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Livio Di Matteo: Total health spending in Canada will reach $331B this year, driven by care deferred during the pandemic

Commentary

Canadian health-care spending is starting to come down to earth after ballooning during the pandemic, but governments are still grappling with the cost of Canadians catching up on deferred care from the last two years.

Total health spending in Canada is expected to reach $331 billion in 2022, or $8,563 per Canadian following the COVID-driven surge of spending since 2020.

In 2020, federal, provincial, and territorial governments (combined) spent $770 per person on health-specific funding to deal with COVID-19. Meanwhile, this pandemic response funding is projected to decline to $376 per person in 2022.

The Canadian Institute for Health Information’s release this morning of the National Health Expenditure Trends 2022 provides insight into Canadian health spending during the COVID-19 pandemic.

Total health expenditure in 2022 is expected to rise by 0.8 percent, following growth of 13.2 percent in 2020 and 7.6 percent in 2021 while in the four years prior, growth in total health spending averaged 4 percent annually. In 2020, total health spending in Canada was $305.1 billion with per capita spending at $8,021. In 2021, forecasted health expenditure growth moderated bringing total health spending and per capita to an estimated $328.4 billion and $8,586.8 respectively.

In terms of spending relative to the size of the economy, it is anticipated that total health expenditure will decline to 12.2 percent of Canada’s gross domestic product (GDP) in 2022, following a high of 13.8 percent reached in 2020 but still well above the pre-pandemic 11 percent.

According to the CIHI, health spending in 2022 is being driven by care that was deferred during the pandemic, resulting in an increase in the number of health care services provided compared with pre-pandemic years. In addition, demographic factors such as population aging and population growth will continue to contribute to spending growth as will the effects of wage and cost inflation. Nevertheless, growth is still expected to moderate in 2022, and indeed once adjusted for inflation and Canada’s robust population growth it would appear that real per capita total health spending is projected to actually decline in 2022 coming in at -1.8 percent compared to 4.3 percent in 2021 and 7.7 percent in 2020.

Health-care spending in Canada seems to be marked by a case of simultaneous feast and famine. It is interesting that stories about health sector resource shortages dominate the pandemic’s wake and yet according to the CIHI, in 2020, of the 38 OECD countries, Canada’s total health expenditure to GDP ratio was the second highest and exceeded by only the United States. In per capita spending during 2020, Canada ranked somewhat lower coming in seventh place behind the United States, Switzerland, Germany, Norway, The Netherlands, and Austria but ahead of everyone else. Oddly enough, much is made of Canada’s aging population, but Italy and Japan have much higher shares of seniors in their population, but both spend less on health than Canada in terms of either the GDP share or per capita. And despite our vaunted commitment to public health care, we have a lower publicly funded share of health spending than the OECD average.

We are entering a turbulent period in Canadian health-care spending and provision. While there have been surges in health-care spending that have raised total spending to new heights, it would nonetheless appear that in the new inflationary environment accompanied by robust population growth, health spending resources per person are actually expected to decline in 2022. And like all things Canadian, there can be expected to be regional variations in the impact based on factors such as economic growth, government revenue growth, and demographics resulting in variations in not only total health spending but in the approximately two-thirds that is provincial government health spending. However, the differences are already substantial.

Credit: Janice Nelson

Figure 1 presents real per capita provincial government health spending (in $2022) using the CIHI data estimates provided for 2022 and they show that the average for Canada was $5,619 with six provinces above the average and four below. Spending ranges substantially from a high of $7,295 for Newfoundland and Labrador to a low of $5,028 for New Brunswick—a nearly $2,300 difference from top to bottom.

Figure 2

Credit: Janice Nelson

Figure 2 plots real per capita spending for the provinces over time with some regional aggregation of provinces to outline trends more clearly and they show that while provincial health spending moves together, the range between high and low-spending regions increased during the 1980s, fell during the spending declines of the early 1990s that were marked by severe recession and the federal fiscal crisis, and then grew again as funding expanded after 2000.

Figure 3

Credit: Janice Nelson

The pandemic era notwithstanding, real per capita health spending has grown since 1975 but there have been distinct phases of growth as illustrated in figure 3. For Canada as a whole, the period 1975 to 1991 saw real per capita spending growth average 2.8 percent annually but this was followed by the retrenchment of the 1992 to 1996 period which saw average annual growth decline an average of 1.6 percent annually. The period from 1997 to 2010 was an era of robust economic growth and marked by the enrichment of federal health transfers with the start of the 6 percent escalator of the 2004 Health Accord. As a result, annual growth rates during this period averaged 3 percent in Canada with Alberta and the Atlantic provinces followed by the Prairies seeing particularly pronounced growth.

While the six percent growth transfer escalator continued until 2017, advance notice that it would end was provided circa 2011 and combined with the effects of the 2008-09 Great Recession and robust population growth, seems to have encouraged provincial governments to rein in their real per capita health spending growth during the 2011 to 2019 period.

After years of concern that health spending was unsustainable, the cost curve appears to have finally been bent. Canada as a whole saw real per capita provincial government health spending average annual growth of 0.6 percent with only Quebec growing above 1 percent annually. However, the three years of the pandemic saw growth rates soar and the question remains as to what will happen next.

Figure 4

Credit: Janice Nelson

Estimates for 2022 see real per capita provincial government health spending declining, though at a much smaller rate than total health spending. Figure 4 illustrates that this decline will not be uniform across individual provinces with the four Atlantic provinces, Ontario, Saskatchewan, and British Columbia seeing increases while Quebec, Manitoba, and Alberta are expected to see decreases. While much is made of the importance of federal cash transfers to fund health care, it remains that spending differences across the provinces are also a result of provincial government choices with how they wish to deploy their own source revenues and resources.

