Parliamentary Budget Officer Kevin Page unveils his costing of the Afghan mission at an Ottawa news conference on Oct. 9, 2008.CHRISTOPHER PIKE/Reuters
Ottawa's battling to rein in record deficits, but there's a bigger problem at play that will make life even more miserable for politicians and taxpayers: Canada's aging population.
Parliamentary budget watchdog Kevin Page is releasing a report Thursday that warns it's not good enough for Ottawa to simply balance the books - because of the increasing squeeze Canada's greying ranks will place on coffers.
He predicts that even if Ottawa slays the deficit, it will still have to confront an expanding "fiscal gap" in revenue in the decades ahead of $20-billion to $40-billion annually.
This will arise as Canada's work force shrinks in proportion to its growing pool of retirees, a trend that should both slow the growth of government tax revenue and increase demands for health-care spending and old-age benefits.
Mr. Page's new report effectively pours cold water on the idea Canada can "grow" its way out of trouble - as the economy expands and generates more tax revenue - or make do with a moderate restraint program.
The budget watchdog says the federal government must prepare to eliminate this revenue gap - through tax hikes or spending cuts - in order to keep its debt levels stable relative to the size of Canada's economy.
Ottawa will be forced to take actions equal to between 1 per cent and 2 per cent of Canada's estimated annual economic output merely to stabilize its debt burden, the Parliamentary Budget Officer calculates. (Mr. Page is using economic output forecasts for 2013-14 to derive the $20-billion to $40-billion prediction.)
His report also says that Ottawa would need to act on an even grander scale if it wanted to go further and shrink the size of its debt relative to economic output.
Failing to at least stabilize the problem will lead to growing deficits and "severe debt problems" over the next couple of decades, Mr. Page warns.
The year 2011 is the beginning of what has been called a "demographic time bomb" for Canada: an explosion of the 65-plus population over two decades coupled with a sharply declining proportion of Canadians in the work force as boomers retire.
"Right now we have a mindset that if we got back to balance, everything would be fine. That's a very short-term perspective," Mr. Page says.
The watchdog takes care to avoid criticizing politicians for past fiscal decisions, but his analysis clearly suggests the combined efforts of the Harper government and former Liberal governments resulted in tax cuts that were deeper than can be sustained. Since 2006, the Tories have reduced taxes on individuals, families and businesses by an estimated $220-billion over 2008-09 and five subsequent years. That works out to roughly $36-billion a year in lost tax revenue.
Canada's demographic troubles are a slow-growing menace to this country.
The number of workers supporting each elderly Canadian is expected to dwindle to 2.5 to one in 2030 from five to one today because of this country's low birth rate, rising life expectancy and aging boomers.
This carries a fiscal cost. As the federal Finance Department warned in the 2005 budget, this looming demographic shift could sap economic growth each year over the 2010-30 period by half a percentage point.
Until the recession hit and blew Ottawa off course, this issue was a central preoccupation for the Finance Department, which warned repeatedly that it was the reason why Ottawa had to keep driving down the national debt until it was only 25 per cent of the economy. Less debt means more room to borrow when the spending pressures of an aging population begin to climb.
The number of Canadians aged 65 and over has been growing at about 2.5 per cent annually. But this rate will climb to between 3 per cent and 4 per cent starting in 2011, when the first in the massive baby boom generation celebrate their 65th birthdays.
Separately yesterday Stockwell Day, the federal cabinet minister tapped to lead the charge on restraining spending, said that he believes Canadians expect "considerable sacrifices" from Ottawa as it slays the deficit.
The Treasury Board president said the March 4 budget will identify some areas where Ottawa expects to ratchet back spending plans to help balance the federal books. "You will see some of the specifics; other areas will be more general where we will want ongoing input from Canadians."