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Parliamentary Budget Officer Kevin Page waits to testify before the Commons finance committee on April 26, 2012.CHRIS WATTIE/Reuters

Ottawa's cost-cutting measures have put it on a sound fiscal track for the future, but the provinces are left holding the bag, says Canada's budget watchdog.

Parliamentary Budget Officer Kevin Page's latest long-term projection on government finances suggests Ottawa has little to fear from the loss of revenue and rising costs tied to the aging population.

Mr. Page also judges the Canada Pension Plan and Quebec Pension Plan fiscally sound.

But the report, released Thursday, shows provinces and municipalities adding so much debt over the next 70 years or so they would resemble Greece and Italy if something is not done.

The report calculates that provinces and their municipalities have a fiscal gap of about 2 per cent of gross domestic product now – or $36-billion – and by 2086 will have debt worth 350 per cent of GDP. Meanwhile, Ottawa will be in a structural surplus.

Mr. Page cautions that this is a "what if" scenario and is not a forecast, but adds that governments need to be aware of the fiscal track they are following to ensure they make the right policy decisions.

"We're not saying in the report that the provinces have to panic and start taking measures right now," Mr. Page said in an interview.

"But in terms of dealing with aging demographics…if they wait five years the gap goes from something like 2 to 2.3 (per cent of GDP). If you wait 10 years it goes to 2.6. If you wait 20 years it's well over 3 per cent [and] it starts increasing exponentially."

In essence, the federal government has already taken "decisive" measures to address the fiscal gap, Mr. Page said.

While he has been critical of the Harper government in the past for failing to acknowledge it was in a structural deficit several years ago – for which he took personal blow-back – Mr. Page said Ottawa has acted to rectify the situation.

In the past two years, Finance Minister Jim Flaherty put a limit to growth on health transfers to provinces, essentially froze program spending for five years, and raised the age of eligibility for benefits under Old Age Security to 67 from 65.

The change in health transfers alone is responsible for about three-quarters of the provincial fiscal gap, Mr. Page says, or about $25-billion in fiscal room.

"Health care is the Pac-Man that will eat up their budgets," he said of the provincial situation.

He notes health-care spending has been rising at about 7 per cent a year for the last decade, and he projects it will rise on average by 5 per cent going forward. But even that is too much, given that the expected trend speed of the economy will slow to between 3 or 4 per cent in nominal terms.

"You can't have health-care spending growing that much faster than GDP and not have some type of sustainability problem when health care is such a big part of your budget."

Not all provinces have a fiscal gap. The report does not separate out resource rich provinces like Alberta from the have-nots, so the 2-per-cent estimate is in fact larger for provinces like Ontario and Quebec and some in the Atlantic region.

Mr. Page said the provinces with a structural deficit will find it more difficult than Ottawa to unload their problems, in part because they can't peg health care expenses to GDP, as Flaherty has.

As well, demographics impact provinces more than Ottawa because as the population ages, health-care costs are expected to explode.

Some provinces have begun to pinch in other areas in anticipation of the coming squeeze. Quebec attempted to raise tuition fees, triggering massive protests.

Following receipt of a report from economist Don Drummond in February, Ontario Premier Dalton McGuinty introduced a two-year wage freeze on all public servants, among other measures.

Mr. Page's report says the provinces do have time to react. Because of current measures and sustained, if weak, growth in the economy, he calculates overall government debt as a percentage of GDP will fall to 31.9 per cent in the next 20 years from the current 53.5 per cent.

But that's not true of all governments. When you put the provinces together, their debt as a percentage of GDP starts rising, albeit slowly in a few years.