Flaherty’s non-negotiable terms fit health spending reality [UPDATED]

Finance Minister Jim Flaherty’s decision to lay down the law, rather than open up negotiations, on health care transfers from the federal government to the provinces might have been a tad undiplomatic. But there’s only so much anyone can say about the etiquette of federal-provincial relations without losing all contact with reality, and that leaves us with numbers, not niceties, to consider.

And the figures Flaherty put on the table look pretty big. He promises to maintain the current 6-per-cent a year pace of growth in health transfers to the provinces until 2016-17, and after that peg the annual hike to nominal gross domestic product growth, or the increase in GDP plus inflation. Projecting with confidence that far out is impossible, but you’d expect nominal GDP to grow by at least 4 per cent [check the update below].

So what Flaherty guaranteed is large annual increases for many years. Yet quite a few provinces are outraged. Is it only because he was heavy-handed in dictating, rather than dickering, over this major element in provincial budgets? If this is only about politesse, of course, it won’t amount to much. To gain public sympathy, the provinces will have to make a solid case that the new federal transfer track can’t possibly keep up with inexorably rising health costs.

That’s an argument many Canadians will be primed to accept. After all, we’ve been told for years that our aging population will inevitably turn into a crushing burden on an already strained health system. The problem with this argument is, however, that the data available so far don’t support it.

Consider some recent projections. Last year, the Organization for Economic Cooperation and Development forecast that an aging population between 2010 and 2025 will translate into increase in health spending in Canada equal to 1.9 per cent of GDP, or about $30 billion in 2010 dollars—about $900 per person. That’s real money but not overwhelming as it mounts over a 15-year period.

Could the OECD have it wrong? Sure. Time will tell. But recent history does not show any reason to assume the worst. The Canadian Institute for Health Information took a close look at the impact of an aging population on health spending in Canada and came to this conclusion:

“Analyses of the drivers of increases in public- sector health expenditures over the last decade showed that the contribution of aging has been relatively modest. To date, system-level cost drivers such as inflation and increased utilization have played bigger roles in health spending increases.”

Provincial health spending grew 3.9 per cent in 2010 and 5.2 per cent in 2009—below the “escalator” that’s been automatically increasing federal transfers by 6 per cent a year since the 2004 fed-prov health pact. Make no mistake: provincial health spending has generally grown faster than combined inflation and population growth. But the recent pace of growth is neither so punishing, nor the outlook for the future so daunting, as to make the transfer scheme Flaherty announced yesterday look unreasonable.


Early comments below suggest a healthy skepticism about my assumption for nominal GDP growth. I’m always hesitant to clog up a post with too many figures, but since it’s come up, the Parliamentary Budget Officer projects nominal GDP growth of 4.8 per cent this year, 2.6 per cent in 2012, 4.0 per cent in 2013, 4.5 per cent in 2014, 5.0 per cent in 2015 and 5.3 per cent in 2016. Private sector forecasts I’ve seen are in the same ballpark. Who knows? But we’ve got to go on something.