By Pawan Shamdasani, Staff Writer
Canada is recognized for being one of the world’s most indebted countries today by the Fraser Institute. In the past decade, Canada’s national debt reached more than 70% of GDP, but since then successive finance ministers have managed to reduce it down through continued surpluses. However, as thousands of baby boomers approach the retirement line, this will fundamentally change the Canadian labour market and lead to a soaring federal budget deficit.
Since the 1950s, there has been a steady decline in Canada’s birth rate. Also, there are not enough immigrants arriving. “So the “providing ratio” — that is, the number of working-aged Canadians relative to those over 65 — will fall,” states Matthew McClearn, of Canadian Business magazine. Currently the ratio is 5:1, but experts expect it to decrease to half by 2040.
This will result in an erosion of the tax base as more retirees outnumber the young people who intend to replace them in the workforce. By the next decade, the number of retirees relative to those in the workforce will grow by 7%.
Government spending will rise as the graying population indulge themselves on pensions, health care benefits and old-age benefits, resulting in a fiscal squeeze for Ottawa and the provinces. At the moment, health, education and elderly and child benefits account for 15% of GDP. However, by 2056, these expenses will shoot up to more than 19%.
This represents almost $68 billion in additional government spending each year, which Canada is not prepared to absorb. William Robson, CEO and president of the C.D. Howe Institute, reports that Canada will have a liability of $1.5 trillion over the next five decades.
A combination of fiscal and non-fiscal measures will be necessary to tighten the demographic squeeze alongside policies to enhance labour productivity and make up for the declining workforce. Canada will also require more budgetary discipline which has enabled it to reduce its debt over the past 10 years.
A careful examination of the rising social costs for healthcare and public pensions will be likely as well. But it is clear that many young Canadians will have to work longer before retiring and pay higher taxes than previous generations.
“Permanent fiscal actions – either through increased taxes or reduced program spending, or some combination of both, will be needed to avoid ever-increasing government deficits,” says Kevin Page, parliamentary budget officer. He warns that if corrective measures are not implemented quickly, the problem will grow “exponentially.” If imposed after 10 years, the solution could cost about $30 billion in spending cuts or tax hikes.
These demographic pressures will possibly lead to a grim financial future. At the end of 2008, Canada’s federal debt was about $458 billion. However, Dale Orr, an independent forecaster, anticipates $150 billion in additional government debt until 2014-15 due to the financial crisis. He believes that the financial burden will not be as harsh as in the 1990s.
Christopher Ragan, an economics professor at McGill University, expects the demographic squeeze to be felt largely between 2020 and 2040. He claims that we could be left in a vulnerable situation of rising interest rates and dwindling money supplies that instead could be contributed towards social spending. In other words, Canada would be subject to debt levels similar to the mid-1990s.
The government and politicians need to think long term and realize the risks of changing demographics if we are to save Canada from diving into an era of increasing deficits.
By Pawan Shamdasani, Staff Writer