Federal fiscal transfers with purpose: equalization, housing, childcare, PSE

Our country is diverse in ways that enrich us. Our varied geography and multicultural population create huge advantages. Yet we also have unacceptable levels of inequality, not only between high-income Canadians and the increasing number of low-income Canadians with part-time, non-standard, precarious employment, but also in terms of the nature of public services available across the country. An elaborate fiscal transfer system channels revenue from Ottawa to other levels of government (provincial, territorial, municipal, Indigenous), but the intended purposes for the funds are too often ill-defined and this results in little or no direct accountability for the spending. We need an independent Canadian Commission on Fiscal Transfers that will help us to meet national goals and objectives. Reforming federal funding structures would also aid in providing Canadians with more accessible and affordable housing, child care, and post-secondary education (PSE).

 

*****

Every year, Ottawa channels billions of dollars to the provinces and territories to reduce inequities among Canadians. This goal is so fundamental to our way of life that it is entrenched in the Constitution. Section 36(1) of the Constitution commits our governments to: “(a) promoting equal opportunities for the well-being of Canadians, (b) furthering economic development to reduce disparity in opportunity, and (c) providing essential levels of public services of reasonable quality to all Canadians.” Federal contributions to provinces primarily take the form of transfer payments specifically designated for health care, post-secondary education, social assistance, and social services. Together these arrangements are called “fiscal federalism.” One specific form of financial redistribution of the nation’s wealth, called equalization, is specifically mentioned in Section 36(2), committing our governments to providing “reasonably comparable levels of public services at reasonably comparable levels of taxation.”

It is important to note that transfers from the federal to the provincial and territorial governments are an integral component of a well-functioning modern federation. In a federation such as ours, the so-called vertical balance between federal and provincial levels is just as important as the horizontal balance that focuses on correcting disparities across provinces. In fact, too much provincial self-sufficiency can lead to greater horizontal imbalances and inter-provincial disparities; this then puts pressure on equalization. Indeed, we should be concerned that Canada is now the most decentralized federation in the developed world as measured by federal transfers as a percentage of provincial revenues. Many economists argue that the level of federal transfers is so low that this will seriously impede our ability to pursue national equity and efficiency on behalf of all Canadians. For example, from 1945 to 2006, federal government revenues only twice dropped below 15% of GDP – in 1958/59 and 1963/64. Under the current Conservative government, revenues have dropped below 15% of GDP for seven consecutive years since 2008/9 to the present day.

It has become increasingly difficult to measure whether the current structure of fiscal federalism allows us to share the financial burden fairly and ensure federal transfers do what they are meant to do to promote national objectives. Governments engage in ad hoc deals that make calculating the real impacts of transfer payments next to impossible. The lack of meaningful scrutiny of intergovernmental transfers by the House of Commons is a serious failure of accountability and transparency. But even without clear indicators and measurement against targets, it is obvious that the collective impact of all this spending falls well short of its intended goals.

In 2014-15, equalization alone will total approximately $16.67 billion, with about half of this amount going to Quebec and the rest distributed across Ontario, Manitoba, Nova Scotia, New Brunswick, and Prince Edward Island. The Canada Health Transfer will distribute almost $32.11 billion and the Canada Social Transfer (CST) another $12.58 billion. There are many other federal programs and initiatives that incorporate equalizing elements, such as employment insurance, which is currently structured to benefit the unemployed who live in areas of the country with fewer job opportunities.

We urgently need to bring coherence, consistency, and accountability to the tangled disarray of federal contributions to provinces so that it does not divide governments and erode Canadians’ ties to one another. For example, equalization payments are funded only from federal revenues and are aimed at allowing provinces to have comparable fiscal capacities to manage the delivery of public services. Yet it is not uncommon to hear critics question why enormous equalization payments are being sent to Quebec when that province pays for services that others cannot afford such as subsidized electricity, relatively low-cost child care (the $7 a day is now a sliding scale up to a maximum of $20 a day depending on income), and the lowest post-secondary tuition fees in the country. Meanwhile, significant differences in the provision of such services continue and are even growing from province to province and municipality to municipality, impacting everything from pensions and health care to infrastructure. What can we do to resolve these inequities?

