Parliamentary Research Branch

PRB 98-3E   THE CANADA HEALTH AND SOCIAL TRANSFER   Prepared by Odette Madore Claude Blanchette Economics Division September 1998 The federal government uses transfer payments under the Canada Health and Social Transfer (CHST) to help the provinces carry out their responsibilities in terms of health, post-secondary education and public assistance. The CHST is a block funding method that came into force in the 1996-97 fiscal year; it represents a merger of two major programs: Established Programs Financing (EPF) and the Canada Assistance Plan (CAP). Unlike EPF, it does not provide an equal per capita entitlement. Nor is it a shared-cost program, as was the CAP: contributions are not based on provincial expenditures. It operates as follows: The Federal-Provincial Fiscal Arrangements Act determines the total amount of CHST entitlement: this is set at $26.9 billion for 1996-97 and $25.1 billion for the period from 1997-98 to 1999-00. Thereafter, until 2002-03, the transfer will be adjusted annually according to the rate of growth in the GDP, but the actual adjustment will be less than the economic growth rate. The CHST consists of a transfer of tax points (or tax transfer) and a cash transfer. The value of the tax transfer varies with the structure of the income tax system and economic growth. The cash transfer is a residual value that corresponds to the difference between the total entitlement and the tax transfer. Initially, the Act provided a floor of $11 billion for the cash transfer. The purpose of this floor is to provide protection against unexpected economic fluctuations that might reduce the total entitlement or significantly increase the value of the tax transfer, leading to a decrease in cash transfers to provinces. Bill C-28, which received Royal Assent on 18 June 1998, raises this lower limit on the cash floor to $12.5 billion for 1997-98 and beyond. The Act also determines the method whereby the total entitlement is allocated among the provinces. For 1996-97 and 1997-98, the provinces received their share of transfers made under CAP in 1994-95 and the EPF in 1995-96. In subsequent years, the provincial shares of the CHST will be established partly on the basis of the province’s demographic weight within Canada as a whole. Certain conditions are imposed on the cash transfer, and provinces that do not comply with these conditions may have their transfer payments reduced. More specifically, provincial health insurance plans must comply with the criteria of the Canada Health Act (universality, accessibility, comprehensiveness, portability and public administration) and must require no contribution from users through extra-billing or user charges. Nor may provinces impose minimum residency requirements on social assistance applicants. There are no special conditions for post-secondary education. The effect of the CHST has been to decrease, then stabilize until 1999-00, transfer payments for health, post-secondary education and social assistance: From 1995-96 to 1996-97, the total CHST entitlement decreased by nearly $3.0 billion. Without changes to the initial legislation, the reduction would have amounted to $4.6 billion between 1995-96 and 1999-00. During the same period, the cash transfer would have declined even more steeply, by almost $6.5 billion. The changes introduced by Bill C-28 will attenuate these reductions. Accordingly, the total entitlement will decline by $3.1 billion between 1995-96 and 1999-00, while the cash transfer will decrease by $5.0 billion. As the graph below indicates, the value of the tax points is continually increasing; since 1997-98, it has exceeded the amount of the cash transfer. Under the initial legislation, it would have been necessary to apply the cash floor provision in 1999-00. Raising the cash transfer threshold from $11 to $12.5 billion, as provided for in Bill C-28, will: Require the use of the cash floor provision as early as 1997-98; Increase the total CHST entitlement by $216 million in 1997-98, $874 million in 1998-99, and by $1.5 billion from 1999-00 until 2002-03, or an overall increase of $7.0 billion (see table below); Increase the cash transfer by the same amount, resulting in additional revenues for provincial governments; Strengthen the federal government's involvement in the system of health insurance and social programs.