Social Policy in Ontario

Aging workforce to drive up debt: Report

Posted on February 19, 2010 in Governance Debates

Source: Toronto Star — Authors: Bruce Campion-Smith

TheStar.com – Business – Spending cuts, tax increases will be needed to avoid decades of chronic shortfalls, federal watchdog says
Published On Fri Feb 19 2010.   Bruce Campion-Smith, Ottawa Bureau Chief

OTTAWA–Canadians are facing the prospect of federal spending cuts and rising taxes to cope with the fallout of an aging population that risks leaving Ottawa awash in red ink, a parliamentary watchdog warns.

With tens of thousands of baby boomers set to retire, the federal government is looking at a grim financial future of dwindling tax revenues and soaring social costs that will spell budget trouble for decades, Parliamentary Budget Officer Kevin Page said.

“We do not have a fiscal structure in place that will deal with aging demographics. We’re going to have to make some choices,” he told reporters Thursday.

While Canada struggles to emerge from the economic downturn – and a $56 billion deficit – Page is urging politicians to think long-term and understand the risks of changing demographics that he says will plunge Canada into an era of crippling deficits if left unchecked.

His office released a report Thursday that said changing demographics “will strain government finances.

“The government’s current fiscal structure is not sustainable over the long term,” the report said.

Page’s report is billed as the first federal report looking at how changing demographics could hit Ottawa’s bottom line.

The problem – and Ottawa’s response – is certain to have an impact on federal budgets and even transfers to the provinces as both levels of government struggle with growing cost of health care.

Canada’s falling birth rate coupled with baby boomers approaching retirement will “fundamentally” change the labour market for decades to come. In the next 10 years alone, the number of people who are retired compared to those still in the workforce will grow by 7 per cent – as much as it grew in the last four decades.

Retired workers pay less tax and draw more on programs like health care and seniors’ benefits, driving up government costs.

Page said “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.

While corrective measures can wait until the economic recovery takes hold, Page did warn that waiting will require even more drastic steps to solve the problem which he said will grow “exponentially.”

Tackled quickly, the remedy could total about $20 billion in spending cuts or tax hikes. But wait 10 years and the cost jumps to $30 billion.

Ottawa could take the first steps in its upcoming budget Mar. 4 by at least acknowledging the medium and long-term risks to federal finances, Page said.

“We have to lay the groundwork to start addressing these demographic pressures.”

A spokesman for Finance Minister Jim Flaherty called Page’s long-term view – as far out as 75 years – an “academic exercise.”

“Canadians expect their government to focus on today’s economy and securing the fragile economic recovery,” Chisholm Pothier said, adding that the government’s immediate focus is rolling out the remaining elements of its job creation program.

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