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September 17, 2006

Sustainable Health and the Negotiating Framework

"Over a five-year period, including the current year (2005/06 to 2009/10), the Ministry of Finance forecasts that $11.4 billion in unallocated fiscal room is available for budget decisions. Half of that amount, or $5.7 billion, is set aside for compensation agreements across the broad public sector."
Ministry of Finance news release on the "Negotiating Framework", November 30, 2005

When Finance Minister Carole Taylor announced the negotiating framework as part of her Second Quarter Report for fiscal year 2005-2006, nothing was said about paying for settlements by starving services. The framework was based on the declaration that the province was doing well and could afford to share the wealth with those who had gone through years of losing to inflation.

With the September 2006 release of the First Quarter Report for fiscal year 2006-2007, it looks like the Campbell government is shifting the ground on how it interprets where the money will come from to pay for the very successful negotiations. The apparent contradiction, between Taylor's claim that health care could absorb 71.3% of the provincial budget by 2017 and the fact that over the past four years revenue has grown by 7.1% per year while health spending has grown by only 4.4% per year, may be explained by the wage settlements.

Table 1.3 in the First Quarter Report showed "updated plan" figures for 2007-08 and 2008-09 for each ministry, but the revised plans did not include the wage settlements. Even though the settlements for all but the teachers were ratified six months ago, the cost of those settlements was shown in a separate line titled "Contingencies - Negotiating Framework"; it indicated $420 million for this year, $895 million for fiscal year 2007-2008, and $1.420 billion for fiscal year 2008-2009. That means the increase of 2.0% shown for the Ministry of Health in 2007-2008, and the increase of 1.2% shown for 2008-2009 must be increased to allow for the wage settlements by shifting money from the contingency line item to the ministry.

When Taylor set out her scenario on health care sustainability under the assumption that health would grow by 8.0% per year while revenue would grow by 3.0%, she could have said that during a period when wages were frozen for three of the four years, health spending increased by an average 4.4% per year. If that rate of increase continues together with the added cost of the negotiated wage increases, then the combined growth rate almost reaches the assumption in Taylor's scenario. The Minister of Finance didn't say those things, but that is the only way to rationalize the apparent contradictions between figures in her First Quarter Report and her scenario built around an 8% annual growth in health spending.

At the time the negotiating framework was set out, Taylor didn't say that accepting it would mean that health spending would be "unsustainable", and she didn't say that accepting it would mean that patients would be on longer wait lists for needed procedures. Is Taylor trying to shift the implied social contract in her framework now that 98% of all public sector workers have settled, or is she simply setting the stage for the Premier's "conversation on health care"?

It is obvious that in addition to funding pay adjustments, it is necessary to increase funding for health care so as to keep up with population increases, increased use due to an aging population and increased costs due to technological change, including higher drug prices. Those factors are likely to make a 5% annual increase in health spending the minimum necessary to preserve the existing service level. That is not a reason to panic and claim the system is not sustainable. Nominal GDP is expected to increase by 5%; if government revenue increased by only 5% it would be a slowdown from the 7.1% per year the Campbell government has enjoyed over the past four years.

Taylor needs to apologize for a First Quarter Report that doesn't make these issues clear, and that isn't transparent in its revision of spending plans for the next two years. Finance Ministers tend to underestimate revenue and overestimate spending. A consequence of planned "surprise" surpluses is that you might linger in pain on a waiting list for a necessary surgery. Is that really sensible budgeting?

In November Taylor said that in addition to $5.7 billion for wage settlements, government had $5.7 billion for other spending between now and 2009-2010. If health maintained its current share of government spending, that means that in addition to the wage settlements, health spending should increase by 41.6% of $5.7 billion, or $2.37 billion. On that basis, there is more than enough room to accommodate the wage increases, the planned increases announced in February, plus the requests from the health authorities.

September 16, 2006

Phony Assumptions in Taylor's Financial Report

Finance Minister Carole Taylor helped spin the Premier's "health conversation" with a misleading graph that accompanied her release of the First Quarterly Report for fiscal year 2006-2007. Her powerpoint graph, titled "health sustainability", demonstrated that health spending would grow to 71.3% of total spending by 2017, if it grew at an annual rate of 8.0% while education grew at 3.0%, other spending was frozen and revenue grew at 3.0%. The Minister's assumptions are not supported by the facts. Revenue has grown faster than health spending since fiscal year 2002-2003. Projecting the recent growth rates shows that health would be reduced to 29% of revenue by 2017, not increased to 71.3%.

Table A8 in the budget documents shows "expense by function". Health spending by function is greater than by ministry since some health spending occurs outside the Ministry of Health. According to the table, in 2002/03 health spending was $10.894 billion; total revenue was $27.659 billion according to Table A7. The First Quarterly Report for fiscal year 2006-2007 says that health spending by function is estimated to be $12.933 billion for fiscal year 2006-2007 (in table A.10); table 1.2 in the Quarterly Report says total revenue is estimated to be $36.386 billion for fiscal year 2006-2007. Calculating the average annual compound growth rate for health spending and total revenue over those four years gives a rate of 4.4% for health and 7.1% for revenue, the opposite of the assumptions in Taylor's graph. At those rates, health spending would be a decreasing percentage of total revenue.

The February 2006 budget and the September First Quarterly Report show planned health spending increasing over the next two years by less than 2% per year. It doesn't make any difference whether you look at spending by Ministry or spending by function:

Planned Health Spending (in billions)
2005/06 2006/07 2007/08 2008/09
Expense by Ministry, table 1.3 p. 11 of 1st Q Rpt $11.413 $11.910 $12.147 $12.290
Expense by Function, table A8, p. 136 of budget $12.481 $12.833 $13.089 $13.261

Since the inception of Medicare, finance ministers have been crying wolf, saying that health spending would soon take 100% of all government spending. In reality, in the 1990s it dipped from 10% of GDP to 9% and is now back up to just over 10%. Of course those figures refer to total health spending while the Campbell government only seems to be concerned about what government spends; government spending on health may increase as a percentage of revenue immediately following a tax cut. If government can afford unsustainable growth in spending for the 2010 games, why can't it afford to spend enough to shorten waiting lists for MRIs? If government can afford substantial corporate tax cuts, like the $143 million per year that was given in the September 2005 mini-budget but not mentioned during the election campaign, why can't it afford to pay for health care? In particular, if revenue is growing faster than health spending, what is the problem?

The February 2006 budget showed a projected increase in health spending by function of only 2.0% between 2006-07 and 2007-08, and only 1.3% between 2007-08 and 2008-09. It is no wonder that on page 20 the First Quarterly Financial Report said: "Health authorities and hospital societies have also identified additional pressures of $63 million for 2006/07, $342 million for 2007/08 and $709 million for 2008/09."

If the health authorities got the requested funds, it would increase the growth in health spending in 2007-08 to 4.6%, and in 2008-09 to 4.0%; that is higher than assumed rate for revenue growth, but much lower than recent experience with revenue growth. The problem is with the government's assumptions for revenue growth of less than 2%; if it is less than population growth (1.2%) plus inflation (1.9%) it suggests a recession, but the Ministry is projecting real GDP growth in excess of 3.0% for the next three years, and nominal GDP growth of 5.0%. How can revenue grow at only 2% if GDP is growing at 5%? The figures don't balance with claims about sustainability for health spending.

It is possible that the spending projections in the budget and in the First Quarter Report are inaccurate. If that is the case because recent wage increases were not factored in, then the Minister of Finance should apologize for presenting an inaccurate First Quarter Report.


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