The provinces might get their health funding boost — with strings attached

Manitoba Premier Brian Pallister said Thursday that when it comes to funding for health care, the provinces aren't looking for the federal government to be their "banker" — they're looking for a "partner."

He's at least half right.

The premiers certainly aren't looking for a banker, because bankers typically apply pretty stringent conditions to any money they hand out (and they usually expect you to pay it back).

For the same reasons, it's not clear how much the premiers want a "partner" either. The money they seek is money they can spend without the federal government being able to say much of anything about it.

What the provinces actually seem to be looking for is a donor.

WATCH: Manitoba Premier Brian Pallister calls out Prime Minister Justin Trudeau on health transfers

You can see the likely compromise here: the federal government increasing funding while acting like something in between a donor and partner. But underneath the political negotiation are some long-term questions about taxes, spending and debt — questions about whether governments at all levels will have enough money to do what citizens want or need them to do in the years ahead.

Officially, the premiers are demanding that the federal government give them enough funding through the Canada Health Transfer (CHT) to cover 35 per cent of all health care costs. There's nothing particularly magical about the number — the last time federal cash transfers covered that share of health costs was in the mid-1970s. But the premiers have decided that it feels like a fair number, or a sufficiently ambitious opening bid.

There is no requirement that CHT funds be spent on health care. Right now, the funding provided by the CHT is equal to about 22 per cent of all health costs incurred by the provinces (though there is a long trail of context behind that number).

In 1977, the federal government transferred "tax points" to the provinces — effectively reducing federal taxes so that provinces could raise theirs — to cover health care costs. The current Liberal government also has signed separate agreements to provide $11 billion over ten years to the provinces to cover specific costs related to mental health and home care.

The provinces have a point

Raising the CHT to cover 35 per cent of all health costs incurred by the provinces would amount to an increase of $28 billion in new annual spending for the federal government. The provinces argue that the federal government is in a better position to carry that cost. But that's not the same as saying it would be easy.

The provinces have a case for calling on the federal government to pay more. The parliamentary budget officer's latest fiscal sustainability report, released last November, repeated a warning that has been offered on a regular basis over the last several years: assuming that an aging population leads to rising health care costs, the combined "subnational" debt-to-GDP ratio will continue to climb unsustainably into the future.

According to the PBO, provinces would need to either raise taxes or cut annual spending by a combined $12 billion to stabilize their collective debt-to-GDP ratio at the pre-pandemic level of 24.1 per cent.

The federal government's debt-to-GDP ratio, meanwhile, is set to decline over the long term. In fact, according to the PBO's calculations, the federal government could cut taxes or increase spending by $19 billion and still expect to get back eventually to its pre-pandemic debt-to-GDP ratio of 28 per cent.

It's time to talk about taxes

A transfer of $28 billion from the federal government to the provinces would flip those calculations. The premiers have their own report from the Conference Board of Canada that says the federal debt-to-GDP ratio would increase to 60 per cent and then very slowly decline to 57 per cent by 2038 — though the Conference Board calculates that provincial debt-to-GDP eventually would continue to rise.

It's debatable what sort of debt-to-GDP ratio the federal government can now carry responsibly. While provincial conservatives might be happy to take that $28 billion, federal Conservatives might be even happier to criticize the federal debt levels that would result.

But it's also possible that someone here needs to think about raising taxes — and most federal governments are going to be reluctant to surrender fiscal room to the provinces if it means those provinces can avoid raising taxes, or even cut them.

The Alberta government, for instance, is in the process of cutting its corporate tax rate from 12 per cent to eight per cent. (When he was Quebec's premier, Jean Charest semi-famously used a boost in federal transfers in 2007 to hand out a pre-election income tax cut.)

One way or another, a conversation about the resources needed to tackle the challenges of the post-pandemic world is necessary — and maybe inevitable.

But Trudeau seems to be in no rush to start the health care aspect of that conversation. "As I've said to the premiers, we will be there to increase those transfers," he told reporters on Friday. "But that conversation needs to happen once we are through this pandemic."

Room for compromise

While the Liberals might be willing to increase the unconditional transfer to some degree, they also have other health care priorities that they'd like to pursue — expanding pharmacare and improving the conditions of long-term care (including a commitment to new national standards).

Put those things together and the provinces might end up with an offer to increase the federal contribution through a combination of conditional and unconditional funds — though perhaps not nearly equivalent to $28 billion in new money.

Conservative leader Erin O'Toole has insisted that he would be prepared to increase the transfers without conditions. He's also stopped short of saying that a Conservative government would actually put up the full $28 billion.

Barring a quick change in government, though, the premiers and the prime minister might realize — as any number of first ministers before them have done — that they're ultimately tied together.

The provinces want money. The federal government wants to advance some legacy-defining priorities. And the public might not be terribly interested in jurisdictional arguments right now.

These are the makings of a beautiful, if acrimonious, partnership.