The Conservative government is hinting that it is prepared to extend large increases in health transfers to the provinces after the current deal expires three years from now.
In its fall fiscal update, the government is projecting a balanced budget by 2016 even if it has to maintain health and social transfers at current growth rates. That assumption is sure to be seized by Canada's provinces and territories, who are concerned with what might happen when current deals on health care, social spending and equalization expire in 2013-14.
It also represents a shot across the bow to the federal Liberals, who have been suggesting that the next election will be partly fought on which party Canadians should trust to renegotiate the health-care deal with the provinces.
"The economic and fiscal outlook for Canada remains very positive," Finance Minister Jim Flaherty said in a speech Tuesday to the Mississauga Chinese Business Association at the Mississauga Convention Centre.
Public-opinion surveys have shown that while the economy remains a top-of-mind concern among Canadians, health care is rising again as a priority issue. The current arrangement ties equalization payments to economic growth, the social transfer rises 3 per cent a year and the health transfer is pegged at 6-per-cent annual growth.
When asked, Mr. Flaherty moved to downplay expectations of further increases of that scale.
"We all know what the rate of inflation is these days, which is relatively modest. We also know what the economic growth is these days, which is moderate," he said, insisting the question is not urgent, even though preliminary talks have begun with the provinces. "The agreements are there until 2014 so it's certainly not on the front burner right now."
Many observers have warned of a looming budgeting crisis for provinces as they face large debt, rising health costs and uncertain future revenues for health care from Ottawa.
The federal forecast does not commit the Harper government to continuing the 6-per-cent increases for health, but using that assumption reveals to the provinces that it can afford such an increase and still balance the federal books on schedule.
Overall, Canada's deficit came in higher than expected at $55.6-billion last year and will be bigger than planned for three out of the next four years, according to the government's latest fiscal update.
Mr. Flaherty had warned last year's deficit might come in slightly higher than the $53.8-billion projected in the March, 2010, budget. The government says the main reason for the change is because the Auditor-General advised the government to book $5.6-billion in "transitional assistance payments" to Ontario and British Columbia to help with the transition to the harmonized sales tax.
The government projects Canada's deficit will be $45.4-billion in 2010-2011; $29.8-billion in 2011-12; $21.2-billion in 2012-13; $11.5-billion in 2013-2014; $1.7-billion in 2014-2015. For the first time, the government lists a clear timeline for returning to balance, promising a $2.6-billion surplus in 2015-2016.
The fiscal projections are based on an average of forecasts from private-sector economists.
Tuesday's forecast reveals that Mr. Flaherty is taking the advice of some private-sector economists, who say the economic recovery is so fragile that Ottawa should err on the side of lower-than-expected growth.
The update confirms this, by reducing the government's projected revenues downward $1.5-billion for each of the next two years in comparison to the private-sector average, with smaller adjustments in future years.
With a report from Tim Kiladze in Mississauga