Think long-term on budget issues

TheStar.com – Opinion/Editorial
Published On Mon Feb 22 2010

According to Finance Minister Jim Flaherty, we’ll have one more year of economic stimulus, four years of federal belt-tightening and then we’ll be home free. The budget will be back in balance.

According to Parliamentary Budget Officer Kevin Page, it will take both tax increases and spending cuts to eliminate the deficit. And even if the government accomplishes that, we won’t be home free.

As Page sees it, starting next year we’ll face the largest wave of retirements in our history. Tax revenues will fall. Economic growth will shrink. Health-care expenditures and old-age benefits will grow. “The government’s current fiscal structure is not sustainable,” Page warned in his latest report last week. “Right now we have a mindset that if we got to balance, everything would be fine. That’s a very short-term perspective.”

His report provides a 75-year perspective. It shows that without corrective action, Canada will face a widening fiscal gap and explosive debt growth for decades.

Page’s remedy: permanent tax increases; spending cuts; or a combination worth roughly $20 billion a year. They needn’t begin until the economy has fully recovered, he says.

This demographic time bomb is no surprise. Federal policy-makers have seen it coming for decades. Flaherty himself flagged it 2006. “If we are to remain at the economic forefront, we need a long-term plan,” he said. He pledged to table a compilation of the indicators on which the plan would be built the following year. It never came.

So Page and his staff did the job themselves, taking into account demographic factors, the size and productivity of the workforce and the demand for health care and elderly benefits.

Their baseline scenario showed a sharp decline in economic growth. The per-capita increase in the country’s output would slow to 0.9 per cent in the next half-century from the 2 per cent average of the post-war era. The national debt would rise from 30 per cent of the gross domestic product to 365 per cent in 75 years.

A spokesperson for Flaherty dismissed Page’s report as an “academic exercise” and said that Canadians want the government to focus on today’s economy, not the distant future. More judicious finance department officials acknowledged that demographics will strain federal coffers and erode living standards unless corrective action is taken.

Most western nations produce regular reports on long-term economic and fiscal trends. The United States, Britain, Denmark and Sweden update their projections annually. Australia, New Zealand, Switzerland and Norway do it every two to four years.

Page intends to make it an annual exercise. “Responsible fiscal planning needs to take account of challenges not only over the next few years, but also those anticipated over the longer term,” he says.

He insists his first “fiscal sustainability” report was meant to supplement, not discredit, next month’s budget. But it did raise immediate questions. Can Canada grow its way back to financial health, as the Prime Minister argues? Can Ottawa balance the budget without raising taxes, as the finance minister claims? Can a nation with a greying population afford to focus on today and let tomorrow take care of itself?

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