Ottawa and the provinces need to close an ongoing, combined budget gap of $46-billion through tax hikes, spending cuts or a mix of both in order to put government finances on a solid footing, the Parliamentary Budget Officer warns in a new report.
Focusing on the sharp demographic shift on the horizon as the number of retirees rises and the percentage of Canadians who are of working age shrinks, Kevin Page's 2011 Fiscal Sustainability Report looks at federal and provincial finances over the next 75 years.
"The fiscal structure at the federal and provincial-territorial level is not sustainable over the long term," the report states. "Population aging will put downward pressure on revenues, as growth in economic activity, and therefore the tax base, slows. At the same time, aging will put upward pressure on programs whose benefits are mostly realized by Canadians in older age groups."
Governments have focused on the short term during three years of turmoil in the global economy, which triggered stimulus spending and increased government debt. But Mr. Page said government leaders must also focus on the long-term cost of this higher debt burden.
"Policy makers will need to address the aging demographic issue. We feel it should be part of the discussion leading up to the 2012 budget," Mr. Page said in an email to the Globe prior to the report's release.
The dependency ratio – a measure of the number of Canadians 65 years of age or higher in contrast to the population who are 15 to 64 – is projected to rise as much this decade as it did over the past 40 years. Mr. Page said demographics and the cost of health care clearly should be a big part of negotiations to renew transfer deals with the provinces that expire in 2014.
There are different ways of measuring combined debt. The PBO points to Statistics Canada data that show combined federal, provincial and municipal liabilities of $846-billion for 2011.
The report focuses on the "fiscal gap" – a measurement of the added revenue or lower spending that would be needed to make government finances sustainable over the long term. The PBO estimates this gap at 2.7 per cent of GDP annually, or $46-billion.
To put that in context, the PBO report notes that federal and provincial spending cuts during the mid 1990s amounted to 6.2 per cent of GDP, but those cuts were ultimately reversed over time.
The PBO report makes a large assumption in its calculations. It assumes that federal transfers to the provinces will continue to grow at current rates. Ottawa and the provinces must renew the current arrangement before it expires in 2014. That deal allowed health transfers to grow by six per cent a year, while social transfers and equalization grew by about three per cent a year.
The PBO report notes that if federal transfers were instead reduced to grow only in line with growth in the economy at large, it would simply transfer the fiscal gap onto the shoulders of the provinces.
Prime Minister Stephen Harper responded to opposition questions on the economy on Wednesday by insisting his government is striking the right balance between stimulus spending and returning to balanced budgets.
"The government continues to run a significant deficit, as is appropriate at these times, but we are taking steps to ensure the budget will balance as the economy grows," Mr. Harper said.
The Globe and Mail reported earlier this year that while the Conservative government is saying little about its plans to renew transfers or address the demographic challenge, internal documents show the issue is creating a great deal of activity behind the scenes in terms of high-level meetings and briefings.
Documents obtained by The Globe under an Access to Information request highlighted a string of statistical warnings, including the fact that Canada will move from the 27th oldest to the 11th oldest country in the Organization for Economic Co-operation within 20 years.
Demographic change leads to debate on a wide range of potential policy options, from raising the retirement age, encouraging higher fertility rates, boosting immigration, tackling health care costs or future levels of taxation and government services for younger workers.