Canada’s federal and provincial governments must raise taxes or make budget cuts to avoid long- term deficits, as an ageing population slows economic growth and boosts spending faster than revenue, the country’s parliamentary budget office said in a report today.
The cuts, if made now, would need to be equal to 2.7 percent of Canada’s gross domestic product, with 1.5 points of that coming from provinces, the budget office led by Kevin Page said in a report from Ottawa today. If delayed for five years the cuts would need to be 3 percentage points, the report said.
“PBO’s analysis suggests that the fiscal structure at the federal and provincial-territorial level is not sustainable over the long term,” the budget office said.
The report mirrors other research from Statistics Canada and private economists showing the ageing population will drive up health costs and pressure government budgets. The cuts required today are less than ones made in the mid-1990s, which equaled to 6.2 percent of GDP, the budget office said.
“To put PBO’s estimate of the fiscal gap in context, it represents $46 billion of fiscal actions in 2011-12 and the amount of these actions, in dollar terms, would increase over time in line with GDP,” the report said.
The estimates are based on a 75-year projection that captures trends such as a changing population and strips out the impact of short-term swings in economic growth. It assumes the annual increases in transfers to provincial governments are kept at today’s pace of 6 percent for health care and at 3 percent for some other social programs.
Combined government debts would increase to more than 400 percent of GDP by 2082 without new increases in taxes or spending cuts, the analysis showed.
Canada’s average economic growth rate may slow to 1.8 percent from 2011 to 2086 from the rate of 2.6 percent observed over 1977-2010, the report said. The decline would come as the growth of the labor force declines with more people retiring and as the share of the population in their “prime working-age” years falls, the report said.