Slower economic growth coupled with higher spending on age-related programs and health care will cause a 4.2 percent (GDP) deficit by 2040
November 3, 2011, Ottawa, ON - With the fall economic update approaching, now is the time for Canadians and their governments to begin thinking in a systematic and critical way about the looming fiscal challenges posed by the unprecedented demographic change already underway. In a new study released by the Macdonald-Laurier Institute, author Christopher Ragan argues that the aging and eventual retirement of baby boomers will present Canadian governments with a two-part fiscal challenge. First, both national income growth and tax revenues will slow. Second, public programs such as health care and income support for seniors will become more costly.
In Canada's Looming Fiscal Squeeze, Ragan estimates what would happen if Canada's federal and provincial governments made no adjustments to their spending programs or their tax rates between 2015 and 2040 to take account of such changes. He estimates that total government spending as a share of the economy would gradually rise well above tax revenues so that by 2040 the deficit would be 4.2 percent of GDP. In current terms, such a deficit would be roughly $67 billion.
Given the magnitude of the problem, Ragan argues that Canadian governments will have to take action. Ragan stated that "governments will either act proactively and methodically now, or reactively, in crisis later. But make no mistake, governments will be forced to act."
Ragan analyzed a number of policy reforms that could improve economic growth and in doing so, mitigate some of the deficit. Specifically, Ragan examined how increasing the immigration rate, labour force participation, and the fertility rate, along with restraining the growth of healthcare and other age-related spending could reduce the expected deficit. In addition, Ragan noted that "any policy changes that enhance the growth in productivity would also aid in reducing the gap between government resources (taxes) and spending." However, according to Ragan's calculations, the totality of these policy reforms is still insufficient to eliminate the deficit he forecasts facing the country.
Ragan concludes, "Canadians and their governments at all levels need to recognize that addressing Canada's looming fiscal squeeze will require a careful and transparent examination of our fiscal priorities. Some adjustments will be necessary on the spending side and on the revenue side, but changing taxes and spending are the only sustainable choices."
Christopher Ragan is a professor of economics at McGill University and the author of the recently released Canada's Looming Fiscal Squeeze by the Macdonald-Laurier Institute (www.macdonaldlaurier.ca).