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Parliamentary Budget Officer foresees trouble supporting ageing Canadians

In his first Fiscal Sustainability Report, Parliamentary Budget Officer Kevin Page warns that an ageing Canada with a shrinking workforce will create problems for governments for the next 75 years.

The report predicts an “explosive” growth in debt to GDP unless the federal government increases taxes, reduces spending, or both.

With an older population, spending pressures in areas such as health care and elderly benefits are projected to intensify. At the same time, slower labour force growth is projected to restrain growth in the economy, which will in turn slow the growth of government revenue.

Using a “medium” population projection from Statistics Canada, the report looks at two projection scenarios, a baseline and an alternative:

In the baseline scenario, the CHT [Canada Health Transfer] grows in line with provincial-territorial government health expenditures projected using a standard approach, while in the alternative scenario the CHT is assumed to continue to grow at its current rate of 6 per cent per year.

For each scenario the report provides an estimate of the ‘fiscal gap’ – the degree to which the current fiscal structure is not sustainable. Specifically, the fiscal gap is the amount of fiscal action in terms of increased revenue and/or reduced spending that is required to achieve fiscal sustainability.

Key to the report is its prediction of the ratio of working-age Canadians to those over age 65: The ratio, roughly 5 to 1 in 2008, will fall to 2.5 to 1 by 2033 and stabilize at 2 to 1 by 2070. In other words, where 5 working-age Canadians now help to support each Canadian over retirement age, just 2.5 will be available to support Canadian seniors in 2033.

The PBO does not expect a surge in immigration. Instead, it expects immigration to remain at about 7 per 1,000 to at least 2076.

As a result of population ageing, labour input growth is projected to decline significantly due to slower growth in the working age population and a decline in the share of the population participating in the labour market.

The slowdown in labour input growth combined with PBO’s assumption of labour productivity growth of 1.2 per cent suggests that the Canadian economy’s potential growth rate will continue to decline, falling from 3.7 per cent in 2000 to 2.1 per cent in 2010 and 1.3 per cent by 2020.

PBO’s long-term projection suggests that growth in real GDP per capita will fall by a little more than half over the next 50 years. After growing by 2.1 per cent, on average, since 1961, real GDP per capita growth is projected to average only 0.9 per cent from 2009 to 2059.

“Slower growth in revenues,” the report says, “combined with increased spending on elderly benefits and health transfers results in explosive increases in the debt-to-GDP ratio over the long term, indicating that the current fiscal structure is not sustainable.”

In addition to more demand for health services by older Canadians, the report anticipates “the enrichment factor” -- rising costs for new drugs, technology, and procedures.

The report argues that reducing the fiscal gap is achievable, but that the government should take steps soon:

Delaying implementing the measures required to achieve fiscal sustainability by one year i.e., waiting until the temporary stimulus under the Economic Action Plan is completed, only marginally increases the fiscal gap.

Delaying implementation until after the economy has reached its potential GDP (i.e., 2014 based on PBO’s most recent projection), raises the fiscal gap slightly under the baseline scenario to 1.1 per cent of GDP. Under the alternative scenario, the increase in the fiscal gap is somewhat larger at 2.2 per cent of GDP when measures are implemented in 2014-15.

The fiscal gaps are also calculated in 10-year increments of delay with a maximum delay of 30 years considered. Delays of this magnitude demonstrate that the amount of fiscal action required to return the Government’s debt-to-GDP ratio back to its 2009-10 level increase significantly as the implementation horizon extends over decades. For example, under the baseline scenario, the amount of fiscal measures required to achieve sustainability increases by 40 per cent (from 1.0 per cent of GDP to 1.4 per cent of GDP) with an implementation delay of 10 years; a 20- year delay doubles the amount of measures; and, delaying 30 years triples the amount of required measures, reaching 3.1 per cent of GDP.

For example, under the baseline scenario, the amount of fiscal measures required to achieve sustainability increases by 40 per cent (from 1.0 per cent of GDP to 1.4 per cent of GDP) with an implementation delay of 10 years; a 20- year delay doubles the amount of measures; and, delaying 30 years triples the amount of required measures, reaching 3.1 per cent of GDP.

The PBO describes its report as “simply a set of ‘what-if’ scenarios that attempt to illustrate and quantify the implications of leaving the Government’s current fiscal structure unchanged over time. ... [T]he analysis cannot be used to determine which actions should be taken or what the Government’s debt relative to GDP should be in the long term.”

Crawford Kilian is a contributing editor of The Tyee.

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