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New Parliamentary Budget Officer Yves Giroux says the provinces have a debt problem and federal transfers won’t keep up with the rising health-care costs associated with Canada’s swelling population of seniors.

In his first report since taking the position this month, Mr. Giroux reiterated the past concerns of the independent watchdog office about the state of provincial finances.

The PBO’s annual fiscal sustainability report aims to provide governments with projections of where their finances are heading if no changes are made to taxation or spending plans.

From a national perspective, Alberta and Ontario account for almost all of the PBO’s finding that provincial and territorial finances are not sustainable. However, smaller provinces such as New Brunswick, Manitoba and Newfoundland and Labrador are on track for large spikes in their provincial debt loads that could force governments to make tough decisions.

“The federal government’s finances are sustainable over the long term. However, it’s a totally different story for provinces and territories,” Mr. Giroux said at a news conference Thursday.

The PBO defines sustainability as a situation in which government debt does not grow continuously as a share of the economy.

By that measure, the PBO says federal finances are sustainable. The report says Ottawa could increase spending, reduce taxes or a combination of both by 1.4 per cent of GDP – or $29-billion a year – while still meeting the definition of sustainability. That represents a slight improvement from the PBO’s 2017 forecast.

In contrast, the PBO says provincial finances as a whole are not sustainable. Fiscal decisions worth $18-billion a year or 0.8 per cent of GDP would be required to address the situation. That estimate also represents a slight improvement over the PBO’s 2017 forecast.

The annual PBO report is frequently cited by provincial governments as they seek more generous transfer arrangements from the federal government.

The Liberal government has tied increases to the $38.6-billion Canada Health Transfer (CHT) – which helps provinces and territories cover the cost of delivering health services – to the rate of growth in nominal GDP, which combines economic growth and inflation. According to the PBO, this policy will see federal CHT transfers “decline significantly over time” as a proportion of total provincial health-care costs, from 21.4 per cent in 2017 to 17.1 per cent by 2092.

During the last round of federal-provincial health-care talks in late 2016, provinces asked Ottawa to set the CHT at a level that would ensure the transfer covers 25 per cent of provincial health-care costs. That proposal was rejected.

In recent months, Saskatchewan Premier Scott Moe has also called for changes to the $19-billion federal equalization program. Prime Minister Justin Trudeau is planning to host a first-ministers meeting later this year focused on internal trade, however transfers tend to be discussed whenever premiers meet with the prime minister.

Smaller provinces also have debt problems. Net debt as a percentage of GDP in New Brunswick is projected to climb to 261.5 per cent from 33.6 per cent over the next 50 years. In Manitoba, net debt will grow to 246.2 per cent from 37.2 per cent over the same period.

The government of Quebec, however, has experienced a major turnaround. The province’s debt load had previously been a source of concern, but the PBO says it is now the only province that is on track to erase its net debt over the next 50 years.

Major shifts in Canada’s demographic profile will have a significant impact on economic growth and government programs over the coming years.

The rate of individuals 65 years and older relative to the population between 15 to 64 years – a statistic known as the senior dependency ratio – is projected to increase from 25.2 per cent in 2017 to 45.6 per cent in 2092.

The PBO report says the “most acute" period of population aging will occur over the next 25 years. This shift is expected to result in slower economic growth as the proportion of working-age citizens declines. This shift will be particularly challenging in Canada’s Atlantic provinces, based on projections for net migration and fertility.

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