Finance Canada
Budget 2000 - Budget Plan, Chapter 3: Maintaining Sound Financial Management -   4
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Major Transfers to Other Levels of Government

Every year the Government of Canada transfers significant funds to the provinces and territories under the CHST and fiscal transfers. The latter include Equalization, Territorial Formula Financing, statutory subsidies and recoveries under the Youth Allowance Program. The 1999 budget put the major transfers on common five-year funding tracks, thereby providing the provinces and territories with improved predictability in funding.

The CHST is a block-funded transfer that supports health care, post-secondary education, and social assistance and social services. It is delivered in the form of cash and tax transfers. The tax transfer component reflects a transfer of personal and corporate income tax room made to the provinces in 1977.

In the 1999 budget, the Government announced the single largest investment it has ever made – an $11.5-billion increase in funding, specifically for health care, over five years. CHST cash payments were increased by $1 billion in 2000-01, $2 billion in 2001-02 and $2.5 billion in 2002-03 and 2003-04, for a total of $8 billion.

In addition, the Government provided a CHST cash supplement of $3.5 billion, which was accounted for in 1998-99. This supplement was paid into a third-party trust so that individual provinces and territories could draw down the supplement (over three years starting in 1999-2000) in a pattern which best meets the needs of their health care systems.

This budget proposes to provide the provinces and territories with another cash supplement of $2.5 billion to support post-secondary education and health care. This amount will be accounted for in 1999-2000. It will also be paid into a third-party trust on passage of proposed amendments to the relevant legislation. It is anticipated that the provinces and territories will draw down this supplement in a gradual manner such that the total cash support will increase by $1.0 billion in 2000-01 and $0.5 billion per year in each of the following three years. However, flexibility will be provided so that the provinces and territories can draw down their allocations in a manner that best serves their needs.

The largest component under fiscal transfers is Equalization. This program provides less prosperous provinces with federal money to assist them in offering programs and services to their residents. It allows provinces with below-average capacities to raise revenues to provide public services that are reasonably comparable to those found elsewhere in the country without imposing above-average tax rates. Currently, seven provinces receive these payments: Newfoundland, New Brunswick, Prince Edward Island, Nova Scotia, Quebec, Manitoba and Saskatchewan.

Payments under the Equalization program are made on the basis of a formula set out in legislation. The legislation also stipulates that the growth in entitlements cannot exceed the growth in GDP. However, there are often large adjustments in current years pertaining to revisions to economic data, which in turn affect entitlements for prior years. For example, data revisions relating to 1996 and 1997, primarily resulting from stronger growth than anticipated in Ontario relative to the Equalization-receiving provinces, resulted in large payments in 1998-99 relating to previous years. This one-time adjustment in 1998-99 accounts for the decline in cash payments between 1998-99 and 1999-2000. For planning purposes, the outlook assumes that, beginning in 2000-01, growth in Equalization payments will equal growth in nominal GDP.

Also included under fiscal transfers is Territorial Formula Financing, which is a transfer to the territorial governments of the Yukon, Northwest Territories and Nunavut, and which recognizes the unique challenges and higher costs of providing public services in the north.

Finally, alternative payments for standing programs represent recoveries of federal tax point abatements under contracting-out arrangements. Provinces were given the option in the mid-1960s to accept tax points in lieu of cash transfers. The value of these tax points is netted against total entitlements, and the difference is subtracted accordingly from cash transfers. Quebec was the only province to choose these arrangements. The recoveries have no impact on net federal transfers or on Quebec’s net receipts.

Direct Program Spending

Direct program spending consists of total program spending excluding the major transfers to persons and other levels of government. It includes subsidy and transfer programs administered by departments, expenditures related to Crown corporations, and operating, maintenance and capital spending by departments, including National Defence.

Subsidies and other transfers are expected to total $20.2 billion in 1999-2000, $19.6 billion in 2000-01 and $20.2 billion in 2001-02. They are higher than projected in the last budget, reflecting the impact of a number of initiatives announced since then.