The federal government must take the lead to develop better coherence and comparability in providing income support and social services across the country so that all Canadians can meet their basic needs and develop their potential. This necessitates significant federal-provincial collaboration to integrate income security benefits into a Guaranteed Liveable Income.

In general, the objective of our social transfers should be ensuring that Canadians have equal access not only to basic health care  and education, but also to adequate food, clothing, and housing through income security programs, as well as to essential social services. A coordinated intergovernmental approach would not just enhance equity and equal opportunity across the country, it would increase Canadians’ mobility, leading to a more dynamic and efficient labour market. We need policy coherence and policy alignment.

The Green Party believes that we urgently need to establish a permanent non-partisan independent advisory commission, similar to Australia’s Commonwealth Grants Commission, to scrutinize and manage fiscal federalism. This Canadian Commission on Fiscal Transfers would examine how every province is doing based on a giant balance sheet of Gross Domestic Product (GDP) in each jurisdiction, taking into account all revenue sources, measuring the effectiveness of programs, and charting improvements in equity. The current equalization formula, among other things, would be replaced.

The Commission – experienced officials and academics appointed by Ottawa – would then submit an annual proposal to the federal government for appropriate equalization and other adjustments to fiscal transfers. This system would better promote our national goals of greater equity and equality of opportunity for all Canadians, regardless of where they reside in the country. The Canadian Commission on Fiscal transfers should work in conjunction with the proposed Council of Canadian Governments to, among other things, provide clear direction on whether certain transfers should be made on a per capita basis or should be made according to “fiscal need” based on the respective fiscal capacities of the provinces. For example, the growth of health, education and social services transfers would be much better tied to average provincial growth in health, welfare and post-secondary education expenditures, than based on a per capita measurement. The Commission’s reports to Parliament and recommendations to the Minister of Finance would make the system of federal contributions to other levels of government more transparent and much less political. Its findings would inform intelligent debate on longer-term national objectives, thereby building stronger ties among Canadians and greater confidence in the fairness of the system.

Sharpening the focus on matters of national concern and bringing all levels of government together will lead to real progress on ensuring important supports like affordable housing, and reasonably priced, available child care are accessible to all Canadians.

A national housing strategy

The federal government has to get back into the business of social housing. The Green Party supports increased and sustained federal funding for social housing. We have to do better to deliver a system that allows Canadians of all circumstances to access decent housing at a manageable cost.

Housing shortages remain critical. An essential component of a strategy to mitigate poverty and inequality is to ensure access to a sufficient stock of affordable housing and to take aggressive steps to eliminate homelessness.

The Green Party supports increased and sustained federal funding for social housing and a greater commitment to building on the innovative Housing First outreach initiative “At Home/Chez Soi” for homeless Canadians. At Home successfully provided social services to more than 1000 chronically homeless persons in Moncton, Montreal, Toronto, Winnipeg, and Vancouver. Federal funding of $110 million was delivered through the Mental Health Commission of Canada. This “on-the-streets” one-on-one strategy has been innovative and productive: homeless persons are first provided with a heavily subsidized home with no strings attached, and then, once settled, they are inundated with services of all kinds, if they want them. This is precisely the kind of collaborative initiative that can really make a difference in a cost-effective way.

The Alberta government has invested $500 million in the past four years in a similar Housing First initiative and the City of Calgary is engaged in a related 10 Year Plan to End Homelessness that has already resulted in an 11.4% reduction in the homeless count from 2008 to 2012. It is important to provide adequate support and funding for these and other initiatives, like the Réseau Solidarité Itinérance du Québec (RSIQ), which have a proven track record of helping homeless Canadians, both the chronically impoverished and those in temporary need.

