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Jeffrey Simpson (Brigitte Bouvier For The Globe and Mail)

Jeffrey Simpson

(Brigitte Bouvier For The Globe and Mail)

JEFFREY SIMPSON

Health spending sanity, or just a hiatus? Add to ...

Are we fooling ourselves? Or are we irrevocably getting health-care spending down to levels that make sense?

On the answer hangs the future of provincial governments’ finances. If the answer is that, yes, the much smaller increases of the past two years herald a permanent shift to spending increases of 2 or 3 per cent, then governments can breathe a little easier. If the answer is that, no, this is just a hiatus before spending rises again, then provinces will be in the fiscal soup.

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For 2012 and 2013, health-care spending rose 2.7 and 2.5 per cent. Factor in inflation and population growth, and health-care spending actually dropped in real terms by 0.1 per cent and 0.2 per cent.

Contrast this with the previous 10 years, when health-care spending rose on average about 7 per cent a year, way above inflation and population growth. Something had to give, and it did, in the form of reduced absolute spending or slower increases in spending on other provincial government programs.

Those 10 years represented policy gone wrong. That money was supposed to “buy change.” It didn’t.

According to the Canadian Institute for Health Information, about half of it went to physician fee increases. These went up, on average, 3.6 per cent a year. Unionized nurses and hospital staff saw average wage gains of 3.4 per cent per year between 1998 and 2008, way above inflation. People in the system got paid better, but the system itself did not improve much.

What would happen if these past two years of restraint were just a pause? What’s the risk? The Canadian Institute of Actuaries wanted to know. It just released a long study on health-care sustainability.

Now, remember that actuaries make assumptions. Some won’t change much, such as demography. Others will change, as governments make new decisions, technology invents new things and social mores evolve.

Actuaries tell us what to watch for in the long term. So the institute warns that if health-care spending were to rise at 3.5 per cent a year – above where it’s been for two years, but still well below where it was the previous decade – the share of provincial operating budgets devoted to health care will rise to 69 per cent in 2037 from about 44 per cent today.

Sixty-nine per cent. Imagine your province’s budget being that distended. What would be left over? Every provincial government, regardless of political stripe, will be under pressure to raise taxes, cut spending on everything else and/or restrain health budgets. Otherwise, they will be in that soup.

They’re in it regardless. The Harper government is cutting transfers to the provinces for health-care from 6 per cent to about 4 per cent after next year. That doesn’t sound like much, but according to the Parliament Budget Office, it’s the major reason why provincial budgets are not “sustainable.”

Then there’s aging. It will add perhaps 1 per cent to the rising costs of health care, but leave fewer people in the full-time work force to pay for it. The Canadian Institute of Actuaries, the PBO and the federal Finance Department all believe aging will reduce the long-term growth of the Canadian economy to 1.5 to 2 per cent a year for the next quarter of a century, compared to 2.5 to 3 per cent for the previous 25 years.

Slower growth plus higher expenditures means trouble for all provincial budgets, with the worst reserved for the likes of Atlantic Canada and Quebec, with populations that are aging and growing slowly, if at all.

More than any other factor, the permanence of the current situation will determine whether provinces’ financial situations will be merely very tight – or really awful.

 

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