Revenue Deficiency, Health Care Sustainability and the Fiscal Dividend

One of the arguments made in the public sector health care sustainability debate is that while the share of national income devoted to public health insurance has grown at a relatively modest rate, the provinces have weakened their resource base with fiscal measures that have reduced their rates of personal and corporate taxation.  It has been argued that in the absence of these measures, the revenue to GDP ratio would not have declined and there would be ample resources to sustain public health care. 

The evidence on this is quite interesting.  The accompanying figures use provincial revenue, population and GDP data from Statistics Canada deflated using the government expenditure implicit price index (1997=100) and plot average and median real per capita provincial government revenues and the revenue to GDP ratio for the 1975 to 2008 period.  I’ve left out the 2009 and 2010 period given the impact of the Great Recession.  The results show that average real per capita revenues across the provinces has risen over time by almost 75 percent.  Despite the tax cuts of the last decade, revenues per capita have continued to rise.  The average revenue to GDP ratio shows a somewhat different story – there is a increase in the average ratio across the provinces from the mid 1970s to the early 1990s and then there is indeed a decline.  However, average and median revenue to GDP rates are now approximately where they were in the mid 1970s. 

 

It is well known that public sector health spending growth rates over the last decade have managed to outstrip growth rates for both government revenues and GDP.  As well, other government program spending has also grown though not as quickly as health spending.  How is all this possible?  Missing from all this is what has happened to debt service costs – the so-called fiscal dividend.  According to the Federal Fiscal Reference Tables, whereas in 1998, the debt interest share of provincial government spending in Canada was 14 percent, by 2008 it had fallen to 8.5 percent.  This freed up resources such that governments were able to increase health spending, all other government program spending and lower tax rates.  This of course came to an end with the deficits of the Great Recession, which once combined with rising interest rates are anticipated to once again raise debt service costs.  It is the end of the fiscal dividend era that is the great challenge facing government spending in general and health spending in particular. 

Comments

[reason]

Now is your chance - Sue Paul Krugman!-)

[Shangwen]

Thanks Livio. I find this disturbing. It's a lot like blowing your tax refund on a vacation when you have crushing credit card debt.

[richard]

" great challenge facing government spending "

Would not those problems largely go away (for an 'era') if the GST was increased to its previous level?

[K]

Livio:  Short rates may follow the curve a bit up from here, but yields (borrowing costs) and forward yields (yield projections) are near record lows.  The 30 yr is at 3.5%!  That means we can afford more than twice as much debt/revenue as 15 years ago when it was at 8%. Where's the evidence that borrowing costs are going to be higher than they were in the past?  Logically, you'd expect the equilibrium short rate to decline with NGDP growth, as the boomers retire.  And future yields would be expected to be as implied by current forward yields (i.e. extremely low).  Are you making a directional call on the yield curve?

[Livio Di Matteo]

K: While interest rates are low, the mass of debt is much larger than it was in the 1980s so that increases in even these lower rates will add substantially to debt service costs. As for where interest rates are going, your argument makes sense but the expectation is that rates internationally are going to rise in the short to medium term especially given the risk premium to holding debt given the situation in a number of countries eg. in Europe.
Richard: Raising the GST back to 7 percent would probably raise 6-7 billion dollars. If that were directed to health, it would certainly be of assistance but health transfers were raised in 2004 under the Health Accord to "buy change" and we still seem to be in the same situation - there never seems to be enough money no matter how large the revenue increases. The fact is, revenues at he provincial level have been rising in dollars per person.

[richard]

" The fact is, revenues at he provincial level have been rising in dollars per person."

Are there data for individual provinces? I wonder how much variation there is in per capita revenues between, say resource-rich (i.e. oil) provinces and other provinces over that time period.