The deficit is structural

TheGlobeandMail.com – Opinions/Editorial – The deficit is structural: No party has put forward a plan, or prepared the public, for the changes necessary to get back to fiscal balance
Published on Tuesday, Jan. 12, 2010. Last updated on Thursday, Jan. 14, 2010.

With the country still emerging from a painful recession, policy makers can dodge tough questions about future deficits. But a report to be released today by Kevin Page, the Parliamentary Budget Officer, shows that a mismatch in public finances is real and present. No party has put forward a plan, or prepared the public, for the changes necessary to get back to fiscal balance.

Canada faces a structural deficit – a situation in which spending is permanently higher, and in this case growing faster, than revenues. It will persist even after the country escapes the recession, and is slated to hit 1 per cent of GDP, and growing, by 2013-14.

The federal government’s revenue-raising ability is emasculated; its successive cuts to the GST were short-sighted, and, as the immediate need for consumers to spend fades, will become increasingly hard to justify. Meanwhile, escaping the structural deficit in future years will be exacerbated by trends Canada is observing now:

* Output declines: The report will put the output gap – the proportion of the country’s economic resources that are underutilized – at 4.5 per cent in 2009. That is weakening tax revenues and putting pressure on employment insurance.
* Changing demographics: An aging population is not a distant prospect, but a current reality: the proportion of Canadians aged 55 and up, and therefore less likely to work, will increase from 30 per cent to 34 per cent in the next four years. That means fewer taxpaying earners, and more people likely to be dependent on social programs. Most transfer agreements with the provinces that administer those programs will expire by 2013, just at a point when provinces will need to do more.
* Debt payments: Canada will add around $165-billion to its total debt in the next four years, increasing it by over a quarter, and leading to around $10-billion more per year in annual interest payments – a significant drag on a budget of less than $300-billion.
* Spending patterns: Spending on programs increased by only $20-billion from 1990 to 2000, but will have increased by over $100-billion this decade. “The business of producing budgets with lots of spending is ingrained in our culture,” says Mr. Page.

Both the government and the official opposition are failing to set the kinds of targets that would lead to meaningful deficit reduction. They talk a tough line on fiscal responsibility, but then add so many fetters (ruling out tax increases or cuts in transfers to the provinces) that their plans end up relying on economic growth to lift the country to surplus.

When it returns, economic growth will be welcomed. But with a structural deficit, growth cannot heal both the job market and the balance sheet at the same time. Mr. Page’s report challenges Parliament and all Canadians to think about the sacrifices they are prepared to make in the name of deficit reduction.

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