• Many Canadian farmers, especially in parts of western Canada, are experiencing a significant decline in their incomes, largely due to factors beyond their control, such as the international decline in agricultural commodity prices. This crisis is having a devastating effect on their families and their rural communities. In response to this crisis, the Government provided $900 million in agricultural assistance under the Agricultural Income Disaster Assistance (AIDA) program in the 1999 budget. In November 1999, the Government announced that it would provide a further $170 million in 1999-2000 for AIDA. In January 2000, the Government announced that it would provide another $1 billion over the next two years to provide similar income disaster assistance to help farmers manage the production and market risks that they face. More recently, in response to continuing low prices and incomes, an additional $240 million in 1999-2000 is to be made available as soon as possible to some Prairie farmers. This amount will be matched by the traditional 60:40 ratio, which would mean $400 million would flow to farmers in particular need. Should grain prices and farm incomes not improve by 2002, additional funding may be considered for that year, provided an overall agreement with provinces has been reached on federal-provincial support for farmers.
• Since 1996, Canada has been a leader in developing the international initiative to provide relief for Heavily Indebted Poor Countries. However, the world’s poorest countries’ capacity to tackle poverty through initiatives in areas such as health and education remains constrained by the burden of servicing their debts. In support of this, Canada will provide $175 million to the multilateral debt relief funds managed by the International Monetary Fund and World Bank. In addition, Canada will provide 100-per-cent relief on debts owed to Canada by eligible developing countries that are making a real effort to improve the well-being of their citizens.

Debt reduction, while a critical element of assistance, will not by itself be sufficient to foster a lasting escape from poverty. Canadians understand the importance of development assistance to fighting poverty. In each of the last two budgets, incremental funding was provided to the International Assistance Envelope (IAE), which encompasses both Official Development Assistance (ODA) and assistance to countries in transition in Central and Eastern Europe. This budget builds on those initiatives. Over the next three years, IAE funding will be increased by an additional $435 million. This is over and above funding for the International Climate Change initiatives described in Chapter 5, which also constitutes ODA.

In addition, increased efforts are required to promote peace and protect people from the instability and the insecurity created by war, conflict and acts of terrorism. Canadians are proud of Canada’s role in seeking to eliminate land mines and create an International Criminal Court. This budget, therefore, provides an additional $10 million annually to the Department of Foreign Affairs and International Trade to help the Government further its human security agenda.

• Nearly half of the health transfers are for health-related services for First Nations and Inuit health services. In the 1999 budget, additional funding was provided to improve health information systems, promote health research and for preventive and other health initiatives.
• The decline in transfers administered by Human Resources Development Canada between 1998-99 and 1999-2000 reflects special one-time funding provided for the Canadian Fisheries Adjustment and Restructuring Program in 1998-99. The profile over the outlook period primarily reflects higher transfers under programs designed to improve access to post-secondary education – the Canada Student Loans Program, the Canada Study Grants and the Canada Education Savings Grant (CESG). The CESG was introduced in the 1998 budget as part of the Canadian Opportunities Strategy. Its success in helping parents and grandparents save for children’s education has exceeded all expectations. Government contributions to individual registered education savings plan accounts are expected to reach about $750 million in 2000-01, nearly triple the amount expected at the time of the 1998 budget. In December 1999, the Government announced it would provide $753 million to help Canada’s homeless persons. Of this amount, $432 million will be administered by Human Resources Development Canada and the remainder by Canada Mortgage and Housing Corporation.
• Transfers administered by Indian and Northern Affairs Canada are expected to increase over the outlook period. Population growth and the costs of providing services to First Nations and Inuit exceed those for the Canadian population at large.
• The increase in transfers under industry and regional agencies in 1999-2000 primarily reflects the payment of $900 million to the Canada Foundation for Innovation (CFI), which awards funds to help post-secondary educational institutions, research hospitals and not-for-profit institutions to modernize their research infrastructure and equip themselves for state-of-the-art research. The new funding in this budget, on top of the $1 billion provided in previous budgets, will support continued CFI awards until 2005. This budget also provides funding through the granting councils to establish and sustain the Canada Research Chairs.
• Most of the transfers administered by Veterans Affairs Canada are for pensions and allowances to veterans and others in recognition of the sacrifices they made while serving their country. In January 2000, the Government announced a special one-time payment to merchant marine veterans or their survivors to compensate for certain benefits that were not available on demobilization. Total compensation is to be capped at $50 million.

