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Konrad Yakabuski (Fernando Morales/The Globe and Mail)

Konrad Yakabuski

(Fernando Morales/The Globe and Mail)

KONRAD YAKABUSKI

This budget will keep Ottawa safe, dump on the provinces Add to ...

When Finance Minister Jim Flaherty rises to table his budget on Thursday, his tone will be self-congratulatory. The recession forced the Conservatives to disobey their instincts and boost spending through the downturn. But their grand plan to shrink the federal state is back on track.

Measures already announced by Mr. Flaherty will mean a significant reduction in federal spending in coming years. Before long, Ottawa will again have more revenue than it knows what to do with. It could even begin another round of tax cuts by the next federal election.

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To be sure, the Finance Minister will issue stern warnings about the need for further belt-tightening in the face of weak domestic growth and an unstable global economy. Barring a major external shock, however, Ottawa’s finances are sitting pretty as far as the eye can see.

Even Mr. Flaherty’s soon-to-depart nemesis, Parliamentary Budget Officer Kevin Page, has declared federal finances to be “fiscally sustainable” over the long term. Ottawa could increase annual spending by $25-billion today and still deliver balanced budgets in coming years.

This is nothing to sneeze at. Governments around the world have made promises they simply can’t keep. The U.S. government has $87-trillion (U.S.) worth of unfunded liabilities for health care and pensions. Millions of Europeans are already experiencing a painful reckoning after years of government as pyramid scheme.

Canadians can look to the future knowing their federal government has the wherewithal to meet its obligations. Generation Xers will wait a little longer to draw Old Age Security benefits – Mr. Flaherty has raised the eligibility age to 67 starting in 2029 – but they can rest assured that Ottawa has prepared for their retirement, even if they haven’t.

Unfortunately, the flip side of this flattering financial portrait is the disastrous state of most provincial budgets. The PBO estimates that, cumulatively, provincial and local governments would need to cut spending or raise taxes by $36-billion annually to achieve fiscal sustainability.

One reason provincial finances are so bleak relates to declining federal transfer payments. The Finance Minister will insist on Thursday that annual transfers for health care, postsecondary education and equalization will still increase in coming years. But they won’t grow fast enough to keep pace with rising health-care costs or improve underfunded universities.

Some provinces will suffer more than others. Starting next year, Mr. Flaherty will dole out health transfers to the provinces on a strictly per capita basis. The change will be especially beneficial to Alberta, which has a younger population than other provinces and is attracting tens of thousands of twentysomethings every year.

Many of the young heading to Alberta are leaving provinces with terrible demographics, further greying the age pyramid in Atlantic Canada and Quebec. Average annual health-care costs for Canadians between 15 and 64 amounted to $2,500 in 2010, according to the Canadian Institute for Health Information. Between 65 and 69, they hit $6,200; at 80 and above, $20,000.

Mr. Flaherty has also said that, starting in 2017, the increase in annual health transfers will only match nominal growth in GDP – instead of the 6-per-cent annual increase the provinces have been receiving. The Council of the Federation estimates the changes will mean $36-billion less in federal cash for the provinces by 2024.

Roll in the cap Mr. Flaherty has imposed on the growth of equalization payments, and paltry increases in transfers for postsecondary education, and you see how the very moves that have made the federal budget sustainable have contributed to the unsustainability of provincial finances everywhere east of Saskatchewan.

Perhaps Mr. Flaherty is doing the provinces a favour. The end of the federal gravy train is the stick. But the ability to experiment in order to deliver more cost-effective health care, free of federal meddling, is the carrot. It could produce a virtuous cycle of reform. Or the Finance Minister has set the stage for a vicious cycle of federal-provincial squabbling that the opposition will be only too happy to exploit. Quebec is already warning about the “return of the fiscal imbalance”; Ontario and the Atlantic provinces could join the chorus.

Mr. Flaherty’s budget will have a good story to tell, until you read between the lines.

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