March 3, 2010
Economic Snapshot
Start defusing Canada’s demographically driven fiscal time bomb now, not later
JOHN CLINKARD
consulting economist, CanaData
A recent report by the Parliamentary Budget Office (PBO) reiterates what many have been saying for some time. Given the increasing demands of an aging population and a shrinking working age population, “the government’s current fiscal structure is not sustainable over the long term,” the report says.
Based on current realistic demographic projections under the current fiscal structure, the PBO forecasts the ratio of debt to GDP will increase from its current (2009-10) estimate of 34% to over 100% by 2050, just 40 years from now.
Unfortunately, the PBO states that fiscal action to achieve sustainability – and avoid ending up like Greece is today – does not need to be taken immediately and could be delayed until the economy has fully recovered.
Avoiding this looming medium-term issue until Canada’s short term economic health improves will only exacerbate it.
As was noted by the C.D. Howe Institute in a recent backgrounder, “the federal government needs a clear and achievable plan to balance the budget in five years.”
Failure to do so risks a repeat of the early 1990s, when Canada was on its economic knees and its debt-to-GDP ratio was approaching 70%.
To achieve a balanced budget by 2015, the C.D. Howe report recommends returning direct federal government program spending (excluding stimulus) as a per cent of GDP from its current level of 6.7% to its 2002 level of just under 6.0%.
The authors of the C.D. Howe report make a number of specific recommendations to achieve this <0x000A>target.
These include:
• Gradually scaling down federal public service employment;
• Reducing the current service cost of deferred compensation arrangements;
• Stabilizing the growth of national defense spending;
• Reducing subsidies to crown corporations;
• Eliminating a number of tax credits which distort taxpayer choices and;
• Slowing the growth of federal transfers to other levels of government.
John Clinkard has over 30 years’ experience as an economist in international, national and regional research and analysis with leading financial institutions and media outlets in Canada.
Data sources: Department of Finance, Office of Parliamentary Budget Officer/Chart: Reed Construction Data – CanaData.
