The federal government should not only cut its own departmental spending, it should also cut federal health transfers to the provinces.
To understand why the federal government needs to rein in transfers to the provinces, consider the growth in transfers for health care. Since 1997-98, the year the federal government finally balanced its budget after decades of persistent deficits, federal health transfers to the provinces increased at an average annual rate of 10.5%.
For comparison, the average rate of economic growth was 4.9% over that period, federal revenues grew at an average rate of 3.2%, and the rate of population growth and inflation was 3%. By any measure, the increase in health transfers has been unsustainable.
In fact, had the federal government simply increased health transfers to coincide with population and inflation growth, it would have saved $98-billion since 1997-98.
But what did Canadians get for all this money?
Remarkably, wait times from GP referral to treatment by a specialist were 53% longer in 2010 than they were in 1997. Wait times were also slightly longer to access critical technologies such as CT and MRI machines, and markedly longer for ultrasounds. In addition, almost 1.7 million Canadians aged 12 or older, 6% of the population, are still unable to find a regular physician.
Put simply, Ottawa sent $98-billion in excess transfers to the provinces while the health-care system continued to deteriorate.
In reality, the primary problem with our health-care system is not a lack of money; it's that the federal government discourages the provinces from experimenting with policies (i.e. competition in the financing of health care and cost sharing) that have been successfully employed in other developed nations with universal-access health care. And the provinces comply in part because they fear losing a substantial portion of their transfer revenue.
The federal government can solve two problems with one simple policy change: Reducing health transfers to the provinces. This would both help address Ottawa's fiscal situation and improve the health-care system. The key is to give the provinces more flexibility to experiment with different models of health-care policy. Revising the Canada Health Act to require universality (ensuring all citizens have health insurance coverage) and portability (ensuring citizens have insurance coverage when they travel and move within Canada), with all other requirements being eliminated, will give the provinces the necessary freedom to experiment.
For those not yet convinced, our own history provides the evidence.
The 1995 federal budget included a major reduction in the total amount transferred to the provinces. Transfers were not only reduced, but also reformed.
Prior to 1995, federal transfers for social services were based on federal-provincial cost-sharing. That is, the federal government paid up to half of the amount that provincial governments spent on social services and social assistance. The provinces decided on the amount of social services and social assistance spending, and simply sent the federal government a bill for half the cost.
The 1995 budget reformed federal transfers by moving away from federal-provincial cost-sharing to a block-grant approach in which the amount transferred by the federal government to the provinces did not depend on provincial spending.
The move to a block grant represented a significant step forward in allowing greater provincial flexibility and control of social service provision. It was now up to the provinces to determine where and how the transfer money was spent and it also meant that any expansion of programs or benefits would be paid for by the provinces exclusively.
Placing the financial responsibility for these programs squarely on the shoulders of the provincial governments led to a wave of innovation and experimentation among the provinces that greatly improved social services. Critically, rates of dependency on social insurance fell while labour-market participation improved, making Canadians much better off than they were prior to the change in transfers.
Unfortunately, Finance Minister Jim Flaherty has indicated the government has no plans to reduce federal transfers to other levels of government. He should reconsider. Even if Ottawa simply maintains per-capita health transfers over the next four years - that is, if it increases transfers at population growth plus inflation - it could save approximately $6.6-billion.
The bottom line is that transfers can be reduced while improving our provincially delivered health-care programs.