A couple of weeks ago, I noted that the Parliamentary Budget Office was suggesting that the time may soon be upon us where the federal government is asked to take up a bigger share of funding provincial programs such as education.  In the interests of thinking about where the sector may be headed, it’s worth a quick trip down memory lane to see where we’ve been, and why federal transfers ceased to be a major funding avenue for institutions.

Transfers for PSE began in 1951 when the Government of Canada decided to devote 50 cents per capita to the task ($7.1 million in 1951 dollars, or about $65 million in today’s money).  This was not a transfer to provinces because Quebec Premier Duplessis – quite rightly – told the feds that the idea of tied transfers was a constitutional non-starter.  So to get around this problem, the National Conference of Canadian Universities (i.e Universities Canada, two name-changes ago) set up a shell organization called the Canadian Universities Fund, which took money from the feds and distributed it to universities directly, except in Quebec where Duplessis told institutions he’d cut their budgets dollar for dollar if they accepted the money.

By the mid-60s, the transfer to institutions had risen to $2 per capita before being replaced by the Federal-Provincial Fiscal Arrangements Act, under which the Government of Canada agreed to split the costs of PSE 50/50 with the provinces and transfer the funds to provinces rather than institutions.  This was what today we would call “a bad move” because provinces, realizing that they were spending fifty-cent dollars in higher education went what we in the public finance business call “hog wild”; in 1972 the feds had to back-pedal somewhat by capping overall spending growth at 15% (!) per year.

One key development in the FAA was that this transfer was not done entirely in cash; a substantial portion of the federal contribution came through what are known as “tax points” – that is, a cession of tax room so that federal tax rates decrease and provincial ones increase.  This mattered in the 1960s because the provinces had ceded tax room the other way in order to help pay for World War II, so this was in some ways seen as a return to the status quo ante.  Those tax points in fact still exist but we no longer count them – they are just seen as a purely provincial revenue source.

In 1977, this arrangement was replaced with something called Established Programs Financing, or EPF, which combined federal contributions for health and post-secondary education into a single transfer which was made up of a combination of cash and tax points.  Crucially, this was a lump sum and no longer tied to provincial expenditures.  Immediately, the federal contribution began to erode not just as a percentage of the total provincial outlay on PSE, but even in its own real terms.  The cash transfer under EPF was initially tied to the rate of nominal GDP growth;  in 1982, total EPF was linked to GDP growth and the cash was calculated as a residual after tax points.  In 1986, as a deficit-fighting measure, the growth rate was reduced to GDP minus 2%, then again to GDP minus 3, before being frozen altogether in 1990.  Since tax points continued to increase in value along with GDP, and the cash transfer was a residual, the cash portion began to dwindle rather rapidly.  By the mid-1990s, it was expected that it would fall to zero early in the following decade.

In the historic 1995 Budget, the Government of Canada merged the EPF with another provincial transfer payment known as the Canada Assistance Plan (CAP), which was designed to help provinces with social assistance costs and which unlike EPF still retained some cost-sharing elements.  This new, larger transfer was essentially one enormous block-grant of cash and tax points to the provinces, the only conditional element of which was that the provinces must respect the Canada Health Act.  It was not simply an amalgamation of two existing programs: coming as it did at a time when federal debt was 71% of GDP and one of every three dollars spent by the government went to interest payments, the amalgamation came with a significant cut as well – roughly $6 billion over two years, leaving the cash portion of the transfer at just $12.5 billion.  But it also placed a floor under cash transfers, which meant that the fear of the early 1990s – that cash payments would dwindle to zero and the stick with which to punish provinces that contravened the Canada Health Act would disappear – was put to rest.

(This new transfer was initially described as the “Canada Social Transfer”, which caused an outcry from those who feared a gutting of the Canada Heath Act.  The feds duly inserted the word “health” and for about 72 hours was known as the Canada Social and Health Transfer, or CSHT.  After the scatological potential of this acronym was realized, the second and third words were reversed and the CHST was born.  I digress.)

As the economy recovered after 1996, these cash payments began to rise again.  In 1999, 2000 and 2003, billions of dollars were poured into the transfer, mostly for the purposes of shoring up the health system; though accountability arrangements were not formally changed, provinces agreed to publicly announce what they would do with any new monies received through the transfer.  By 2004 transfer had risen to $22.3 billion.  In 2004, the CHST was split roughly two-thirds/one-third into a Canada Health Transfer (CHT) and a Canada Social Transfer (CST), with the latter designed to include spending for PSE, social assistance and child care and set at $8.3 Billion.

In 2007, the Harper Government announced an $800 million increase in the CST and Assigned it specifically for post-secondary education, though there was no way to tie this investment to any specific actions by the provinces.  Still, for the first time since the demise of EPF it was possible to see the actual amount of cash transfer “designated” for PSE.  Since then, 30.7% of the CST –now valued at over $14 billion – is “deemed” to be related to post-secondary education, meaning that federal transfers “in respect of” post-secondary education are now just over $4 billion per year.

But of course, federal contributions to PSE go beyond mere transfers.  We’ll get into that a bit more tomorrow.