Calls for ever higher federal transfers disconnected from economic reality

Elections always seem to eventually devolve into a Ping-Pong tournament of spending promises and spending requests and nowhere is that more evident than when it comes to the provincial calls for more federal transfers—especially health transfers.

It was only last spring that provincial premiers called for an increase in health transfers totalling $28 billion to bring Ottawa’s share of provincial health spending to 35 per cent. And then there’s always the call for other transfers, whether in the form of stabilization payments, infrastructure support, social transfers or equalization.

However, federal politicians should take care in what they promise provinces in the heat of the federal election campaign and what they eventually choose to deliver, given that federal intergovernmental transfers have been growing at a relatively healthy clip—even before the pandemic-induced surge. (And when adjusted for inflation and population, transfers have been growing at a much faster clip than GDP.)

In 2019-20, the federal government transferred $78.7 billion to the provinces and territories. Of this amount, $40.4 billion (51 per cent) was the Canada Health Transfer, another $14.6 billion (19 per cent) was the Canada Social Transfer and $19.8 billion (25 per cent) was equalization. The remaining 5 per cent (about $4 billion) was essentially federal transfers to support Territorial governments.

Given total federal spending that year of about $360 billion, these transfers represent about 21 per cent of federal spending, up from 13 per cent in 1997 (near the end of the federal fiscal crisis).

However, one measure—per person transfers, adjusted for inflation—remains the best way to see just how much federal transfers have increased. After all, this money is ostensibly transferred to the provinces to provide services for each Canadian.

In 1997, real per-person federal transfers to the provinces (2014 dollars) were under $1,000. By 2019 (pre-pandemic) that number had essentially doubled to more than $2000. Over this period, real per-person federal transfers grew at an average annual rate of 3.3 per cent.

True, some of this period coincided with the 6 per cent federal health escalator that reverted to the rate of GDP growth subject to a 3 per cent minimum in 2017, but it was a much faster growth rate than one might expect given Canada’s economic performance. Indeed, real per-person income in Canada did not double during this period.

Finally, from 1997 to 2019, real per-person GDP grew at an annual average rate (after inflation) of 1.6 per cent. To put it bluntly, Ottawa increased per-person federal transfers to the provinces at double the average annual growth rate of real per-person GDP.

The popular demand on the campaign trail, that Ottawa should continue to grow provincial transfers at a rate much higher than the growth rate for income and productivity in Canada, demonstrates either a complete disconnect with economic reality or self-absorption on a massive scale.