Dodge Says Canada's Finances Threatened by Health Care ‘Spending Disease’

Canada’s finances are threatened by a “spending disease” in which health-care bills may account for about one in every five dollars spent in the economy in 20 years, former central bank chief David Dodge said.

The country spent about 12 percent of gross domestic product on health care in 2009, a figure that may grow to 19 percent by 2031, Dodge and former central bank economist Richard Dion wrote in a paper for the Toronto-based C.D. Howe Institute today. The increase will be driven by new technologies, an aging population, rising demand and higher prices for health-related goods and services, the report said.

“There is an extraordinarily difficult set of choices that are going to have to be made,” Dodge said in a telephone interview from Toronto. “You can’t continue to duck it.”

Health care is one of the biggest voter issues in Canada’s May 2 election campaign, according to recent polls. Prime Minister Stephen Harper has said opposition parties will hurt the economy with new spending and tax plans, while Liberal leader Michael Ignatieff has said Harper will waste money on fighter jets and prisons, and plans to reverse past and future corporate tax cuts to help free up cash needed for health- funding negotiations with Canada’s provincial governments.

Drug Costs

Shares of the four health companies in the country’s main stock index have jumped 118 percent in the last year, almost four times as much as the next sub-index of commodities stocks. The gauge doesn’t include Shoppers Drug Mart Corp. (SC), the country’s largest pharmacy chain, whose shares have fallen 4.8 percent in the past year. The company has fought the Ontario provincial government’s plan for new rules to curb drug costs.

The report constructs an “optimistic” scenario, in which policy changes cut health costs and economic growth prospects improve. In that scenario, health-care spending would still increase to 15 percent of the economy by 2031.

The financial impact will still be felt even if governments are “incredibly successful in improving the efficiency and effectiveness of the health-care system,” the report said. The “difficult choices” include cuts in the quality and quantity in publicly funded services, higher taxes and reductions in other government services, the report said.

Today’s paper echoes the findings of a former visiting economist at the federal finance department, Christopher Ragan. Canadian governments need to generate surpluses of about C$40 billion ($42 billion) from 2015 through 2020 to cover rising health-care costs, Ragan said at an August 2009 presentation.

‘Danger’ Zone

Without changes to fiscal policy, Canada’s federal, provincial and local government debt will swell into a “danger” zone greater than 60 percent of gross domestic product, Ragan said at the time.

Finance Minister Jim Flaherty’s March 22 budget, which wasn’t passed by Parliament before the election was called, forecast a C$29.6 billion deficit in the fiscal year that begins April 1, and a surplus in the 2015-2016 fiscal year. Ignatieff has said the deficit would shrink to 1 percent of GDP within two years if the Liberals form the next government.

Dodge was Bank of Canada Governor from 2001 to 2008, and the country’s top civil servant in the finance and health departments before that. He currently works as a senior adviser at law firm Bennett Jones LLP.

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net.

To contact the editors responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net; David Scanlan at dscanlan@bloomberg.net.

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