The Liberal government promises an ambitious Throne Speech on Wednesday. We’re expecting to see new spending to combat global warming and to cushion the economic pain of the pandemic. Much of it could be a terrible mistake.
A report released Tuesday by the Fraser Institute, a conservative think tank, shows that a relentlessly aging population, coupled with the economic trauma of COVID-19, has Canada on track to reach debt levels worse even than the 1990s.
That crisis forced Ottawa and the provinces to bring budgets back into balance at the cost of overcrowded classrooms, deteriorating infrastructure and ever-longer wait times for health care.
No one should want to live through that again. But the institute predicts we are well on our way.
Despite high levels of immigration, Canada’s population is growing more slowly than in the past, from better than 2 per cent annually in the 1950s and ’60s to about 1 per cent in recent years because people are having smaller families.
actual and projected debt-to-gdp ratio
Canada federal debt as a percentage of GDP, 1990-2050
75
69.6
Projected
70
66.8
65
60
55
49.1
50
45
40
35
30
25
1990
2000
2010
2020
2030
2040
2050
JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE:
fraser institute (via Canada, Department of
Finance; authors’ calculations)
actual and projected debt-to-gdp ratio
Canada federal debt as a percentage of GDP, 1990-2050
75
69.6
Projected
70
66.8
65
60
55
49.1
50
45
40
35
30
25
1990
2000
2010
2020
2030
2040
2050
JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: fraser
institute (via Canada, Department of Finance; authors’
calculations)
actual and projected debt-to-gdp ratio
Canada federal debt as a percentage of GDP, 1990-2050
75
69.6
Projected
70
66.8
65
60
55
49.1
50
45
40
35
30
25
1990
2000
2010
2020
2030
2040
2050
JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: fraser institute
(via Canada, Department of Finance; authors’ calculations)
At the same time, life expectancy continues to increase, from 74 years of age for a woman in 1960 to 84 today, to a projected 89 years by 2068. By then, more than a quarter of the Canadian population will be 65 or older.
This means that, over the coming decades, federal spending on pensions and other supports for seniors will steadily increase, even as the working-age share of the population – the share that pays most of the taxes – falls from 67 per cent today to below 60 per cent by 2068.
These grim numbers were going to stress federal finances even before the pandemic arrived. With the unemployment rate now in double digits and the budget deficit climbing past $350-billion, the situation has become truly grim.
The Fraser study assumes that fallout from the recession will result in a modest increase in federal government spending as a share of GDP from about 16 per cent last year to 17 per cent in future years, even as federal revenues remain constant at the 2019 level of 15 per cent of GDP.
The result is a structural deficit emerges. “The projections demonstrate that the federal government is not on track to balance its budget at any point during the next three decades,” the report concludes.
As debt piles up, by 2050 the federal debt-to-GDP ratio will have reached almost 70 per cent, it forecasts, higher than at any time since the years after the Second World War, and higher than it was in the 1990s, when the Jean Chrétien government launched its austerity drive.
All of this assumes that interest rates will remain low for decades to come. Even a modest increase would accelerate the point of crisis into the next decade.
The impact on provincial governments, which have greater spending responsibilities and less fiscal capacity than the federal government, could be even worse. The 1990s were so painful because provinces were forced to slash services as they struggled to balance their own budgets even as Ottawa cut back on transfers.
There are solutions. Conservatives would point to the need to reduce government spending while increasing productivity. Progressives would argue for targeted investments to improve economic growth.
Increasing taxes could narrow the gap, although beyond a certain point that becomes self-defeating.
Much higher immigration levels would increase the size of the work force, but at the risk of increasing social tension.
Government could ask more of, and give less to, the old, by increasing the retirement age and cutting back on pension payments. Experience shows such policies are highly unpopular.
Of course, as 2020 taught us, it’s risky to predict the future from the past. "Projections change,” Jake Fuss, an economist with the Fraser Institute and co-author of the report, acknowledged in an interview. “But we wanted to show that if things carry on the way they are going right now, we risk returning to a situation like the 1990s.”
As we mourn the passing of John Turner, we are reminded that in the early 1970s, as federal finance minister, he oversaw the last balanced federal budgets for more than two decades. Those lost years brought Canada to the brink of insolvency.
Are we about to repeat history?
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John Ibbitson