The Globe and Mail

Thursday's federal budget must confront a hard truth: We are entering a dark decade that will test the will and ability of governments across Canada.

Facing that truth and meeting it head-on will limit the pain to come. But democracies rarely work that way. The temptation for government and opposition politicians is to ignore gathering clouds, or promise to make them disappear, without saying how.

But that hard truth, those dark clouds, will not go away.

“This budget is a tipping point,” says Janice MacKinnon, who was Saskatchewan's finance minister when that province became the first to balance a budget back in the 1990s. “The message to Canadians has to change from one of ‘spending is good' to ‘cutting is necessary.' Governments have to begin to confront the challenges and phase in tough choices.”

Prime Minister Stephen Harper tried to switch the political channel Wednesday, with a Speech from the Throne that offered an overtly conservative response from this Conservative government to the economic challenges facing our country – a response that includes more foreign investment, less red tape and limits to public-service salaries.

Mike Cassese/Reuters

Finance Minister Jim Flaherty tries on his new budget shoes at a store in his home riding in Whitby, Ont.

But while the Throne Speech might have made the debate over proroguing Parliament old news, it offered no clear plan to address four forces that are dragging at Canada's hopes for a prosperous decade.

The first is the decade that just ended. Canada is only now emerging from a recession that sent unemployment to 8.7 per cent and this year's federal deficit to $56-billion.

Mr. Harper has promised to eliminate that deficit by 2015 without cutting spending or raising taxes, relying instead on revenues from a growing economy.

Can't happen, says the Parliamentary Budget Officer.

“We do not have a sustainable fiscal situation,” Kevin Page maintains, “and the whole world is watching.” To Finance Minister Jim Flaherty's chagrin, Mr. Page's office has repeatedly maintained that the federal government has a structural deficit that can be eliminated only by cutting spending or raising taxes.

The budget will do neither. Nor will it reduce transfers to provinces, because that would imperil funding for health care, the second cloud on the horizon.

With costs rising by 2.5 per cent a year, after accounting for inflation and population growth, health care is consuming nearly half of the budget in some provinces, even as the baby boom heads into retirement. Canadians need to confront the truth that the health-care system as it exists simply can't be sustained.

“The federal government will be under intense pressure from the provinces, who will not be able to make ends meet because of the explosion in health care spending,” warns Pierre Fortin, an economist who teaches at the Université du Québec à Montréal. “The provinces will always be at the door, asking for more money.”

But aren't they always? “You haven't seen anything, yet,” he predicts.

Whether it means increasing public funding, reducing services, exploring private-sector alternatives or charging users, Canadians need to debate how to provide health care for an aging population without bankrupting governments or impoverishing patients.

But funding health care – and defence, and foreign aid and all the other commitments of a federal government – depends on revenue from businesses and taxpayers. That revenue, in turn, depends on a robust U.S. economy to buy Canada's goods. Canada is an exporting nation, and most of those exports go to the United States.

But that's another cloud. The U.S. economy is deeply troubled. The federal budget deficit, at $1.6-trillion (U.S.), represents almost 11 per cent of gross domestic product. (Canada's deficit is a mere 5 per cent of GDP.) Thanks to the bursting housing bubble, almost one-quarter of all U.S. mortgages are under water – the mortgage on the house is more than the house is worth.

As Americans and their governments struggle to purge debt, they can be expected to spend less, meaning less demand for Canadian goods.

“For manufacturers, it's a really tough transition,” Ms. MacKinnon observes, although “the commodity sectors of the economy are already reaping benefits from booming Chinese and Indian markets.”

Not only is demand likely to remain weak, Canadian competitiveness is also at risk. Productivity is the ratio between what gets made, and how much labour is needed to make it. Throughout the past decade, productivity increased faster in the United States than in Canada, by about two percentage points each year.

In recessions, productivity usually increases, as companies lay off workers and those who remain work harder.

But Statistics Canada reports that during this recession, Canadian productivity actually fell, by 1.2 per cent, while U.S. productivity increased by 4.9 per cent.

Productivity is like the weather: Everyone complains about it, but no one does anything. Economists are largely baffled by the productivity gap between Canada and the United States, although it may have something to do with the money that Ottawa spends on equalization, which encourages workers in poorer regions to stay put rather than to move to where the jobs are.

Wednesday's Throne Speech promised new support for education, fewer restrictions on foreign investment and continued low taxes in support of economic innovation.

But unless governments can properly diagnose and cure the productivity gap, our businesses will become less and less competitive.

All countries face deficits, rising health care costs, a global economy no longer powered by U.S. consumers, and problems with productivity. As Ms. MacKinnon stresses, with its abundant natural resources and solid track record of fiscal prudence, Canada may be better positioned than almost any developed nation to confront those challenges.

But first we have to acknowledge them.

“Not making a decision is a decision,” says Alex Himelfarb, who was the clerk of the Privy Council for former prime ministers Jean Chrétien and Paul Martin. “Ignoring issues means you're counting on private solutions, regional solutions, rather national solutions.”

It is hard to believe that is any solution at all.

Live coverage today: Stay with as as we get under way at 1 p.m. ET. Live Q&As and full budget coverage after 4 p.m. ET.