Is it time for a federal transfer based on demographics?

Posted on September 16, 2021 | By Ashley Fitzpatrick | 0 Comments

Look ahead 10 years, 20 years into the future. What does your province look like? In Atlantic Canada, the demographic trend to an older population—“aging population”—is a well understood reality. It adds pressure on multiple fronts in labour and healthcare, on top of other ongoing transformations like the energy transition. How can we meaningfully start to release some of the pressure?

Provincial governments have a role to play in keeping costs down and encouraging new sources of revenue but, as part of the response, could demographics become a greater factor in federal-provincial transfers?

What about a transfer program that is new? We’re not reforming CHT (Canada Health Transfer) or Equalization, but we introduce a new transfer program that explicitly tries to address demographic-related challenges with provincial governments,” economist Trevor Tombe asked Wednesday, during a public talk highlighting the long-term challenges for Newfoundland and Labrador’s public finances and some considerations in the discussion of provincial-federal arrangements.

He emphasized Newfoundland and Labrador specifically is facing two, main challenges going forward: demographics, plus a forecast for declining oil production and declining oil royalties in the 10-year, and particularly the 25-year and 50-year outlooks.

Equalization, it pays to provinces with below-average fiscal capacity. So consider this as a transfer program that pays only to provinces with above-average elderly population shares,” Tombe said of the “Canada Demographic Transfer” idea.



Trevor Tombe



A professor with the University of Calgary, Tombe has written on the challenge of finding equitable federal transfer arrangements. He was one of more than a dozen scheduled speakers for the day-long event: “The economic and fiscal trajectory of Newfoundland and Labrador: We are here now, what should we do, how should we do it, and how long can we wait?”

The event was hosted by the Collaborative Applied Research in Economics (CARE) initiative at Memorial University of Newfoundland and Labrador and the Atlantic Institute for Policy Research, based at the University of New Brunswick. It was a mixture of in-person conference at the Emera Innovation Exchange in St. John’s, with about 50 guests, and an online forum with participants across the country. Tombe presented from Alberta and was not the only one to highlight demographics.

A recent piece of work on GDP growth prospects for the provinces, released by S&P Global, spoke to the “hinderances of an aging population” and presented Atlantic Canada as having the weakest growth outlook of any region in the country in part as a result of its rapid aging.

While the trend is national, it is most notable in the Atlantic provinces, which have recorded years of outmigration by young people. In the next 10 years, our modeling predicts that New Brunswick, Nova Scotia, and Prince Edward Island will record a lower contribution from the working-age population to average real GDP growth compared with the national median,” it stated, while adding investments in machinery and equipment should help to improve labor productivity and help offset the pains of the aging workforce.

Looking at Newfoundland and Labrador, the report referred to earlier work out of the Parliamentary Budget Office and said the province will benefit from an increasing participation rate and higher labour productivity, with the PBO forecast showing Newfoundland and Labrador with the highest labour productivity gains of the provinces from 2026-2095, but still with a notable fiscal gap.

Aging has a direct effect on a province’s economic and fiscal trajectory. Older individuals tend to withdraw from the labour force, as an example, but the more direct implication for the budget involves healthcare spending, as Tombe said.

It is not basic healthcare service to seniors but the complexity and nature of services that adds to the per person cost. In Newfoundland and Labrador, the $40,000 spent per individual over the age of 90 per year is a magnitude higher than the amount spent per person for a younger age group. You can take actions to support better population health, improve health outcomes from services and work to generally lower costs in the system, but there are undeniable, immediate pressures for provinces.

Just demographics alone looks slated to increase real, inflation-adjusted per person, health spending by about 40 per cent by 2040,” Tombe said of the Newfoundland and Labrador outlook.

It would amount to about $1.3 billion today for comparison, “or more than the entire revenue from the sales tax.” Per Budget 2021 estimates, the sales tax for 2021-2022 was about $1.2 billion and represented 18.6 per cent of the province’s total revenues.

A new transfer program aside, Tombe looked at possible relief to come in the existing transfer programs. On Equalization, he said Newfoundland and Labrador may see a payment under the program in 2022-2023. As offshore oil production drops and overall economic growth declines potentially in the mid-2030s, payments under the existing program would increase as an aid.

Change in the formula determining payments would shift things, so the province could see higher payments from the program sooner. That would come through things like removing the fiscal capacity cap or excluding resource revenues (versus partial exclusion) in the formula. A full exclusion of resource revenue this year, for example, would have resulted in Newfoundland and Labrador receiving about $556 million.

But Tombe emphasized, even if it was all tailored to Newfoundland and Labrador’s needs, equalization payments and health transfers would not be a complete solution for what lies ahead. It has to be a combination of work by the province to keep healthcare spending down, changes to existing federal transfer programs and some out of the box thinking.

Neither reasonable reforms to fiscal arrangements, nor provincial fiscal choices are individually sufficient. There does need to be this mixed approach.”



The Emera Innovation Exchange at Memorial University of Newfoundland’s Signal Hill campus in St. John’s was host site for a combined in-person and online event looking at the Newfoundland and Labrador’s fiscal trajectory. — Photo courtesy of MUNL



Also presenting at the daylong event, well-known businesswoman and former Newfoundland and Labrador Finance Minister Cathy Bennett described demographics as the province’s most significant issue. While discussions around labour shortages become quite complex, Bennett said there’s no arguing the fact the province’s population forecasts and immigration track record make it clear Newfoundland and Labrador is set to be working with fewer people in future.

That is a risk to the treasury. It’s a risk to how service programs are delivered. It’s a risk to how municipalities are managed, how municipalities are supported. And there’s a litany of things that become a problem when we have the population decline that we do,” she said, adding supply chains, education, senior care and healthcare delivery are all affected.

She promoted a push on immigration unlike anything seen before to help ease the pressure to whatever degree possible.

Bennett said business leaders, citizens, must call on provincial government members, “to be brave and focus on this with even more gusto. We need to support their efforts to negotiate pieces of the national immigration quota that are larger for our province and we need to advocate collectively as provinces to increase the quotas that are set by the federal government.”

The focus on immigration, she said, must include easy connection to career opportunities and skills development for newcomers, being “the thing that drive their ability to stay.”

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