One of the arguments made in the public sector health care sustainability debate is that while the share of national income devoted to public health insurance has grown at a relatively modest rate, the provinces have weakened their resource base with fiscal measures that have reduced their rates of personal and corporate taxation. It has been argued that in the absence of these measures, the revenue to GDP ratio would not have declined and there would be ample resources to sustain public health care.
The evidence on this is quite interesting. The accompanying figures use provincial revenue, population and GDP data from Statistics Canada deflated using the government expenditure implicit price index (1997=100) and plot average and median real per capita provincial government revenues and the revenue to GDP ratio for the 1975 to 2008 period. I’ve left out the 2009 and 2010 period given the impact of the Great Recession. The results show that average real per capita revenues across the provinces has risen over time by almost 75 percent. Despite the tax cuts of the last decade, revenues per capita have continued to rise. The average revenue to GDP ratio shows a somewhat different story – there is a increase in the average ratio across the provinces from the mid 1970s to the early 1990s and then there is indeed a decline. However, average and median revenue to GDP rates are now approximately where they were in the mid 1970s.
It is well known that public sector health spending growth rates over the last decade have managed to outstrip growth rates for both government revenues and GDP. As well, other government program spending has also grown though not as quickly as health spending. How is all this possible? Missing from all this is what has happened to debt service costs – the so-called fiscal dividend. According to the Federal Fiscal Reference Tables, whereas in 1998, the debt interest share of provincial government spending in Canada was 14 percent, by 2008 it had fallen to 8.5 percent. This freed up resources such that governments were able to increase health spending, all other government program spending and lower tax rates. This of course came to an end with the deficits of the Great Recession, which once combined with rising interest rates are anticipated to once again raise debt service costs. It is the end of the fiscal dividend era that is the great challenge facing government spending in general and health spending in particular.