Aging Canada will boost budget pain, watchdog says

Canada's aging population and other factors mean the country's finances are not sustainable over the long term, according to a report released Thursday by Parliament's budget watchdog.

Government debt can't grow faster than the economy in order for a country to be considered fiscally sustainable, and in his report, Kevin Page estimates the amount of fiscal action required to achieve sustainability.

He says that to fill the gap between debt and gross domestic product (GDP) and to restore sustainability to the public finances, it would require policy actions worth 2.7 per cent of Canada's GDP. To do this, the government either has to raise taxes, reduce overall program spending, or deliver a combination of the two.

Page's estimate of the fiscal gap would mean $46 billion worth of fiscal action this fiscal year alone, and that amount could increase over time in accordance with GDP.

The parliamentary budget officer's report looks at the sustainability of the federal and provincial and territorial governments over a period of 75 years, based on assumptions about program spending, demographics and the tax base.

Page's report cautions that the projections are not necessarily the most likely scenarios, but they attempt to capture what would happen if governments do nothing different over the coming years.

The report highlights the effects of a shrinking and aging population on the economy. Slower labour force growth because of those factors could mean annual average real GDP growth will drop from 2.6 per cent during the period of 1977-2010 to 1.8 per cent over 2011-86.

The aging population will drive down economic activity and the size of the tax base, while increasing demand on social programs, it says. The end result will be vanishing budget surpluses over the medium term (the federal government is aiming to be back in a surplus position after 2015) and instead, "sizable deficits" over the long term.

Page's report says governments can wait until the economy is fully recovered to take action, but that they shouldn't delay too long or the fiscal gap will grow even larger. Delaying fiscal action by five years, for example, would expand the gap from 2.7 to 3.0 per cent, according to the report's projections.

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Courtesy: CBC.CA