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Declining federal transfers.

In its 1991 budget, the federal government of Canada continued to transfer more of the burden of deficit control to the provinces. The two most important transfers affected were the Established Programs Financing (EPF) arrangement and Canada Assistance Plan (CAP) funding.

Freezes and the Budgets

Significant spending reductions had been announced by the federal government in its 1990 budget to deal with a mounting deficit problem. The primary instrument of this spending restraint was a reduction in planned federal transfers to the provinces. The major component was a two-year freeze in the per capita growth of the Established Programs Financing transfer, beginning in 1990/91. The 1991 federal budget extended this freeze for a further three years. Exhibit 1 shows the effect of these measures in the province of British Columbia.

For a number of years, the federal contribution has been declining as a share of provincial spending on health care and post-secondary education. The latest change to the EPF formula will accelerate this decline. Whereas the federal contribution once offset just under one-half of the cost of this programming, in 1991/92 it accounts for only 37 percent of British Columbia's costs; this proportion will fall to 27 percent by the end of the decade.

The EPF transfer is split into a cash portion and a tax transfer portion. When growth in the overall EPF contribution (cash and tax) is curtailed and growth in the tax point transfer component is determined by generally faster growth in income tax revenues, it is only a matter of time before the cash transfer, as the residual, disappears. It is estimated that this will happen within the next 12 years.

The cash transfer is the only amount which is recorded as a federal contribution. Its disappearance will leave the federal government with no "lever" with which to exercise management control over program standards (as is now done through the Canada Health Act). The federal government recognizes this and in the 1991 federal budget announced plans to bring in legislation to allow it to exact funding penalties from equalization and Canada Assistance Plan transfers for noncompliance by the provinces with federal conditions.

Canada Assistance Plan

The CAP transfer assists the provinces in the funding of social assistance and social services to those in need. It represents 40 percent of the value of federal transfers to British Columbia.

The 1990 federal budget announced limits on the growth of CAP transfers to those provinces not receiving equalization. The limit was to be 5 percent over 1989/90 for 1990/91 and 10 percent over 1989/90 for 1991/92. The effect of the growth limitation on CAP was to reduce 1990/91 revenue by $48 million and it will reduce 1991/92 revenue by $156 million. While it is difficult to predict future costs of social assistance, it is probable that this measure will cost British Columbia several hundred million dollars in the 1992/93 to 1994/95 period.

The federal action is of considerable concern, in view of the results of a legal challenge to these restrictions. In the spring of 1990, the government of British Columbia initiated a court challenge to the federal government's right to limit the growth of the CAP transfers. Several other provinces intervened on behalf of British Columbia. In June 1990, the British Columbia Court of Appeal decided in the province's favour. The federal government immediately appealed the decision to the Supreme Court of Canada, and the case was heard in December 1990. The federal government based its case on an interpretation of the powers of the federal Parliament to the effect that this body must not be constrained in its ability to manage its fiscal affairs. The Supreme Court ruled in August 1991 in favour of the federal government.

The Supreme Court's validation of this operating principle sets a dangerous precedent: it effectively authorizes the federal government to release itself from the funding provisions of any signed agreement.


These federal restraint actions not only cast considerable doubt on the continued viability of joint funding mechanisms, they call into question the commitment of the federal government to upholding the terms of existing federal-provincial agreements.


Richard A. Wells, C.G.A., is director of finance, Corporation of the District of Maple Ridge in British Columbia. He currently serves as the provincial representative for the GFOA. He was assisted in the preparation of this article by Al Tamblin, executive director, Municipal Financial Services Branch, Ministry of Municipal Affairs, Recreation & Housing, Province of British Columbia. Material in the article is extracted from the document, Budget 1991, of the province's Ministry of Finance and Corporate Relations.
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Title Annotation:Canada's policy of reducing fund transfers to the provinces
Author:Wells, Richard A.; Tamblin, Al
Publication:Government Finance Review
Date:Apr 1, 1992
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