====================================================================== Note: The electronic version of the following Appendix F is for informational purposes only. The printed version remains the official version. All tables have been placed at the end of the file. ====================================================================== APPENDIX F COST TO BRITISH COLUMBIA OF MEASURES BY THE FEDERAL GOVERNMENT TO REDUCE ITS FUNDING SHARE OF SOCIAL PROGRAMS Since 1981/82, the federal government has applied restrictions to its contributions to programs jointly funded with the provinces. The most prominent of these programs are: the Established Program Financing (EPF) arrangement, helping to fund health care and post-secondary education; and the Canada Assistance Plan (CAP) transfer for social assistance. As a result, the provincial government has been burdened with the task of funding health care, post-secondary education and social assistance programs in the face of a progressively weakening federal contribution share. In the fall of 1992, the Ministry of Finance and Corporate Relations asked the major national consulting firm, Ernst & Young, to conduct an independent review of the fiscal impact of federal offloading on British Columbia. Their report, released on February 3, 1993, calculated the impact of federal restraint on the two major transfers(1). It estimated the financial impact on the province to date and, assuming a continuation of current federal policies, projected the impact on the province to the year 2000/01. One feature of the Ernst & Young study was to calculate provincial interest costs attributable to federal offloading. Because offloading reduces provincial revenues in each year, it creates corresponding increases in provincial borrowing requirements (or a reduced surplus that could be used to pay down outstanding debt). Therefore, the cost of this additional borrowing was included when the total fiscal impact of federal policies was determined. As shown in Table F1, the study found that federal changes to the two major federal-provincial cost-shared programs since 1981 had a negative impact on British Columbia of $1.6 billion in 1992/93; this would rise to $4.7 billion in 2000/01. ------ (1) Not evaluated were the many federal changes made to less prominent federal transfers aimed at reducing federal costs. These have a smaller, but still significant, impact on the province. IMPACT ON PROVINCIAL DEFICIT Table F2 illustrates the report's conclusion that the impact of restrictive federal transfer policy on British Columbia's finances is severe. It noted that, all things being equal, the 1992/93 British Columbia deficit would have been reduced by $1.6 billion -- 84 per cent of the deficit. As the table shows, the cost of offloading in 1993/94 exceeds the estimated deficit. DECLINING FEDERAL SHARE OF HEALTH AND POST-SECONDARY EDUCATION PROGRAM COSTS Current federal government policies have lowered the federal share of key health and post-secondary education programs. As shown by Chart F1, federal funding, measured as a percentage of related provincial costs, has declined from 40 per cent in 1981/82 to 33 per cent for 1992/93. Ernst & Young projected that this funding share will fall to 23 per cent of provincial costs by 2000/01. DECLINING FEDERAL SHARE OF SOCIAL ASSISTANCE COSTS The study found that federal offloading has also significantly reduced federal funding of British Columbia's social assistance programs. Chart F1 shows that the federal government funded 50 per cent of provincial social assistance costs up to and including 1989/90. However, severe federal restrictions imposed since that time have had a dramatic effect: reducing the share of provincial program costs covered by the federal contribution to 36 per cent for 1992/93. If current federal policies are maintained, the federal funding share will decline to 33 per cent by 2000/01. FUTURE OFFLOADING COSTS The study also projected the impacts of current federal offloading policies on British Columbia to the year 2000/01, assuming no change in federal policy. Chart F2 shows how the annual cost to British Columbia from offloading will increase from $1.9 billion in 1993/94 to $4.7 billion in 2000/01. CONCLUSION The Ernst & Young report concluded that reductions in federal contributions to British Columbia to support education, health and social assistance programs will continue to impose a significant burden on the province's finances. While the report confined itself to an accounting of the impact of federal restraint measures since 1981/82, it helps substantiate the provincial position that federal policies have contributed to a growing fiscal imbalance between levels of government within the Canadian federation. This situation of imbalance is likely to worsen because spending pressures are highest in areas of provincial responsibility such as health, education and social services. The status quo is not sustainable. Correction of the fiscal imbalance will require broad and significant reform applied to all facets of federal-provincial fiscal arrangements. ---------------------------------------------------------------------------------------- TABLE F1 FINANCIAL IMPACT OF RESTRICTIVE FEDERAL FISCAL MEASURES ---------------------------------------------------------------------------------------- 1992/93 2000/01 ---------------------------------------------------------------------------------------- ------($ millions)------ Program: Established Programs Financing (EPF) for health and post-secondary education ............................ 914 2,240 Canada Assistance Plan (CAP) contributions to social assistance programs ................................. 306 670(1) Increased interest costs associated with above program reductions ............................ 417 1,775 ----- ----- Total Impact ............................................ 1,637 4,685 ===== ===== (1) Recent estimates suggest that spending on social services may rise more quickly than assumed in the Ernst & Young extrapolation. Accordingly, the negative impact of federal restrictions on the Canada Assistance Plan transfer could be significantly higher than the $670 million indicated for 2000/01. ---------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- TABLE F2 IMPACT OF RESTRICTIVE FEDERAL FISCAL MEASURES ON BRITISH COLUMBIA BUDGET DEFICIT(1) --------------------------------------------------------------------------------------- 1992/93 1993/94 Revised Forecast Estimate --------------------------------------------------------------------------------------- ------($ millions)------ Surplus (Deficit) ............................... (1,950)(2) (1,535) Impact of Federal Transfer Reductions ........... (1,637) (1,866)(3) ------- ------- Calculated Surplus (Deficit) without Transfer Restrictions......................... (313) 331 ======= ======= (1) Assumes no change in other provincial budgetary measures over the period of cutbacks. (2) At the time the Ernst & Young report was released, the projected deficit for 1992/93 was $2.3 billion. This has since been revised downward significantly. (3) The Ernst & Young calculation did not include the impact of federal transfers other than EPF and CAP, and used a conservative extrapolation of the CAP impact, rather than the budget estimate. If adjustments are made to account for these factors, the negative fiscal impact becomes $2,318 million and the calculated surplus without transfer restrictions becomes $783 million. ---------------------------------------------------------------------------------------