A Very Brief History of Federal Cash Transfers: Canada 1867 to 2017

This is a post in celebration of Canada’s 150^th and similar in time span to my previous one on housing supply and dwelling starts. Canada is a federation and a key feature of its operation is a system of intergovernmental transfers between its fiscal tiers. Indeed, transfers and regional equity are enshrined in Section 36 of the 1982 Constitution Act and Section 36(2) reads: “Parliament and the government of Canada are committed to the principle of making equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation.”

Ottawa transfers money to the provinces and the provinces in turn transfer money to the municipalities. At the federal-provincial level, transfers have been in effect since 1867. Given their surrender of tariff revenues, the provinces were left with spending in excess of revenue and alternate fiscal arrangements were made in 1867 with the creation of the statutory Dominion subsidies – the first intergovernmental transfer program. These subsidies were paid on a per capita basis and amounted to about 80 cents per capita.

Using data from Historical Statistics of Canada and the Federal Fiscal Reference Tables (and the Federal Budget for 2017), I have put together a series on federal cash transfers to the provinces from 1867 to 2017. Figure 1 plots nominal federal cash transfers to other governments and casual observation suggests most of the action has been since the end of the Second World War. The Great Depression severely stressed provincial government finances given that welfare was a provincial responsibility and the Rowell-Sirois Royal Commission appointed to examine federal-provincial finances recommended cash transfers or national adjustment grants which eventually became federal government policy in the post World War II era. Indeed, 1957 sees the start of equalization, the federal-provincial fiscal arrangements acts and the Hospital Insurance and Diagnostic Services Act, which starts health transfers to the provinces.  

In 1867, total federal cash transfers to other levels of government were 3 million dollars and accounted for 21.4 percent of total federal budgetary expenditure. By 2017, these transfers were estimated at $68.7 billion and actually accounted for almost the same share of federal spending at 21.7 percent. However, as Figure 2 shows federal cash transfers have not always been one-fifth of the federal budget.   As a share of federal government spending, federal cash transfers fall quite quickly after Confederation and are below 5 percent from the start of the First World War until the Second World War. During the Second World War they increase dramatically because of the federal funding arrangements known as the War Taxation Agreements that later evolved into the Tax Rental Agreements. The federal government essentially took over provincial personal and corporate income tax bases in return for a compensatory revenue payment – a transfer. This experience in essence marks the start of the modern transfer system.

Federal cash transfers as a share of spending soar in the 1960s reaching about 20 percent in the late 1970s and then start to decline. This decline marks the end of cost sharing with the provinces for health with the onset of Established Program Financing (EPF) and later on in the mid 1990s, the Canada Health and Social Transfer. Between 1977 (the onset of EPF) and the late 1990s, federal cash transfer as a share of total federal spending went from 20 percent to 13 percent before starting a rebound fueled in part by the 2004 Health Accord. In 2017, the share was at an all-time high of 21.7 percent.

Figure 3 also plots these federal cash transfers in real per capita terms using a GDP deflator based on work by Mac Urquhart for the period 1870 to 1980 and then Statistics Canada (v62788999) for the period since. In 2014 dollars, real per capita federal cash transfers rise from 21 dollars in 1870 to 138 dollars by 1945 and then reach 263 dollars by 1960. Growth becomes more rapid and they hit 1037 dollars by 1975 but restraint then sets in and by 1990 they have grown to only 1,377 dollars. They fall to 980 dollars by 1998 and then begin to grow again and in 2017 are estimated at 1,821 dollars.

While the provinces often lament that they require more funding from Ottawa, it remains that at present, both as a share of federal spending and in real per capita terms, federal cash transfers are as high as they have ever been.

Update: April 17th

And by popular request, here are federal cash transfers to other governments as a percent share of GDP.  These really soar after the 1960s, peak in the late 1970s and then decline. They have rebounded since the late 1990s but still not quite where they were in the late 1970s.

Comments

[Jacques René Giguère]

Given that the federal monies are not mined from a magical fountain but come from taxes collected in the various provinces, most of the transfer, especially for Tier I provinces,is merely taxes collected in your own juridiction and given back with strings attached.
Only Tier II provinces, all of them samall and insignificant in the grand scheme of things, receive something significant. What Tier I receive is now mostly a small compensation for their industrial economy being harmed by the oil curse.
Which give rise to the toxic political meme of "(Select your favorite richer province) pays for (select your most despised slightly-less rich province)".

[Majromax]

> it remains that at present, both as a share of federal spending and in real per capita terms

What about as a share of GDP? A federal government that cut taxes and its own program expenditures would maintain per-capita transfers and increase transfers as a share of federal spending, but it would not represent any increased commitment to provinces. I'm guessing that from the strong mark-1-eyeball correlation between figures 2 and 3 that this is not the dominant story, but it would be nice to be sure.

[Karina Gram]

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