The federal government is heading for a string of much larger than expected deficits over half a decade that will drive Ottawa more than $170-billion into debt, a new independent forecast warns.
The projection by the Toronto-Dominion Bank, whose economics department is regularly consulted by Ottawa, is twice the $85-billion in deficits forecast by the Harper government in its January budget.
The bank is forecasting a far more tepid recovery and subsequent growth for both economic output and Ottawa's tax-revenue base. TD expects commodity prices, a major factor, will rebound less strongly than the government has estimated.
Toronto-Dominion also predicts Ottawa will still be deep in deficit by 2013-14, by which time the Conservatives have promised a return to balanced budgets - unless significant spending restraint is imposed.
TD economists Derek Burleton and Don Drummond were among the first to publicly warn of deeper deficits in March, more than two months before Finance Minister Jim Flaherty acknowledged this year's shortfall had swelled to $50-billion.
Mr. Flaherty Tuesday shrugged off the TD forecast, saying that many economists were more bullish than he was when he tabled his budget and now the bank appears to be more pessimistic than average.
"I'm sure different economists will have different views … but they [Toronto-Dominion]are on the low side of the private sector forecasters right now."
TD's forecast warns that deficits will be $70-billion higher than what Mr. Flaherty has so far acknowledged. Taken together with the $100-billion in shortfalls the Tories have already confirmed will pile up over six years, this drives Ottawa more than $170-billion deeper into debt.
The TD projections would push Canada's debt levels as a share of the economy to 34.6 per cent, an increase of six percentage points from the last fiscal year and far from the 25-per-cent goal Ottawa had been pursuing before the recession. But it's still a long way from the mid-1990s when Canada's debt as a share of the economy topped 60 per cent.
Persistent deficits - if Ottawa cannot slay them in the next short while - will dog the federal government as it grapples with a looming demographic shift that will drive up the costs of care for Canada's soaring elderly population.
The population of Canadians aged 65 and over has been growing at about 2.5 per cent annually. But this rate will climb to between 3 per cent and 4 per cent starting in 2011, when the first in the massive baby boom generation celebrate their 65th birthdays.
2011 is the beginning of what has been called a "demographic time bomb" for Canada: an explosion of the 65-plus population over two decades coupled with a sharply declining proportion of Canadians in the work force as boomers retire.
It also threatens to be a drag on economic growth just as an aging population of voters is expected to be pressing the provinces - and ultimately, Ottawa - for more health-care dollars.
"This is a tsunami we're facing in terms of change," Parliamentary Budget Officer Kevin Page said. "The repercussions are going to hit us hard."
It's not the situation Canada wants to find itself in as the work force shrinks in proportion to retirees.
"If you're running large structural deficits now when you're about to see labour supply growth fall dramatically, that's not a good place to be," Mr. Page said.
The number of workers supporting each elderly Canadian is expected to dwindle to 2.5 to 1 in 2030 from 5 to 1 today because of this country's low birth rate, rising life expectancy and aging boomers.
This carries a fiscal cost. As the federal Finance Department warned in the 2005 budget, this looming demographic shift could sap economic growth each year over the 2010-30 period by half a percentage point.
Until the recession hit and blew Ottawa off course, this issue was a central preoccupation for Finance, which warned repeatedly that was why Ottawa had to keep driving down the national debt until it was only 25 per cent of the economy. Less debt means more room to borrow when the spending pressures of an aging population begin to climb.
The baby boom generation is the largest single group in Canada's population and its aging will drive up hospital bills and long-term care costs for taxpayers.
"On average, somebody over 65 costs double in terms of health care of somebody under 65. By far the most expensive health care years are the last two years of your life," Mr. Drummond said.
The Toronto-Dominion Bank forecast says Ottawa could balance the budget in as little as six years if it starts to restrain the growth of program spending in 2012-13.
Separately, Liberal Leader Michael Ignatieff said Tuesday he will decide next week whether to try to defeat the minority Harper government and force an election. Both the NDP and the Bloc Québécois would have to support the Liberals in order to achieve this.
Mr. Ignatieff said the opportunity will come next week when he expects Mr. Flaherty to issue a report card on the progress of the Tories' economic stimulus spending.