Federal Financial Support to Provinces and Territories: A Long-term Scenario Analysis

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Summary
This report provides a long-term scenario analysis of the three largest federal transfers:  Equalization, the Canada Health Transfer and the Canada Social Transfer.

Equalization

  • Based on our long-term projections and under the status quo structure, fiscal capacities will not be equalized across provinces when the growth in Equalization payments is capped at nominal GDP growth.
  • That said, removing the GDP growth cap would have only a marginal long‑term impact on federal or subnational sustainability.
  • Changes to the rate of resource revenue inclusion affect the distribution of Equalization entitlements to a maximum of (+/‑) 0.4 per cent of GDP in receiving provinces, except in Newfoundland and Labrador (1.8 per cent of GDP).
  • Removal of the Fiscal Capacity Cap could affect the distribution of Equalization entitlements by as much as 1.7 per cent of GDP in Newfoundland and Labrador.

Canada Health Transfer (CHT)

  • Similar to Equalization, based on the status quo, growth in the CHT envelope is limited to growth in nominal GDP.
  • If CHT payments were to grow in line with provincial and territorial health spending, the federal fiscal gap would deteriorate by 0.3 percentage points of GDP. Subnational fiscal gaps would improve by as much as 0.7 per cent of GDP in Prince Edward Island.
  • If the CHT were to cover 25 per cent of provincial health spending, the federal fiscal gap would deteriorate by 0.5 per cent of GDP. Subnational fiscal gaps would improve by as much as 1.4 per cent of GDP in Newfoundland and Labrador.

Canada Social Transfer (CST)

  • Under the status quo, growth in the CST envelope is limited to 3 per cent annually.
  • If CST payments were to grow in line with provincial and territorial education and social spending, the federal fiscal gap would deteriorate by 0.1 per cent of GDP. Provincial and territorial fiscal gaps would improve marginally.

By removing the growth caps for Equalization, the CHT and CST, the federal government could more effectively address fiscal disparities among the provinces and maintain its financial support for health care and social programs over the long term, without putting federal finances on an unsustainable path. That said, these changes would not be sufficient to put most provinces on a sustainable fiscal path.

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