We need a Grand Bargain to save our public services

TheGlobeandMail.com – Opinions – Ottawa and the provinces should take a hard look at options such as tax swaps and European-style social insurance
August 9, 2010.  Joshua Hjartarson and Karim Bardeesy

Canada’s premiers missed a major opportunity at last week’s meeting of the Council of the Federation. They called on the federal government to protect the major transfers that help provinces fund health care and other programs, but, as a first volley, that call fell far short.

The premiers’ inclination to seek federal reassurance is justified. Ottawa is again posting large deficits, federal transfers expire in 2014, and provinces could fall victim to unilateral cuts to transfers as they did in the 1990s, when the federal government balanced its books by drastically reducing transfers at no apparent political cost to itself. This time, there will be less scope for provinces to make up the difference.

But Canada doesn’t simply need “protection” of current transfers. It needs a Grand Bargain, where greater, more transparent and more reliable federal funding is combined with a realignment of the way the provinces deliver those services, and of the whole fiscal relationship between the provinces and the federal government.

The arrangements are already insufficient. The Parliamentary Budget Officer, Kevin Page, notes that, at their current pace, federal transfers are failing to keep up with growing provincial costs.

Some provinces, especially Ontario, Quebec and British Columbia, are experimenting with solutions they hope will tame health-care spending. These fundamental reforms – to the way health professionals are paid and hospitals are funded, to drug plans – are some of the most aggressive public policy experiments under way in Canada.

But without a different and better partnership with Ottawa, it’s difficult for provinces to make the investments needed for these reforms to stick. Without more federal support – now stuck at 20 per cent of total provincial spending – current reforms could stall. New ones will not get off the ground.

The scramble to fund health care threatens to crowd out investment in all other areas of provincial jurisdiction. Perhaps none is more important for Canada’s long-term prosperity than postsecondary education. This, too, is funded in part by the federal government, through the Canada Social Transfer, and so is subject to the same uncertainty.

With prized programs at risk, what should the path beyond 2014 look like? The Council of the Federation can seek inspiration abroad. The principles that underlie any deal could be guided by a recent World Bank study that outlined international best practice regarding fiscal transfers. They should be transparent, predictable, promote efficiency and ensure that provinces have adequate revenue to fulfill their obligations while having the autonomy to facilitate experimentation. On adequate revenue, in particular, Canada is an international outlier.

But this isn’t just a call for more funding. The Council of the Federation needs to rethink its entire approach to funding social programs if they are to be sustainable.

The provinces and the federal government should take a hard look at options such as European-style social insurance, in which health and welfare spending are funded by payroll deductions that are split off from the regular income tax stream.

Tax swaps, whereby the federal government takes over corporate income tax and the provinces take in all sales tax revenue, are another alternative worthy of consideration. (This would also help avert a race to the bottom among provinces that have historically competed to set the lowest corporate income tax rate.)

Australia does all-in transfers, bundling federal health and social payments into a single funding package, that are then equalized according to each state’s need.

These are transformative ideas. Canada’s political situation, however, should embolden the premiers to pursue an open, more contentious discussion with the federal government and to set the stage for a Grand Bargain. An opinion poll commissioned by the Mowat Centre for Policy Innovation shows that, in every province except Quebec (where sentiment is almost evenly split), people feel they’re not getting fair treatment when it comes to federal transfers.

Elections are likely in six provinces by the end of 2011. Incumbents can start to campaign on getting a better deal from Ottawa, and they should prepare the ground for principled negotiations, for whichever new government is elected.

The alternative to an aggressive provincial strategy that lays out principles and best practices for a new deal on public services is more of the same: more short-term fixes, more side deals with individual provinces, and more arguments about the size of the escalator (or the annual increase from the federal government), which probably will be in the range of 3 per cent to 6 per cent but still fail to keep pace with costs.

Canada’s fiscal framework is complicated; its sunset in 2014 appears distant. To wait much longer gives the federal government more room to set the terms of debate and pursue a “divide and conquer” strategy that minimizes its obligations.

The provinces need to avoid this trap. The premiers, through the Council of the Federation, should take the opportunity to set the stage for wide-ranging negotiations. It won’t be easy. But it’s up to the provinces to revitalize the country and safeguard the public services that Canadians hold dear – services that Canadians ultimately look to the provinces to deliver.

Joshua Hjartarson is policy director of the Toronto-based Mowat Centre for Policy Innovation. Karim Bardeesy is an editorial writer for The Globe and Mail.

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