Other subsidies and transfers include assistance to support Canadian culture and identity, fisheries adjustment, and cost-sharing with the provinces and territories of juvenile justice services, among others. One of these is an increase in funding for the Canada Council of $10 million per year.

The 1999 Speech from the Throne made a commitment to increase support for the production of Canadian stories and images. To this end, the Government will work over the course of the coming year to modernize its support for feature films to improve the diversity and quality of Canadian films and reward success. As well, the administration of the tax credits that support film and television production will be simplified and strengthened.

Payments to Crown corporations consist of direct expenditures to appropriation-dependent Crown corporations and the annual profits and losses of enterprise Crown corporations. Over the outlook period, payments are expected to increase, reflecting transitional assistance with respect to certain Crown corporations administering their own employee pension plans as part of the reform of public service pension plans. Canada Mortgage and Housing Corporation will invest an additional $268 million in the Residential Rehabilitation Assistance Program as part of the Government’s December 1999 announcement to help Canada’s homeless persons.

Defence spending declined by over 20 per cent between 1993-94 and 1998-99, reflecting the impact of the restraint measures introduced in the 1994, 1995 and 1996 budgets. Despite these reductions, the Canadian Forces have continued to demonstrate an unwavering dedication, internationally and at home, in dealing with armed conflicts and natural disasters. In the 1999 budget, defence funding increased to address compensation and benefits. Funding was also made available during 1999-2000 to assist the military to meet Canada’s international commitments in Kosovo. Funding for the next three years has also been increased to improve National Defence’s ability to participate in peacekeeping activities, upgrade capital equipment and address quality of life issues within the military. Since the 1999 budget, an incremental $2.3 billion has been provided through 2002-03.

All other spending includes departmental operating and capital costs and centrally held funds to assist departments in managing unavoidable cost pressures. The increase between 1998-99 and 1999-2000 reflects, in part, the costs associated with addressing the Y2K computer problem in federal departments, as well as retro-active pay adjustments. Over the past year, the Treasury Board Secretariat conducted a major review of the Government’s capacity to deliver existing programs. This review has resulted in increases in funding in a limited number of areas that are regarded as essential to the health and safety of Canadians or critical to the sustainability of high quality public services. Including funds earmarked for capital, this budget provides funding of $0.5 billion in 1999-2000, $1.2 billion in 2000-01, and about $1.0 billion in both 2001-02 and 2002-03 (Table 3.7). Examples of how these funds will be used include:

• Fisheries and Oceans is responsible for maintaining safety and security on Canada’s waters and ensuring the sustainability of marine resources. The past several years have seen growing pressures on fish stocks, the introduction of new marine navigation technology and growing marine traffic. To help meet these challenges, Fisheries and Oceans will receive additional funding of $320 million over the next three years.
• The Government is committed to protecting the health of Canadians and finding new and better ways of responding to the emerging challenges to public health. Incremental funding is being provided to strengthen federal health protection activities such as disease control and testing of food, drugs and natural health products. This budget also allocates additional funding to enable Health Canada to sustain existing services within the First Nations and Inuit health system. In total, this budget allocates $352 million over four years for initiatives in these areas.
• In the past year, Canada has experienced an unprecedented increase in the number of migrants attempting to bypass proper channels for entering the country. Allowing this illegal migration to continue would clearly compromise the integrity of the refugee determination and immigration systems. As well, there is a need to address new and emerging threats, including those from terrorism, to the security of Canada and its neighbours. The Government is therefore taking action to strengthen the control of Canada’s borders.

• Citizenship and Immigration Canada will receive incremental funding to meet challenges to the immigration and refugee determination systems.
• The RCMP and Canada’s security agencies provide vital law enforcement, anti-crime and security services. This budget will provide additional funding to strengthen federal policing and security activities, particularly in the area of organized crime, and improve policing services provided to provinces, territories and municipalities.
• This budget provides additional funding to the Canada Customs and Revenue Agency to modernize its border management processes, fundamentally redesigning its customs practices. Streamlined processing of low-risk pre-approved imports and travellers will facilitate trade and travel and make Canadian business more competitive. This will allow the Agency to devote more resources to those enforcement activities that are most crucial to protecting Canada’s borders.