In order to really make progress on eliminating homelessness, however, it will require much more investment in affordable housing. This means both maintaining and substantially increasing federal spending for social housing from its allocated fiscal base of $1.6 billion today. In Renewing Canada’s Social Architecture (May 2015), the Mowat Centre, the Caledon Institute, the IRPP, and the Institute for Competitiveness and Prosperity make the disturbing projection that federal operating spending for social housing is set to decline from the peak of $1.6 billion today to $81 million in 2031, reaching zero in 2040. (The federal government will contribute $119 million annually to the Homelessness Partnering Strategy from 2014 – 2019 and $1.25 billion for a 5 year extension of the Investment in Affordable Housing Program.)

The Green Party favours the more transformative approach that is discussed in Renewing Canada’s Social Architecture: “Unlike income support programs that are available to anyone who qualifies, the limited supply of subsidized housing leads to long wait lists and inconsistent, inequitable treatment. A shift to an income-side approach to assisting people who can’t afford decent housing would allow policymakers to turn this issue on its head. An income-tested housing benefit model could ultimately be part of a streamlined and integrated income support program such as a Guaranteed Annual Income model.”

This transformative approach to ensuring adequate income support for housing is reflected in the long-term goal of the Green Party to eliminate poverty altogether through a Guaranteed Liveable Income. This is one of the priority issues to be placed before the Council of Canadian Governments, as it will take a multi-jurisdictional approach – ending poverty band-aid programs and replacing them (and their costs) with a straightforward system of a consolidated benefit to every Canadian.

Expanding the actual stock of affordable housing has to focus on rental housing, however desirable the goal of promoting home ownership may be. The tax system should restore the favourable treatment once in place for purpose-built rental housing. To expand affordable rental housing, consideration should be given to a low income housing tax credit. To this end, the Canada Mortgage and Housing Corporation (CMHC)[1] could distribute funds to provinces for the purposes of supplying more rental housing based on core need. Unfortunately, Budget 2015 did not deliver on a promise to sustain funding for social housing at current levels.

A low income housing tax credit is precisely the kind of collaborative initiative that can really make a difference in a cost-effective way. We should also consider establishing the Canadian equivalent of the American Office of Social Innovation and Civic Participation to create new partnerships among government, private capital, social entrepreneurs, and the public. One outcome of such collaboration would be the provision of long-term funds for a broad range of non-governmental agencies (like the Mental Health Commission), which deliver targeted social services.

Child care

Most Canadians support programs for the well-being of children. Relieving the stress of parents, especially those who are struggling to balance work and family, has both social and economic benefits. Child care and early childhood education (ECE) are valuable goals in their own right, but they are also a means to an end, allowing parents to work or go to school and to provide better opportunities for the next generation. High-quality child care and ECE equalize opportunities for children to have successful and fulfilling lives.

Unfortunately, Canada has a dismal record in supporting child care. This is particularly distressing given our relative wealth and prosperity. Canada provides regulated child care spaces for only 22.5% of children age six or younger with working parents; by contrast, the rates are 60% in the United Kingdom, 69% in France, and 78% in Denmark. Little federal funding goes to provinces for child care through the amorphous Canada Social Transfer (CST). As with so much of our dysfunctional system of fiscal federalism, it is impossible to assess what impact, if any, these contributions have on strengthening the child care infrastructure in Canada or on assisting families that need help the most.

By far the most federal support for child care has been delivered, since 2006, through a taxable Universal Child Care Benefit (UCCB) which, as of 2015, provides $160-a-month for children under six and $60-a-month for children aged 6 to 17. It is estimated the net UCCB cost will be $6.7 billion by 2017-2018. These benefits are further enhanced by the Child Care Expenses tax Deduction (CCED). The problem is that these payments and tax measures disproportionately benefit wealthier Canadians. Indeed, according to the Parliamentary Budget Officer, no less than 51% of the new UCCB payments will go to parents of older children in families that do not even claim child care expenses. These expenditures do nothing to improve the availability and affordability of quality child care spaces, especially for lower-income Canadians.

