Budget Bulletin: Federal Transfers

The federal government continues to erode necessary funding that the province needs for critical health care and social programs. The federal government's one-time injection of funds into the health-care system has been far less than sufficient and more than offset by dramatic reductions in equalization payments to the province.

EQUALIZATION REDUCTIONS FUND HEALTH-CARE SUPPLEMENT
The federal government claims it is meeting provincial needs by adding dedicated health-care funding through the Canada Health and Social Transfer. In actual fact, the $58 million in additional funding that Nova Scotia received as its share of the $2 billion promised by the federal government for health care has been more than offset by federal reductions in our equalization entitlements (paid to the least-wealthy provinces). In fact, national federal savings through equalization in 2003-04 were more than enough to fund the one-time additional $2 billion in health-care dollars directed to all provinces, including the wealthy provinces of Ontario and Alberta.

The fiscal ability of Nova Scotia to raise revenues from its own sources remains below the standard five provinces used for equalization purposes. Despite this fact, the federal government continues to limit the fiscal resources that it commits under the equalization program. Historically, limiting the cost of the equalization program has been justified as necessary given that the federal government was grappling with high budget deficits. In an era of consistent federal surpluses, both today and into the future, restrictions on the equalization program are unacceptable.

Equalization-receiving provinces continue to seek restoration of a national average standard for equalization purposes. The removal of this standard in the early 1980s continues to cost Nova Scotia more than $130 million a year in reduced entitlements. As well, the federal government has been called on to restore full revenue coverage under the formula. The unilateral removal of 50 per cent of provincial user fees from the formula in 1999-2000 has resulted in an annual loss of over $400 million nationally and $40 million per year for Nova Scotia. The deficiencies of the equalization formula are continuing to limit Nova Scotia's ability to have sufficient fiscal resources to provide comparable levels of essential programs at comparable tax rates -- a commitment by the federal government under the Constitution.

HEALTH AND SOCIAL TRANSFER REDUCTIONS
In addition to concerns under the equalization program, the federal government's recent one-time supplement of $2 billion for health care under the Canada Health and Social Transfer (CHST) does not reverse a decade-long practice of underfunding health and social transfers to the provinces. The introduction of the CHST in 1996-97 dramatically reduced federal support for key social programs. Unlike previous federal transfer programs, the CHST redistributed funding amongst provinces on an equal per capita basis. As a result of this reallocation, millions of dollars have been directed away from the poorest provinces and into the richest provinces. The funding formula also does not reflect the differences in costs faced by provinces in the delivery of these essential services.

As a result of federal cost-cutting measures to critical social programs through the 1990s, federal support for health and social transfers is less than it was a decade ago. From 1992-93 to 2002- 03, the federal government provided no increases in per capita support for health care, social services, or post-secondary education. Meanwhile, provincial spending on these programs has increased from $2,711 per capita to $3,514 per capita, an increase of $803 per capita.

Nova Scotia's requirements for federal health-care funding are much greater than current transfer programs acknowledge. The province's incidence of chronic illnesses and its older population result in an above-average burden on the health system. The equal per capita funding formula of the CHST and the inadequacies of equalization transfers to the province ignore these circumstances, and Nova Scotia is left without adequate resources to manage its cost pressures.

MAINTAINING A COMPETITIVE TAX ENVIRONMENT
The federal government has suggested that Nova Scotia should raise income taxes to make up the shortfall in health-care funding. Uncompetitive tax rates discourage investment and drive talented young Nova Scotians away in search of better opportunities. The government of Nova Scotia is committed to maintaining a competitive tax environment while also maintaining public services. This cannot last however, without renewed federal support. The federal government must reinvest in Nova Scotia by strengthening the equalization program, including a return to the 10-province standard of fiscal capacity. At the same time, the federal government must bear its share of health care and social program costs through a long-term and stable funding commitment.

NOTE: For further 2004-05 budget information, see the Department of Finance website at www.gov.ns.ca/finance .