The upside of downloading

OttawaCitizen.com – opinion
December 3, 2011.    By Brian Lee Crowley, The Ottawa Citizen

The next time you hear provincial politicians saying Ottawa should not solve its fiscal problems by “downloading” to the provinces, reach for the salt shaker.

So-called downloading got a bad rap in the 1990s as Ottawa struggled to balance its budget, and did so in part by cutting transfers to the provinces to pay for things like health care and social welfare. Those cuts in transfers are what are now called downloading.

Today’s Finance Minister, Jim Flaherty, is struggling to reduce federal spending. He was, however, also a minister in Mike Harris’s Ontario government, and remembers cuts to federal transfers made fixing the province’s finances harder. He has promised this time Ottawa will not cut transfers. He is wrong to do so. Downloading was a hugely positive force in the 1990s, and Ottawa is making a mistake leaving it out of its fiscal tool box today.

To understand why, consider the greatest example of social program innovation in Canada in the last 20 years: welfare reform. By the mid-nineties the combination of a fiscal crisis and a worrying long-term rise in the number of Canadians on welfare set the stage for dramatic reforms.

Change began in earnest in 1995. The trigger was Paul Martin’s bold changes to the financing of social programs in that year’s federal budget, specifically a tough reduction in the amount of money given to the provinces to provide social assistance, and its transformation into a block grant. Not only would Ottawa not pick up a share of rising costs, but it would reduce the support it was already giving. Crucially, the reforms also gave the provinces more leeway in how welfare operated. Ottawa stopped trying to use its spending power to entice the provinces into a poorly designed national welfare system.

Most provinces cut benefits, particularly for single, employable people. Reform’s opponents caricatured this as balancing the books on the backs of the poor, but the changes were actually rooted in a growing understanding that when welfare benefits are too high, strong incentives are created to enter or remain on welfare. Many of the reforms were aimed at re-establishing a balance between welfare benefits and the income available to workers from low-paid work.

Another fairly common reform was to integrate welfare with provincial employment programs. In addition, a number of provinces worked to improve the administration of welfare, including reducing fraudulent claims.

Unsurprisingly, given the altered incentives created by Paul Martin’s restructuring of transfers, many provinces also reformed their welfare systems to focus on better results and controlling costs. But different provinces focused their attention on different things, tailoring reform to their local circumstances. B.C. focused on time limits on entitlements, Alberta on getting employable young people into work, and Ontario on workfare.

This is downloading at work. It was directly responsible for a wave of innovative experimentation by the provinces, freed from Ottawa’s poorly thought-out policy ambitions.

The success of these reforms was dramatic. By 2000, the number of welfare beneficiaries in Canada had declined to a little over two million (6.8 per cent of the population) from a peak of 3.1 million (10.7 per cent of the population). Welfare-related spending was better controlled, helping governments to balance their budgets. Most importantly, however, social welfare seemed to be achieving better results by getting more employable individuals into the job market and dealing with some of the more pressing reasons that caused people to consider welfare as an alternative to work. The happy outcome was that the number of people living in poverty in Canada declined strongly over the decade following the Liberals’ fiscal reforms.

These welfare changes would not have occurred without transfer reform at the federal level, reforms that changed fundamentally the incentives for provincial governments, making them much more accountable for their spending decisions and the consequences of poor program design.

In other words, we have downloading to thank.

Why didn’t reductions in transfers in support of heath care at the same time result in fundamental reform of our health-care system (apart from hospital amalgamations and other cosmetic changes)? Chiefly because Ottawa was unwilling to give the provinces the freedom to redesign health care that they were given to fix welfare. And yet health care is in exactly the same mess welfare was. Spending is rising far too quickly and we get poor value (i.e. in terms of queuing and access to doctors and medical technology) for these vast sums when you compare Canada to other countries with public health-care systems such as Sweden, Switzerland, France and Germany.

We could, and should, do better. But we won’t until Ottawa stops letting the provinces off the hook through rising federal transfers that only delay the day of reckoning. Cutting transfers plus freedom to experiment is the magic formula. If that is downloading, bring it on.

Brian Lee Crowley is managing director of the Macdonald-Laurier Institute, an independent non-partisan public policy think tank in Ottawa: macdonaldlaurier.ca.

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