The federal government's finances are on track over the long haul, but Ottawa would be wise to compile a cumulative accounting of provincial and territorial finances as well, says the Parliamentary Budget Office.
Changes to provincial health transfers and old age security will dramatically reduce Ottawa's debt-to-GDP ratio by 78 per cent by the year 2050, according to the independent report released Wednesday.
Fiscal sustainability means the federal debt ultimately won't grow faster than the economy, the report concluded.
"The take-away from this is, federally, we're in a good spot right now," Kevin Page, the parliamentary budget officer whose five-year term expires March 25, said in an interview.
The PBO, created by Stephen Harper's Conservative government after it came to office in 2006, has been creating "fiscal sustainability" reports since 2010 – reports that have drawn the ire of Finance Minister Jim Flaherty.
When Mr. Page first reported a long term "fiscal gap" in 2010, Mr. Flaherty dismissed the study as academic.
After Ottawa unilaterally moved to cap health transfer payments to the provinces in December 2011, the PBO revised its long-term outlook to say federal finances were sustainable.
And when the 2012 Conservative budget raised the eligibility age for old age security to 67 from 65 – using the rationale that the pension system is in crisis – the PBO disagreed, again using long-term sustainability models.
That prompted Mr. Flaherty to call Mr. Page's report "unbelievable, unreliable, incredible."
Last October, the Finance Department finally released its own projections for long term fiscal health. They matched the PBO model almost exactly.
"When go back (now) and look at their analysis, they had the same analysis we did – the same methodology, same assumptions, almost identical numbers," Mr. Page said in an interview.
There were no slings or arrows directed at the PBO by Finance following Wednesday's report.
"The government agrees that thanks to recent government actions, the fiscal structure of the federal government is sustainable over the long term," government spokesman Jack Aubry said in an email.
Projections remain open to global turmoil, the Finance Department reiterated.
"That's why getting back to balance and putting the federal debt-to-GDP ratio on a downward track is so important. It provides the fiscal flexibility to respond to unexpected global economic shocks and address the future priorities of Canadians, while keeping taxes low."
The independent budget office projects that Ottawa actually has a little more wiggle room to increase spending or cut taxes over the long haul than Finance predicts.
And that's where the provinces come in.
The health transfer has been climbing six per cent annually, and few provinces think they'll be able to hold health-care cost increases to Ottawa's limit of nominal GDP growth – between three and four per cent.
In short, more of the cost of health care will fall on provincial ledgers, said Mr. Page.
"We're all in this together," he said. "The fiscal burden isn't eliminated. We move that fiscal burden a little bit, going forward, from the federal books and we put it onto the provincial-territorial books."
Almost $60-billion a year, raised by Ottawa from Canadian taxpayers, is transferred to provinces and territories.
"It is important to look at this totally when we make these big decisions," Mr. Page said.
Fudging the books to foreclose political options is exactly the reason Conservatives, in opposition, proposed an independent budget office.
Liberal governments of the 1990s downloaded costs onto the provinces, then ran up huge, unprojected surpluses that automatically went toward federal debt reduction when the final numbers came in after fiscal year-end. At the time, Reform MPs said Ottawa was over-taxing Canadians and hiding the fact by low-balling surplus projections.
The PBO was designed to provide independent financial reports that MPs could use as the basis for honest, well-anchored debates about available policy options.
Mr. Page said the fact that the Finance Department's sustainability numbers of last October line up so well with his office's ongoing reports is a good sign.
"If you're a parliamentarian, whether on the opposition side or the government side, this kind of gives you a sense of confidence – two data points saying the same thing. We have some room to manoeuvre."
Rather than attacking his office, said Mr. Page, the government should routinely respond to his reports with its own data that either refutes, clarifies or corroborates the PBO's findings.
"The problem for me is they made (the sustainability numbers) available after they made all the decisions," said the budget officer.
"We do front-end due diligence. You want this analysis to support a decision."