Imagine receiving a credit card bill that totalled $243,476. This would no doubt be a shock for most Canadians. But if you add up all the liabilities of every Canadian government -- federal, provincial, and local -- that is in fact how much each taxpayer would owe of the $4.1 trillion total in direct debt and unfunded liabilities.
This admittedly is a very large number and much bigger than what is usually talked about by both politicians and pundits alike. So let's deconstruct it to gain a better understanding.
All too often the public discourse about government liabilities focuses solely on money directly borrowed by governments -- so-called "direct debt." With the federal and most provincial governments returning to deficit spending in recent years and borrowing a lot of money, direct debt has re-emerged as an important issue. But direct debt is just the tip of the liability iceberg, representing less than one third of all government liabilities.
As of 2011/12, the combined net direct debt of the federal, provincial, and local governments totaled $1.2 trillion. Direct debt alone translates into a $71,901 bill for every Canadian income taxpayer. Although not the largest component of total government liabilities, direct debt has important consequences.
Governments, like families, have to pay interest on the money they borrow. And these payments aren't insignificant. All levels of government combined to pay $62.3 billion in interest payments in 2011/12. That represents 10 per cent of total government revenue in the same year. In other words, for every dollar collected by Canadian governments, 10 cents went to paying interest on direct debt. That's money not used for programs that Canadians care about like health care, education, and social services or other important priorities like tax relief.
Over time the borrowed money (including principal) must be paid back so direct debt is basically a deferred tax bill. That means future taxpayers -- today's young Canadians -- will partly pay for current deficit spending.
The burden on the next generation of taxpayers is much greater when we account for the unfunded liabilities of government programs. In addition to direct debt, Canadian governments have committed themselves to providing programs that are not fully funded. That is, they have promised to provide a host of programs which current tax rates leave unfunded.
Three such programs with large unfunded liabilities are the Canada Pension Plan (CPP), Old Age Security (OAS), and Canada's public health care system.
When these programs were designed around a half century ago, the assumption was that demographic and economic trends of the time would continue. The idea was to tax a relatively large cohort of younger workers to pay for the benefits of a relatively small number of elderly.
The demographic assumptions turned out to be false. In 1956, only 7.7 per cent of Canadians were over 65 years old. That proportion doubled to 15.3 per cent in 2013 and is expected to increase further to 25.4 per cent by 2061.
Put simply, the aging of Canada's population has resulted in large and growing unfunded liabilities. The funding shortfall is estimated at $792.3 billion for the CPP, $494.4 billion for OAS, and $894.7 billion for medicare. Together the unfunded liabilities in Canada's public pensions and health care programs total $2.2 trillion or $134,841 for each income taxpayer.
These unfunded program obligations make up more than half of total government liabilities. And their sheer size calls into question the structure of taxing current workers to provide benefits for retirees. Ultimately, to maintain current levels of spending in the future, taxes will have to increase or benefits for other programs will have to be cut -- or both.
To its credit, the federal government recently announced changes to OAS benefits including a phased-in increase to the eligibility age from 65 to 67 starting in 2023. The trouble with this reform, however, is that it is too timid as a large unfunded liability remains. Consider that the current age for accessing OAS benefits would be 74 had the eligibility age increased in lock-step with life expectancy since 1966.
Bolder reforms are needed not only for OAS but also the CPP and medicare to restructure programs in a way that accounts for demographic changes in Canada.
Along with restructuring program obligations, governments must make balancing their budgets a more immediate priority. Otherwise, the annual deficits currently planned for the future will simply add to the existing stock of government liabilities. If action is not taken, young Canadians will be stuck carrying the bill.
This piece was co-written by Hugh MacIntyre, Fraser Institute analyst and Milagros Palacios, Senior Research Economist, Fraser Institute.
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