Although additional funding is being provided for urgent operating and capital pressures, the Government will continue to operate in the most efficient and cost-effective manner possible. Under the Expenditure Management System, departments will still be required, to the greatest extent possible, to fund new cost pressures by internal reallocation and increased efficiencies.

Table 3.7
Providing Essential Public Services

Public Debt Charges

Based on the financial results for the first nine months of the year, public debt charges are estimated to total $41.5 billion for 1999-2000, slightly higher than in 1998-99 (Table 3.8). Over the outlook period it is assumed, for the purposes of projecting public debt charges, that the $3-billion Contingency Reserve would not be needed and would be used to reduce the public debt. The increase in public debt charges in 2000-01 and the subsequent reduction in 2001-02 reflect the expected increase in market interest rates and their subsequent easing.

Table 3.8
Public Debt Charges

Prudent and effective debt management are required to ensure that debt service costs and the Government’s exposure to unexpected changes in interest rates and rollover risk are kept low. Greater cost stability has been achieved over the past several years by increasing the share of the Government’s interest-bearing debt issued at fixed rates from about 50 per cent in 1992-93 to about two-thirds currently. A higher proportion of fixed-rate debt provides protection against unexpected changes in interest rates and brings the term structure of the debt in line with other major sovereign borrowers. In the early 1990s, the impact of a 100-basis-point increase in interest rates was estimated to raise public debt charges by $1.8 billion in the first year. Today the same increase in interest rates would increase debt charges by only $0.9 billion in the first year.

Taking into account the financial requirements forecast for 2000-01 (see below) and the desire to maintain a prudent debt structure and well-functioning Government of Canada securities market, the main financing operations – the bond and Treasury bill programs – are expected to operate at levels similar to 1999-2000. More detail on the Government’s overall debt strategy will be available in the Debt Management Strategy: 2000-01, to be published by March 31, 2000.

Financial Requirements/Surplus

Financial requirements/surplus provides a measure of the net cash requirements needed to fund the Government’s programs and debt charges. The difference between the financial requirements/surplus and the budgetary balance is due to a number of non-budgetary transactions (off-budget transactions) that provide funds to the Government. Non-budgetary transactions convert the accrual-based spending and revenue concepts in the budgetary balance to the cash-based financial requirements. The largest of the non-budgetary transactions are government employee pension accounts. Other smaller sources of funds include loans, investments and advances, cash in transit and accounts payable.

In 1998-99, there was a financial surplus (excluding foreign exchange transactions) of $11.5 billion (Table 3.9). This comprised a budgetary surplus of $2.9 billion and a net source of funds from non-budgetary transactions of $8.6 billion, most of which resulted from developments in the pension accounts. Of this amount $5.0 billion related to the federal public sector pension plans, with an additional $1.2 billion attributable to changes to the Canada Pension Plan (CPP). With respect to the CPP, changes to federal legislation are being proposed to allow the provinces to repay borrowings from the CPP at the market price.

For 1999-2000, a financial surplus of $8.0 billion is expected. This lower surplus reflects the assumption of a balanced budget and a lower source of funds from the pension accounts, primarily reflecting special adjustments in 1998-99 related to the reform of the public service pension plans.

For 2000-01, a financial requirement of $5.0 billion is expected, the first requirement in three years. Normally, non-budgetary transactions provide the Government with a net source of funds.

With the reforms of the public sector pension plans, effective April 1, 2000, the difference between the budgetary balance and the financial requirements/surplus will be permanently reduced. Government and employee contributions to the employee pension plans will now be invested in financial markets, rather than included as part of non-budgetary transactions. This will reduce the non-budgetary source of funds by at least $3.5 billion per year. In addition, a number of Crown corporations, which are currently members of the public sector pension plans, will be setting up their own pension plans. As such, there will be transfers of the applicable assets to these new plans.

There will also be a number of extraordinary cash payments in 2000-01 – the liabilities for which were included in the budgetary balance in prior fiscal years. These include payments associated with the pay equity settlement and the transfer of the CHST cash supplement to a third-party trust.

A financial balance is expected for 2001-02.

Table 3.9
Budgetary Balance, Non-Budgetary Transactions and Financial Requirements/Surplus¹

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