I'm going to talk a little bit about an aspect of fiscal federalism that is marked by much controversy these days, which is [Inaudible—Editor] health care.
Numerous provincial leaders in recent years have claimed that Ottawa has greatly reduced its cost-sharing for provincial health care. They claim that Ottawa currently pays only 21% of provincial costs, so they demand that federal transfers increase to 35%. As I will explain shortly, the provinces are wrong. Federal cost-sharing has not been reduced.
The extent of cost-sharing now is the same as it was in the mid-1970s. It's about 35% of provincial spending. The provinces err because they only consider the amount of cash that Ottawa gives them each year. They ignore the substantial cash value of the tax points Ottawa gave them in 1977.
I am familiar with change in federal cost-sharing. I was a health economist at McGill University for 40 years, beginning in 1968. When the changes in cost-sharing arrangements were negotiated in 1976, I was writing my book, The Canadian Health System, and following the negotiations very closely.
Additional funding for health care may well be justified now, but federal-provincial negotiations to decide amounts and modalities should be based on careful analysis, unhampered by erroneous provincial claims.
New spending will probably require additional funding from both levels of government. The provinces have not acknowledged this. They want Ottawa to foot the bill.
To understand why the provincial claims are wrong, one must be familiar with the changes in cost-sharing arrangements made in 1977. Prior to that year, federal cost-sharing was only for hospital and physician services. In 1976, for example, Ottawa paid 46% of provincial costs for these two services. Its payments were equivalent to 36% of total provincial spending.
Moreover, before 1977, federal transfers were composed entirely of cash. In 1977, Ottawa and the provinces agreed to reduce these cash payments and, by way of compensation, to transfer some federal tax points to the provinces. That is, Ottawa reduced its income tax rates, allowing the provinces to raise theirs. Thus, since 1977, federal cost-sharing, if properly measured, has had two parts, which are the cash payments and the increased provincial tax revenue from the transferred tax points. The provinces err because they consider only the first part—the cash payments.
Calculations I made several years ago show they are making a major mistake because the value of these tax points has been substantial. In 2005, 2006 and 2007, cash payments alone were 22% of provincial health spending, but when the value of the tax points is included, total cost-sharing was 34% of provincial spending. That's essentially the same as in 1976.
More recently, David Naylor, an important Canadian health care researcher and former president of the University of Toronto—and two co-authors—found that the same thing prevailed in 2019. The total federal transfers that year were 35% of total provincial spending on health care. Again, that is essentially the same as in 1976.
Thus, contrary to the provincial claims, Ottawa has not reduced its cost-sharing for health care. The provinces should stop making those claims. Although additional health care funding may well be justified, the necessary federal-provincial negotiations should be based on careful analysis, not hampered by erroneous provincial claims.