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Kevin Page is president and CEO, Sahir Khan is vice-president, and Helaina Gaspard is director of democratic institutions at the Institute of Fiscal Studies and Democracy, University of Ottawa.

From Wednesday to Friday, Yukon Premier Darrell Pasloski will host Canada's premiers in Whitehorse. Symbolically, this will be the first time a territory will chair a Council of the Federation gathering and host the premiers' annual summer meeting. Quite rightly, political focus is shifting to the North, where both challenges and opportunities abound. From a policy perspective, political courage appears to be congealing across levels of government and party lines to address some major long-term issues.

Our next federal budget will likely be highlighted by two critical themes: innovation and health care. The next industrial revolution will involve the fusion of technologies between physical, digital and biological dimensions. The ability to innovate will be vital, and we need to participate in this revolution. As Tom Friedman of The New York Times has said, "When fast gets faster, slow gets really slow." We do not want to be competing over a shrinking economic pie related to past industrial revolutions.

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Similarly, our health-care system is ripe for reform. It's one of the largest economic sectors in Canada: $220-billion a year, 10.9 per cent of GDP, 1.5 million jobs. Our prosperity will be increasingly tied to it. Innovation and demographics are increasingly important and will act as crucial agents of change.

Sir Isaac Newton's Second Law of Motion for the physical universe says that the change in motion is proportional to the force impressed on it. In political space, look at the continuing initiatives of the premiers: health care, productivity, innovation, energy, trade and fiscal arrangements. All are long-term issues at the centre of the federal agenda as well. This confluence is a positive force multiplier. Most federal political parties have laid out commitments for reform to strengthen long-term care and reduce the cost of drugs. We need bold thinking with a longer-term vision linking health care and innovation, supported by a new system of fiscal arrangements that drives better performance.

Dr. Allen Schick from the University of Maryland maintains that budgeting is about three pivotal variables: fiscal balance, allocation and operational efficiency. Canada is running modest annual budgetary deficits relative to the size of our economy, as is natural when the economy is operating below potential.

According to a recent fiscal sustainability study by Canada's Parliamentary Budget Office, we have a modest negative fiscal gap to close across all levels of government, about 0.6 per cent of annual GDP – meaning that some structural adjustment to spending or revenue is required. It's a fair bet that, before the decade is out, we will need a policy discussion about tax reform to produce more revenue. Otherwise, we will be saddling the next generation with a debt problem.

PBO analysis for subnational (provincial, territorial, municipal, aboriginal) governments shows that permanent policy actions amounting to about 1.5 per cent of GDP (about $30-billion annually) are required to stabilize debt. At the same time, the federal government has a positive gap of about 1 per cent of GDP ($19-billion annually). That translates into a significant imbalance within the federation. Our provinces and territories are financially exhausted.

Government leaders rarely speak about the optimal allocations of budgets – operations versus capital; education versus public security – as households do around the supper table. Do we fix the roof or go on vacation? Adjusting allocations can help restore longer-term balance. Some recent federal commitments are steps in the right direction, including the commitment to double infrastructure spending over the next 10 years. More recently, the move toward equitable access to government services for First Nations child welfare represents a positive step.

In Whitehorse, we can expect another call by the premiers for Ottawa to increase its share of provincial and territorial health care spending to 25 per cent. The federal cash share currently stands at about 22 per cent, down from 33 per cent in 1984, when the Canada Health Act was passed. Federal spending in this sector is projected to fall steadily over the long term given the current program structure and weaker growth rate formula.

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In this regard, it is difficult to imagine the preservation of the principles of the Canada Health Act without more federal skin in the game. It is also difficult to imagine a major reshuffling of taxpayer dollars toward provinces and territories without renewed efforts to use innovation to help flatten steepening health cost curves. And we require improved reporting to encourage fiscal probity and performance in provincial health plans.

The federal government remains open to discussion with the Council of the Federation. There is early talk of keeping the current Canada Health Transfer program in place with some additional monies to support long-term care. This will likely fall short of needed reforms. Let's hope the premiers are successful in bringing greater commitment from the federal government on health care with an increased level of spending and new negotiated programs that will help reform long-term care, reduce the cost of prescription drugs and restore intergovernmental fiscal balance.

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