The Four Ages of Health Spending and Ontario’s Differential and Growing Gap

The last post documented the “Four Ages’ of Ontario provincial government health spending. The first age, in the wake of the creation of the Medicare system stretches from 1975 to 1989 and saw average annual growth of 3 percent.  The second age from 1990 to 1997, encompassing the 1991 recession and the 1995 federal fiscal crisis and transfer cut witnessed a decline in real per capita provincial government health spending with an average growth rate of  -0.7 percent annually.  From 1998 to 2010 – there was a recovery in the average annual growth rate of provincial government health spending to 3 percent, fueled by a recovering economy, the fiscal dividend of low interest rates, and increases in federal transfer funding.  Finally, with the actions taken to meet the expiry of the Health Accord in 2017 and the economic slowdown after the Great Recession in 2008-09, the growth rate plummets again eking out an increase averaging 0.5 percent annually from 2010 to 2019. 

It should be noted that the four ages of health spending marks not only Ontario, but indeed all the provincial health care systems.  However, what is interesting is the differential performance of Ontario with respect to the rest of Canada.  As Figure 1 illustrates, when the average annual growth rates of provincial/territorial government health spending between Ontario and the rest of the country are compared, Ontario has been growing slower – or shrinking faster -than the rest of country since 1990.   

 

For the period 1975 to 1989, Ontario on average grew slightly faster at 3 percent annual average growth compared to 2.9 percent for the rest of Canada.  However, come the cuts of the 1990s, Ontario shrank at -0.7 percent annually while the rest of the country only shrank at -0.2 percent.  Meanwhile, during the recovery period from 1998 to 2010, Ontario grows at 3.1 percent but the rest of Canada at 3.3 percent.  Finally, since 2011, while growth has slowed everywhere, the rest of Canada still manages to edge Ontario out with average annual growth of 0.6 percent compared to 0.5 percent for Ontario.

The long-term effect of this on real per capita provincial government spending have accumulated over the long term to generate a growing gap between Ontario’s and the rest of Canada's provincial/territorial government health spending.  As Figure 2 shows, from 1975 to 1989, per capita provincial government health spending in Ontario was lower than the rest of Canada but rises to close the gap.  It briefly matches the rest of the country and then after 1995 again falls below where it has since remained.  Indeed, since 2010 the gap has widened appreciably.  In 2010, real per capita provincial government health spending in Ontario was $4,213 compared to $4,491 in the rest of Canada - 6 percent lower.  In 2019, it is forecast at $4,386 compared to $4,742 in the rest of Canada – 7.5 percent lower.

Ontario – the largest economy in Canada – on a per person basis basically spends less on its government health system than the rest of the country.  While some of that might be ascribed to a greater population density and economies of scale in providing health services, given that there appear to be constant calls to addresses waiting times and shortages, it is unlikely the difference is due to superior system performance combined with greater efficiencies.  Moreover, that gap has been growing over time.  In other words, the wealthiest economy in the Canadian federation is providing less spending per person when it comes to public sector health care than the rest of the country.  Some of the growing gap is the result of the more brutal impact of the two major recession periods on Ontario compared to the rest of the country but it is also a function of Ontario's poor fiscal management as well as its choices.   More on how that difference pans put across assorted categories of health spending in the next post.

The Big Challenges Addressing Ontario’s Deficit & Debt Problem

The last couple of days have seen two reports – one by Statistics Canada and one by the Ontario Financial Accountability Office – which taken together provide the best picture yet as to why Ontario faces a big fiscal challenge in resolving its deficit and debt issues.  First, the Financial Accountability Office (FAO) in its Spring 2019 Economic and Budget Outlook under its baseline projection projects that Ontario’s budget deficit decreases from $11.7 billion in 2018-19 to $7.3 billion in 2020-21 and improves rapidly over the following three years, reaching balance in 2022-23 and a relatively large surplus of $6.4 billion by 2023-24.  

Yet, the FAO notes that the 2019 Ontario Budget projects smaller deficits over the next two years due to the government’s more optimistic outlook for revenue growth.  However, beginning in 2021-22, the 2019 budget incorporates provisions for unannounced revenue reductions and spending measures. This would lead to higher deficits and add to Ontario’s debt. The Province should still achieve a balanced budget by 2023-24, due to its plan to significantly restrain the growth in program spending.  The 2019 budget will see program spending grow at just 1 percent annually over the next five years bringing per capita government spending from $10,494 in 2018-19 to $9,391 – a decrease of 10.5 percent.  Per capita government spending in Ontario is already the lowest in the country and this additional decline would widen the gap even more.

So why is Ontario unable to provide provincial government program spending closer to the national average? The answer to that lies in another report by Statistics Canada titled Income Growth per Capita in the Provinces since 1950 which examines GDP per capita and real GDI per capita over a 66-year period to provide insight on which provinces experienced the most growth over the course of this period, and how this affected per capita income levels across provinces.  The news for Ontario is pretty grim in terms of economic growth rates.  Whereas in 1950, Ontario had the highest GDP per capita of the ten provinces – followed by British Columbia and Alberta – by 2016 it was down to 4^thplace with Alberta, Saskatchewan and Newfoundland and Labrador in the top three positions.  More startling is the growth rate of per capita income – which places Ontario at the bottom of all the provinces over this period (See figure).

So, Ontario in a sense over the last 50 years has spent beyond its means in an effort to keep up with the other provinces in terms of the provision of public services but that has still not been enough.  It now has the lowest per capita spending of the ten provinces, the largest provincial total public debt, the second highest per capita public debt, and is engaged in an effort to balance its budget which will widen the program spending gap further with the other provinces.  Now some may point to the factor here as a revenue problem driven by the unwillingness of Ontario to raise taxes.  Ontario indeed has the lowest total revenue per capita among the ten provinces but it has the third highest per capita tax revenue – after Quebec and Newfoundland.  Ontario’s relatively higher per capita tax revenue is offset by lower revenues from resource royalties, federal transfers as well as all other revenues when compared to other provinces.  No, it is not a tax revenue problem.

The problem is three-fold: First, Ontario has had a weaker economic growth rate relative to the other provinces and needs to boost its productivity and economy to grow faster thereby expanding its tax base.  Second, Ontario has not had has a resource sector boom that has enabled provinces like Alberta and Saskatchewan to leap ahead in terms of income and ultimately government spending and nor is it likely to get one from northern Ontario resources anytime soon given the slow pace of development.  Third, as a result of its strong tax base - all things considered – Ontario is still a source of federal government revenue and ultimately transfers to other parts of the country which allow those regions to maintain a higher level of spending.  While balancing the budget by 2022-23 will resolve Ontario’s fiscal situation, it remains that the long-term pressures driving its fiscal imbalance are still there.