Provinces should be cautious about cost-sharing agreements with Ottawa

According to Premier Danielle Smith, Alberta will withdraw from the federal government’s dental care plan by 2026 mainly because the plan would duplicate coverage already provided to many Albertans (although she plans to negotiate unconditional funding in lieu of being in the program). Indeed, all provinces should be wary of entering into such agreements as history has shown that Ottawa can reduce or eliminate funding at any time, leaving the provinces holding the bag.

In the 1990s, for instance, the federal government reduced health and social transfers to the provinces amid a fiscal crisis fuelled by decades of unrestrained spending and persistent deficits (and worsened by high interest rates). Gross federal debt increased from $38.9 billion in 1970/71 to $615.9 billion in 1993/94, at which point debt interest costs consumed roughly $1 in every $3 of federal government revenue.

In response to this debt crisis, the Chrétien Liberal government reduced spending across nearly all federal departments and programs. Over a three-year period to 1996/97, health and social transfers to the provinces were 51 per cent ($41.0 billion) less than what the provinces expected based on previous transfers. In other words, the provinces suddenly got a lot less money from Ottawa than they anticipated.

This should serve as a warning for the provinces who may find themselves on the hook for Ottawa’s big spending today. In the case of dental care, an area of provincial jurisdiction, the Trudeau government has earmarked $4.4 billion annually for the provinces on an ongoing basis. However, any change in federal priorities or federal finances could swing the financial burden from Ottawa to the provinces to maintain the program.

The current state of federal finances only heightens this risk to the provinces. The federal government has run uninterrupted budget deficits since 2007/08, with total federal debt climbing from $707.3 billion in 2007/08 to a projected $2.1 trillion in 2024/25. The current government—or perhaps a future reform-minded government focused on balancing the budget—could reduce transfers to the provinces.

The Trudeau government has committed to significant new funding in areas of provincial jurisdiction, but provincial policymakers would do well to understand the risks of entering into such agreements. Ottawa can unilaterally reduce or eliminate funding at any point, leaving provinces to either assume the unexpected financial burden through higher taxes or additional borrowing, or curtail the programs.