The Green Party supports transferring more federal funds to the provinces, in a reconstituted and expanded CST, to enable public and non-profit providers to substantially increase the number of child care spaces available for at least 70% of children age six or younger as in European countries like France and Denmark. (Transfers for post-secondary education would be removed from the current CST and placed in a separate transfer described below.) Workplace child care is also a priority, enhancing employee productivity while significantly increasing parental access to children any day of the week. To address affordability, the Green Party supports cancelling the UCCB and converting the CCED into a refundable tax credit, along with other measures to ensure more lower-income Canadians receive greater assistance with their child care expenses.

Provincial governments should establish standards for the quality of child care services and their fees; they should also integrate child care services with ECE programs. There is a particular need to consider arrangements for the growing number of Canadian workers with non-standard, unpredictable work schedules.
Post-secondary education

The Green Party proposes that the Post-Secondary Education (PSE) component of the Canada Social Transfer (CST) should be separated out as an independent transfer payment.

The Standing Senate Committee on Social Affairs, Science and Technology in its report of December 2011, Opening the Door: Reducing Barriers to Post-Secondary Education in Canada, recommended that the federal PSE funds should be reconstituted as a new, independent Canada Education and Training Transfer. The Green Party supports the report’s recommendation that the federal government work with the Council of Ministers of Education, Canada (CMEC), to develop a national strategy that includes setting targets, collecting better data, recognizing and transferring credits, expanding online learning, and funding research and pilot projects. The goal would be to enhance the accountability of provinces and territories for the federal funding they receive. This is a valuable approach to developing clear purposes and objectives for PSE and PSE funding, and since the CMEC would collaborate with the federal government, the final arrangements could be subject to endorsement by the Council of Canadian Governments. Any new federal investment should ensure increased access to PSE and that lack of income is not a barrier for qualified students.

The current federal transfers for PSE provide limited support directly to students — some $695 million was delivered in 2012 – 2013 through the Canada Student Grants Program, which amounts to less than $2000 a year for each of 357,000 debt-strapped students. (Budget 2015 included a modest expansion of grants beginning in 2016-2017 to low- and middle-income students enrolled in educational programs with a minimum duration of 60 weeks.) Most federal support goes directly to the universities. A $1 billion Post-Secondary Education Infrastructure Trust was established in 2006. In addition, approximately 80% of public support for university research in Canada comes from the federal government, much of it through the granting councils, including the Social Sciences and Humanities Research Council, the Natural Sciences and Engineering Council of Canada, the Canada Council, and the Canadian Institutes of Health Research.

All levels of government need to collaborate on a national system to promote agreed purposes and objectives for PSE, as in other developed countries. This must include how to ensure more funds go to the students in order to reduce the costs of post-secondary education, of which tuition is only a component, so that younger Canadians are not condemned to start their working lives under the shadow of unmanageable debt.

The Green Party believes that serious consideration must be given to fully funding the first two years of post-secondary education for all Canadians, to providing for a graduated repayment of debt reflecting employment income, or to perhaps allowing students to pay off their debt by working as part of a Youth Community and Environment Service Corps on designated projects for the betterment of society in their respective communities.

[1] The Green Party believes that the CMHC should not be privatized. The CMHC competes with two private mortgage insurers and ensures a competitive financial sector, preventing the emergence of a private oligopoly of firms that would inevitably lean towards hiking interest rates. Housing policy is a key complement to monetary policy. Since a home is most Canadians’ biggest asset and debt, the government can use the CMHC to anticipate and prevent a housing bubble, rather than have to use the sledgehammer of increasing interest rates economy-wide. For example, the Finance Minister has tightened rules on mortgages four times in four years, eventually eliminating the 25-year amortization period. But the government is unable to prevent banks competing with each other to provide inappropriately lower longer-term mortgage rates.