POLITICS
09/29/2011 10:20 EDT | Updated 11/29/2011 05:12 EST

Budget Officer Kevin Page Warns Aging Population To Cause 2.7 Per Cent, $46 Billion Long-Term Fiscal Gap

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OTTAWA - Canada is facing a permanent fiscal shortfall of $46 billion in today's dollars that will only get worse in future if not tackled, the country's budgetary watchdog warns.

Kevin Page's new report on the long-term fiscal position of the country's federal and provincial governments said Thursday they face an underlying shortfall worth 2.7 per cent of gross domestic product.

That is still a far better position than some advanced nations, but Page notes that the sooner the problem is tackled the less painful it will be.

"We don't want to get behind on this issue," Page said. "The more we can deal with these proactively, the smaller the costs will be."

Ottawa is better off than the provinces — its fiscal deficit is equal to 1.2 per cent of GDP, compared to the provinces at 1.5 per cent.

Page — who, as Parliamentary budgetary officer, has the job of providing non-partisan analysis — says the only way to deal with the issue is through increasing revenues, likely through tax increases, or cuts to program spending, or a combination of both.

The Harper government is currently committed to reducing federal departmental spending by $4 billion a year, but Page said that would not be sufficient.

Given the current economic difficulties, Page admits it may not be wise to try and close the shortfall now, but he also cautions that the longer governments wait, the bigger the gap will become.

"A lot of people are saying Canada has a bit more time," he said. "But the longer term issue is these need to be part of the conversation sooner rather than later, and today we do not have a sustainable fiscal structure."

Bank of Montreal economist Douglas Porter agreed that given the risks to the global and Canadian economies, governments are not fixated on longer-term scenarios. Page's new report has a 75-year horizon.

"I don't think anybody doubts we have serious medium-term fiscal challenges we need to address at some point, but let's make sure we have a recovery that's going to stick before we start worrying where the deficit will be in 10 years," Porter said.

Rather to reduce costs, the talk in Ottawa is of hikes to government spending. The NDP has called on the federal government to create jobs through infrastructure projects, while the Liberals want a cancellation of increases to payroll taxes scheduled to go into effect Jan. 1.

Page also cautions that the longer governments wait, the bigger the gap will become — although he acknowledged there isn't an immediate crisis.

"A lot of people are saying Canada has a bit more time," Page said. "But the longer term issue is these (issues) need to be part of the conversation sooner rather than later, and today we do not have a sustainable fiscal structure."

The report does not directly deal with current government deficits, but on the underlying fiscal track of governments.

It assumes the governments will continue to maintain current spending programs and levels of revenue generation relative to the size of the economy.

As such, the report cautions that it is not predicting what will happen, only showing policy-makers what could happen if actions are not taken, or conditions don't change.

The last time Ottawa was in a negative fiscal track was in the 1970s and 1980s, before the Conservative government of Brian Mulroney introduced the goods and services tax and the Jean Chretien Liberals followed up with deep spending cuts.

Page doesn't dispute that Ottawa, and the provinces, could get to a balanced budget in four or five years as the economy recovers, although he says that's seems less likely with the current economic slowdown.

Rather, he argues that governments are proceeding along a track that is fundamentally unsustainable, given current spending patterns and expectations for economy's potential growth in the next 75 years.

The problem is that as the population ages, a smaller proportion of Canadians will be working and paying taxes, and a larger portion will be retired and collecting benefits, including health care.

To show how dramatic the shift is, the report notes that given current birth and immigration levels, the ratio of retired seniors to the general population rises from about 24 per cent in 2010 to 37 per cent in 2030.

He notes that it does little good for Ottawa to download the problem to the provinces because the country's overall fiscal situation would not change.

Page's findings are little changed from a similar report he issued last year, but the latest analysis places a hard number on the fiscal gap and includes the provincial component.

In all, Canada's accumulated debt stands at 57.9 per cent of gross domestic product currently, with Ottawa responsible for about 34 per cent of that.

Page says the fiscal difficulties facing peripheral European countries like Greece, Spain, Portugal, Ireland and Italy, as well as the U.S., is an example of what happens when governments ignore fiscal fundamentals.

"It's a cautionary tale for Canada," he said.