What is a Provincial Government to Do?

 

Ontario is coming up to Budget Day next week on March 26^th and it will be interesting to see what the provincial government does on a number of issues because quite frankly the provincial government is in a bit of a pickle when it comes to economic and fiscal policy.  Over the last decade, Ontario has been hit by a productivity decline that has translated into slower economic growth.  Since the pandemic, this has been combined with a bout of inflation and a surge in population growth.  When you start looking at Ontario fiscal and economic indicators in real per capita terms, there are going forward disturbing implications for our standard of living.

 

If one compares the 2023-24 fiscal year forecast from the Fall Economic Update with the 2018-19 fiscal year, total provincial government revenues and expenditures are up approximately 30 percent respectively.  Health expenditure is up 33 percent.  The size of the provincial economy is up 22 percent.  On the surface, this is seemingly good news in the wake of the pandemic.  The problem is that over the same period, population in Ontario has grown by an estimated 12 percent while prices have risen nearly 19 percent.  Put another way, the combination of population and inflation at nearly 30 percent has outstripped nominal GDP growth while essentially matching the growth of government revenues and expenditures and in particular health spending.

 

The best way to visually illustrate these effects is to create an index.  Figure 1 uses data from Statistics Canada, the Fiscal Reference Tables and the 2023 Ontario Fall Economic Outlook and Fiscal Review to create real per person indices of economic and fiscal performance setting 2013/14 as 100.  Figure 1 plots real per capita (deflated using the CPI-All Items Index) Ontario provincial government Own Source Revenue, Federal Transfers, Total Revenue, Program Expenditure, Debt Service Costs and Total Expenditures.  Note that 2023-24 is an estimate.

 

 

 

In real per capita terms, debt service costs have been a bright spot in that despite the continuing rise in both the provincial net debt and interest rates, inflation and population growth have served to reduce the real per capita burden of servicing Ontario’s debt.  Indeed, the drop-in debt service has probably been able to free up resources for program spending. On the other hand, compared to 2018/19, real per capita revenues and expenditures are now below where they were.  In other words, provincial government revenue and spending have not kept up with inflation and more importantly population growth.

 

 

 

Figure 2 illustrates the decline in the Ontario way of life a bit more succinctly.  Does the health care system feel strained?  Real per capita provincial government health care spending after the surge of the pandemic is back to where it was in 2018/19.  Indeed, it has not changed much since 2013/14.  During that time, one imagines that labor costs for health care have gone up pretty dramatically which means there are indeed fewer doctors and nurses available to service a growing population. And to top it all off, real per capita output in Ontario has not kept pace with either inflation or population growth.  While real per capita GDP in Ontario grew somewhat from 2013/14 to the pandemic, it has since declined.

 

Looking at Figure 2, if the average Ontario had to ask themselves am I better off than a decade ago when it comes to my real per capita income and health spending, the answer is one that should concern the provincial government.

Health Spending in Ontario: Restraint of the 2010s is Over for Now

 

The Canadian Institute for Health Information (CIHI) release of the National Health Expenditure Trends 2021 provides a much awaited first macro snapshot of what happened to Canadian health spending during the COVID-19 pandemic.  Canada is expected to spend a new record of $308 billion on health care in 2021 — $8,019 per Canadian. It is also anticipated that health expenditure will represent 12.7% of Canada’s gross domestic product (GDP) in 2021, following a high of 13.7% in 2020.  A new feature of the numbers this year is the government COVID-19 response funding which in 2021 constitutes 7% of total health spending.  The COVID-19 response funding includes money for treatment costs, testing and contact tracing, vaccination, medical goods, and other related expenses and is a separate category from the standard ones used. 

 

Once one starts to examine and analyze spending both including and excluding the COVID-19 response spending provided, as well as adjusting for inflation and population growth, the picture looks more variable depending on the categories examined, the financing sector considered, and the province involved.  For example, private sector health spending was hit quite hard and categories such as other professionals and hospital spending also saw declines in real per capita spending. 

