Five Little Noted Data Points…From the 2018 Federal Budget

Demographic crunch: Federal government direct spending on “elderly benefits”[1] is set to rise at an accelerating pace. From $48.2 billion in 2016-17, this category of spending is projected to reach $67 billion – a 39% jump – by 2022-23. The upward pressure will continue through the 2020s. This spending trajectory casts doubt on the wisdom of the federal government’s move, in 2016, to reverse the previous government’s decision to gradually raise the age of entitlement for Old Age Security (OAS) payments from 65 to 67 years. With life-spans steadily increasing, it makes sense to modify policy to encourage people to spend more years in productive work.

Outlook For Selected Federal Government Program Expenses
(billions of dollars)
2016-2017 2017-2018 2018-2019 2019-2020 2020-2021 2021-2022 2022-2023
Major transfers to persons
Elderly benefits48.250.953.656.760.163.567.0
Employment insurance benefits20.720.120.721.722.523.324.0
Children's benefits22.123.423.723.924.324.725.1
Major transfers to other levels of government
Canada Health Transfer36.137.138.640.241.743.344.9
Canada Social Transfer 13.3 13.7 14.2 14.6 15.0 15.5 15.9
Equalization 17.9 18.3 19.0 19.8 20.5 21.3 22.1
Territorial Formula Financing 3.6 3.7 3.8 3.9 4.0 4.1 4.2
Gas Tax Fund 2.1 2.1 2.2 2.2 2.2 2.3 2.3
Home care and mental health 0.0 0.3 0.9 1.1 1.3 1.5 1.2
Other fiscal arrangements -4.3 -4.7 -4.9 -5.3 -5.4 -5.6 -5.9
Total 68.7 70.5 73.6 76.5 79.3 82.3 84.7
Direct program expenses
Transfer payments 41.6 44.1 47.5 50.4 52.4 52.0 52.0
Operating expenses 86.0 95.6 93.1 92.3 92.9 94.9 97.3
Total 127.6 139.7 140.5 142.7 145.3 147.0 149.3
Total program expenses 287.2 304.6 312.2 321.5 331.5 340.7 350.1
Source: Budget 2018, page 324.

Slower growth in federal health transfers: Ottawa pays for a modest share of the overall public-sector cost of delivering health care services to Canadians. The provinces bear the bulk of these costs. But in 2016-17, the federal government did transfer $36 billion in “cash” to the provinces to help pay for health care. This amount is expected to climb to $45 billion by 2022-23. According to the Budget, federal health transfers to the provinces will grow by 4% a year going forward. In the preceding decade, they were increasing by about 6% a year. The downshifting in the rate of growth of federal health transfers is sure to put a squeeze on provincial government budgets in the next several years.

Canada is benefitting less from higher world oil prices: Global oil prices have strengthened since 2016. However, Budget 2018 recognizes that the “discount” that Canada receives for our oil exports is an impediment to realizing the full economic value of the country’s extensive energy resources. The discount, which stood at a whopping US$20/barrel as of early 2018, reflects “pipeline constraints” and Canada’s inability to access more remunerative offshore markets for our oil (page 290, Budget 2018). The discount has more than doubled in the past year, costing Canada tens of billions of dollars in foregone income.

Business investment remains weak, despite capacity constraints: Capacity utilization across Canadian industries has risen in recent years and is now almost back the pre-2008 peak (page 288, Budget 2018). Capacity constraints normally presage a significant pick-up in business fixed investment –on machinery, equipment, construction, advanced technology products, and engineering infrastructure. Unfortunately, that doesn’t seem to be happening in the current economic cycle. Statistics Canada just reported[2] that non-residential investment is expected to rise by less than 1% in 2018, down from the modest 3% increase seen in 2017.

Iindigenous communities continue to face persistent socio-economic gaps. Budget 2018 puts considerable emphasis on Indigenous reconciliation and includes a host of measures aimed at improving the lives of aboriginal persons. Ottawa plans to spend an additional $5 billion on programs/services in this area over the next few years. One indicator of the difficult conditions in many aboriginal communities is the percentage of children in care. While Indigenous children make up 7.7% of all Canadian children under age 14, they account for 52% of children in foster care.

[1] Mainly Old Age Security payments.

[2] “Non-residential capital and repair expenditures 2016 (revised), 2017 (preliminary), and 2018 (intentions),” The Daily, February 28, 2018.