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The Globe and Mail

Tough decisions needed to update Canada's fiscal house

Some countries heading toward national insolvency act decisively. David Cameron's government, for example, has embarked on the wrenching and politically volatile course of pulling Great Britain back from the brink. By contrast, the U.S. deficit is forecast to continue in the $1.5-trillion range, obviously ignoring the late American economist Herb Stein's famous dictum: "If something cannot go on forever, it will stop."

Canada's fiscal house is in much better shape than that of the United States, Britain and other OECD countries. But complacency at this juncture would destroy our hard-earned strength. Combined federal and provincial government revenues have not returned to pre-recession levels, and spending has grown such that a substantial portion of core program funding is debt-financed.

Unfortunately, there's no real chance of revenues catching up. In fact, the opposite is true and Canada's greying population is a big reason. Statistics Canada estimates that the number of senior citizens will at least double by 2031, outnumbering children for the first time in our history. The coming federal budget, tabled before the election, predicts that spending on seniors' benefits will grow by a whopping 30 per cent over the next five years. That doesn't include the promised 6-per-cent annual growth in federal contributions to the provinces for health-care costs for our aging population.

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Retirement of the baby boomers not only means lower income tax revenues, but lost economic growth due to the already serious inability of employers to replace these skilled workers. Then there's the unfunded pension liabilities for federal workers, which the C.D. Howe Institute warns is some $65-billion higher than noted in the public accounts. The stark outlook is for fewer working taxpayers burdened with mushrooming health-care and pension costs for increasing numbers of seniors.

The election of the first majority government in seven years provides an opportunity to enact the structural changes needed to prevent Canada from facing the kinds of painful and divisive program cuts Britain is now facing (and are inevitable in the United States). Even though Canada is starting from a stronger base, implementing the changes needed to maintain a spending diet will still be politically challenging.

Well before the election, the Harper government was working on becoming more efficient through a strategic review process requiring each ministry to reduce costs by a mandatory 5 per cent. This push to greater efficiency needs to be taken further, through more efficient, lower-cost private contractor provision of government services. And Ottawa should follow the private sector's lead by converting public service pensions from open-ended defined-benefit plans to defined-contribution programs that include significant employee contributions.

Along with becoming more efficient, governments need to become smaller. In terms of social programs, this means reducing the number of people receiving government support. The universality paradigm must be replaced to focus dollars on those who actually need help. Why insist on paying benefits for the well-to-do? This logic should be applied to all social programs, but first priority should be health care, where rapidly rising costs are ravaging federal and provincial budgets.

The Canada Health Act should be amended to allow Canadians to purchase health insurance and to seek treatment either through the universal publicly financed system or at user-pay private clinics, the same freedom enjoyed by citizens of every other developed country. A recent report by Conference Board of Canada provides further justification for this, citing patient care outcome data that ranks Canada's health-care system well back of European systems that allow user-pay options. Contrary to the rhetoric of the "no two-tier" crowd, study after study of European health care shows that those private payments reduce waiting lists by freeing up money to treat people who need publicly financed care.

These actions will be controversial. The cries from vested interest groups will be shrill. But failure to act means that electing a strong, stable majority government will have done little to mend the demographic and structural fissures that are making Canada's social programs structurally unsustainable.

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