 

When provincial-territorial government health spending is examined, their real per capita total health spending in 2020 rose 8.1 percent but once the COVID-19 response is factored out their spending declined by about one percent though it is also expected to rebound in 2021.  Hardest hit in provincial-territorial health spending in 2020 in terms of percentage declines in real per capita spending: physicians (-5.8) other professionals (-6.1), drugs (-2.3) and hospitals (-0.5).  Meanwhile, public health grew 4.1 percent, other institutions (including long-term care) grew 1.2 percent while capital spending grew 10 percent.  

 

These results are not unexpected given the decline in surgeries and physician visits brough about by the pandemic. The closing of outpatient departments and postponing of medical visits and procedures during the height of the pandemic meant a reduction in some aspects of health service provision and health spending. According to CIHI’s own analysis of COVID-19’s effect on hospital care services, from March to December 2020, overall surgery numbers fell 22% compared with the same period in 2019, a drop of 413,000 surgeries.

 

 

 

Moreover, real per capita spending growth net of the COVID response funding also varied across provinces in 2020 (See Figure 1).  While Newfoundland and Labrador, Prince Edward Island, New Brunswick, Quebec, Manitoba, Saskatchewan, and Alberta saw a decline in real per capita spending net of COVID-19 response funding, Ontario, British Columbia, and Nova Scotia saw small increases with Ontario the largest at 1.2 percent. New Brunswick, Quebec and Alberta saw the biggest declines in real per capita health spending at -3.3, -3.5 and -3.6 percent respectively.  This demonstrates that during the health system disruption of the pandemic, the decline in service provision at least as measured by real per capita spending, was greater in some provinces relative to others.

 

In 2019, Ontario’s total provincial government health spending was $63.1 billion and in 2020 including the COVID-19 response funding it soared to $72 billion.  In 2021 it is expected to reach $75.2 billion including the COVID funding response. Even when the COVID-19 response is removed, Ontario still saw increases in health spending with provincial government health spending net of COVID forecasted at $67.4 billion in 2020 and $71.7 billion in 2021.  Moreover, these increases continue once adjustments are made for population and inflation.

 

 

Figure 2 plots real per capita provincial government health spending in Ontario in $2020 from 1975 to 2021 calculated from the CIHI data.  Spending growth moderated substantially after 2010.  Whereas the average annual growth rate of real per capita provincial government health spending from 2000 to 2009 averaged 3.1 percent, for the period 2010 to 2019 it grew below 1 percent. However, when COVID-19 spending is factored in, real per capita provincial government spending grew 8.1 percent in 2020 and 2 percent in 2021.  When you factor out the COVID-19 response, the growth rates are 1.2 percent and 3.9 percent respectively.

 

 

Finally, Figure 3 looks at real per capita provincial government health spending growth by major categories.  Hospitals declined in 2019 by 1.2 percent but then grew at 2.1 percent in 2020 and can be expected to grow 1 percent in 2021.  Other institutions (including long-term care) also shrank half a percent in 2019 but then grew 4.4 percent in 2020 and is expected to grow 18.6 percent in 2021.  Physician spending grew 1.8 percent in 2019, then shrank by half a percent in 202 and is expected to rise 1.7 percent in 2021.  Other professionals (e.g., provincially funded dental and optometry) fell 2 percent in 2020 but can be expected to grow 6 percent in 2020. Provincial government drug spending in real per capita terms fell in both 2019 and 2020 but is expected to grow 9 percent in 2021.  Public health saw increases close to 10 percent in each of the three years reported in this chart.  Administration on the hand has shrunk in each year including an 18 percent drop in 2020.

 

So, the impact of the pandemic on provincial government health spending in Ontario after the COVID-19 response has been factored out appears to be a renewed focus on making health a priority at least for the immediate future.  Whereas pre pandemic the focus appears to have been on restraining expenditure growth, the stops are off for the time being.  Whereas real per capita spending growth was under one percent for the 2010s, there is a reversal underway with major increases in other institutions (mainly long-term care), other professionals and drugs.