The picture going forward from 2022 will see upward pressures on health spending just from population growth alone given Canada’s robust population growth that is the fastest in the G-7. As well, there are ongoing shortages of health human resources given the age distribution of the health sector labour force—nearly 20 percent are over age 55—which means a combination of post-pandemic burnout and retirements are driving increased scarcity and pressure on wages and salaries. This scarcity is occurring at the same time as increased demand from the backlog of delayed diagnostic tests and procedures during the pandemic are dealt with. We are in the curious position of being one of the biggest spenders on health in the developed world and yet marked by growing shortages of services as well as mediocre performance on many health indicator outcomes compared to countries that are spending less than we do.

And so, the grand operatic performance that is the Canadian health system in crisis will continue. Inevitably, as autumn turns to winter and hospital emergencies are increasingly clogged with COVID and other rebounding respiratory system ailments, the media will present arias that dramatically chronicle the mounting crisis.

The provinces will then join in a unified choral performance repeating their perennial demands for increased health transfers from the federal government to address the situation. Finally, Ottawa will conclude the performance with a well-rehearsed and precise recitative resisting the handover of funds without conditions that are tied to outcomes it desires, moving the discussion and the problem forward to yet another fiscal year.

For Canada’s health system, tomorrow is yesterday.

Sean Speer: No, the government is not running a tight fiscal policy

Commentary

As we await Finance Minister Chrystia Freeland’s forthcoming Fall Economic Statement, there’s a debate going on about whether the government is running a tight fiscal policy. Permit me to weigh into the debate: the answer is no. 

The case in favour depends on a set of flawed assumptions including relying on an inflated benchmark due to the massive spike in program spending during the pandemic and disregarding the pre-pandemic fiscal trendline. The real story here is that the Trudeau government significantly grew federal spending prior to the pandemic, raised it to unprecedented levels during the pandemic, and has kept them elevated in its aftermath. 

Let’s start with a definition. A tight or contractionary fiscal policy can refer to a budgetary surplus or, more generally, to lower government spending which in turn reduces aggregate demand in the economy.  

The former definition clearly doesn’t apply here. The federal government recorded a $90.2 billion deficit last year and, according to April’s budget, is projected to run a $52.8 billion this year—though the Parliamentary Budget Office anticipates that it will ultimately come in lower.

The latter definition technically applies. Program spending declined from a pandemic high of $608.5 billion in 2020-21 to $468.8 billion last year and is projected to fall further to $452.3 billion this year.

But this technical definition belies the underlying facts of the government’s fiscal policy. A major problem with the argument in favour of a tight fiscal policy is that it uses as its benchmark the unprecedented increase in program spending during the pandemic. Program spending jumped by 79.8 percent between 2019-20 and 2020-21. It’s hardly surprising therefore that spending is falling from such a historic high. 

What’s surprising is that after a nearly 80 percent year-over-year increase, it’s only decreasing by about 30 percent in the subsequent two years and then is set to resume growing again (see Figure 1). In other words, a considerable share of the pandemic-induced spike in program spending has proven to be far less temporary than it’s often characterized. 

Another way to see this is to try to forecast what would have happened to program spending were it not for the pandemic. As Figure 1 shows, during the Trudeau government’s first five years in office, program spending grew by an annual average of 6.4 percent. It’s important to note here that this level of sustained spending growth was in and of itself significant: it far outstripped key economic indicators such as real GDP growth or inflation over this period.

Figure 1. Graphic credit: Janice Nelson.

But if the government had merely kept spending growth at this rate, program spending in the current year would be $45.4 billion less than is currently projected (see Figure 2). This may provide a useful back-of-the-envelope sense of how much of the pandemic-induced spike in federal spending has persisted. 

Figure 2. Graphic credit: Janice Nelson.

The upshot is that rather than a true contraction in program spending, we’re actually seeing a level-step increase in the overall trendline that exceeds even the Trudeau government’s own pre-pandemic profligacy. Consider for instance that program spending in 2021-22 was nearly 19 percent of GDP which (excluding the extraordinary experience of 2020-21) is the highest percentage since 1982 and the fourth highest in records dating back to the mid-1960s.  

There’s also reason to believe that there are risks to the government’s own spending projections. Remember that program spending grew by an annual average of 6.4 percent in the five years prior to the pandemic. Over the five-year period between 2022-23 and 2026-27, the government is projecting program spending to grow by an average of just 1 percent. 

Notwithstanding the minister’s recent talk of restraint, it seems implausible given her government’s parliamentary agreement with the New Democrats and its own predispositions that it will be able to sustain such limited spending growth through an expected recession and the next election. 

To put it in perspective, an average growth rate of 1 percent is not much more than the spending growth in the last five years of the Harper government which the minister and other Liberals decried as “austerity” at the time. The point here isn’t about partisan hypocrisy but rather if one was betting his or her own money, the solid bet would be that program spending is only poised to grow even further in the coming years.

Which brings us back to the debate that we started with. Characterizing the Trudeau government’s fiscal policy as tight is the policy analysis equivalent of my toddler eating a lot of candy on Halloween night and then committing to eating slightly less candy thereafter and calling it a diet. Thursday’s Fall Economic Statement may be called various things but tight isn’t likely to be one of them.