Governments in Canada must adjust to coming changes brought on by an aging population, or risk a situation of unsustainable public debt that approaches what's now being seen in European countries like Greece, says a new study.
A report released Thursday from the Macdonald-Laurier Institute, an Ottawa-based research group, indicates that the amount of government debt in comparison to the size of the economy — or the debt-to-GDP ratio — will rise to almost 100 per cent by 2040 from less than 50 per cent now, under current public spending trends.
Jason Clemens, the think-tank's director of research, said this report takes into consideration government plans to eliminate deficits in the coming years, but looks at "structural deficits" that will emerge over the longer term.
The report, authored by Christopher Ragan, an economics professor at Montreal's McGill University, says this is the result of mass retirements of baby boomers leading to a combination of fewer workers to create economic growth and more demand on government spending, largely related to health care and the needs of the elderly.
The reports warns that Canada could hit the kind of "debt wall" seen in European countries, and almost faced by Canada in the 1990s. This can limit a country's access to international investment and lead to surging interest rates, it noted.
"A quick glance at the current situation in Greece and other highly indebted European countries should be all that is necessary to remind us of the dangers," wrote Ragan.
The study presents a number of measures that could help the situation, though most have their own pitfalls.
It emphasizes spending restraint and reductions in government, despite the fact such measures will be unpopular with the public.
"This essay is not the place to review the relative merit of specific spending programs, though this is precisely the exercise that all Canadian governments will soon need to embark upon in a serious and ongoing way," the report says.
Increasing taxation is also an option, it points out, while acknowledging this can carry political and economic costs. The report says most economists agree raising sales taxes, like the GST, would be the most effective way to raise lots of money with minimal drag on the economy, but it adds that "it is likely the least popular tax increase one could imagine implementing."
While the public might be more open to higher corporate taxes, the paper notes this can have negative consequences on economic growth.
"Finding the right balance between the economic costs and political costs requires considerable finesse on the part of the government, a balancing act that would be aided with clearly stated objectives and careful but honest communications," the report says.
Clemens added that the pain caused by action to deal with the aging population would be more easily absorbed if dealt with incrementally over a number of years rather than waiting until a crisis develops.
"We can implement difficult policy changes over 20 years where we don't displace people to any great extent, and we can methodically, incrementally implement these changes," he said. "Or we can do it in the middle of a crisis where we do have to displace people."
Some of the other recommendations include changes in government policy to increase the immigration rate, getting a bigger proportion of the population in the labour force and boosting the fertility rate.
However, these ideas also come with complications.
For example, for an increase in immigration to be effective it would have to focus on newcomers with higher-than-average labour-force participation rates and lower-than-average demand on public services, it says. Such emphasis could come at the expense of objectives, such as family reunification, and create controversy.
Coincidentally, Immigration Minister Jason Kenney announced Thursday that as many as 10,000 more skilled-worker immigrants would be allowed into Canada next year, resulting in between 55,000 and 57,000 immigrants under the skilled-worker program.
The report also says more people could be encouraged to join the labour force through things such as tax incentives, investment in child care, retraining programs and wage subsidization. But direct costs to government from these things versus their economic benefits would have to be carefully weighed, the paper notes.
It also raised the possibility of raising the age at which people can start receiving Canada Pension Plan payments, or the equivalent program in Quebec.
While financial incentives, such as "baby bonuses," could be used to encourage people to have more children, the case of Quebec using such measures shows the effect it has could be minimal in comparison to the decline in fertility rates over the last several decades. It notes that Canada has gone from an average of 3.6 children for every woman on average during the "baby boom" from the mid-1940s to the mid-1960s to just 1.7 children now.
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