations on how to make federal support for PSE, as well as other elements of the CST, more accountable and transparent.B. Allocating CST on an Equal-Per-Capita vs. Need BasisThe federal government and other experts justify the move to equal per capita cash by proposing that this removed an implicit mechanism within the CST that compensated for fiscal disparities among provinces and territories; an issue that is argued to be more appropriately addressed solely through the Equalization program.Some academics and the less prosperous provinces/territories maintain, however, that while an equal- per-capita transfer may appear equitable, it may not be so in practice since it does not match resources with needs. They propose that factors such as demographics and density, for example, should be considered.In response to this view, the federal government and some experts note that one of the challenges to determining an appropriate needs-based allocation is the complexity in attempting to account for the wide range of factors that could affect provincial/territorial health and social program costs, including PSE.X Given the disparity of opinion, negotiations on CST renewal are likely to include considerations on the appropriate allocation method.C. Additional Funding for the CSTIn the lead-up to efforts to restore fiscal balance among FPT governments in 2006, provinces and territories had been calling for the federal government to provide an additional $2.2 billion, as a first step in restoring funding for social programs to 1994-1995 levels, rising to an overall increase of $4.9 billion to account for inflation.Senate, Special Committee on Aging, Proceedings, 2nd Session, 39th Parliament, 26 November 2007, 1:37-1:53.In the lead-up to efforts to restore fiscal balance among FPT governments in 2006, provinces and territories had been calling for the federal government to provide an additional $2.2 billion, as a first step in restoring funding for social programs to 1994-1995 levels, rising to an overall increase of $4.9 billion to account for inflation.Senate, Special Committee on Aging, Proceedings, 2nd Session, 39th Parliament, 26 November 2007, 1:37-1:53. " See, for example: The Council of the Federation, Reconciling the Irreconcilable: Addressing Canada's Fiscal Imbalance, Advisory Panel on Fiscal Imbalance, March 2006, pp. 73-75. The choice of 1994-1995 as a benchmark year reflected the level of funding for social programs just prior to cutbacks in spending introduced by the federal government in the mid-1990s.The methodology behind the request to restore funding in nominal terms compares the 2005-2006 level of funding for PSE, social assistance and social services under the Canada Social Transfer (CST) to the corresponding level in 1994-1995. In 1994-1995, federal support earmarked for PSE was provided through EPF and federal support for social assistance and social services was provided through the Canada Assistance Plan (CAP), a 50/50 cost-sharing cash transfer. The notional EPF federal cash transfer for PSE in 1994-1995 was approximately $2.7 billion and funding through CAP was approximately $7.9 billion, for total support of $10.6 billion. In 2005-2006, funding for PSE, social assistance and social services was provided through the CST. The CST provided $15.8 billion in support, including $8.4 billion in cash and the balance through a tax point transfer. Comparing the EPF/CAP cash amount for 1994-1995 to the 2005-2006 level of cash funding through the CST left a gap of approximately $2.2 billion. Comparing the inflation-augmented EPF/CAP cash level of $13.3 billion to the 2005-2006 CST cash level of $8.4 billion left a gap of approximately $4.9 billion.Table 2 - CST Cash Gap (billions of dollars)1994-19952005-20062010-20112013-2014EPF-PSE/CAPNominal*Inflation-augmented*10.610.610.613.310.614.510.615.4Actual CST cash*8.411.212.2GAP Nominal Inflation-augmented2.24.9-0.63.3-1.63.2* Value of the transfer in fiscal year 1994-1995.Estimate of what the value of the transfer would have been if it had grown by the rate of inflation over time (Note: Fiscal year 2013-2014 derived assuming annual average inflation of 2% after 2010-2011).* In current dollars.Source: Table prepared by the author using data obtained from Department of Finance Canada (CST) and Bank of Canada (inflation).Although the federal government responded to the first request in relation to restoration of funding in nominal terms through new investments provided in Budget 2007, stakeholders have observed that the latter, inflation-augmented benchmark has yet to be attained. If provinces and territories were to continue to press the federal government for restoration of funding to take account of inflation and assuming an average inflation rate of 2% over the next few years, the CST would need to reach some $15.4 billion by the end of legislated funding for the CST in 2013-2014, leaving a gap of $3.2 billion from the actual legislated funding level in that year.D. Flexibility vs. AccountabilityIn general, most observers agree that the federal government's role in influencing provincial/territorial social programs has become more restricted than it was during the post-war period, when cost-sharing arrangements included conditions on the use of matching funding and explicit government-to- government a