Fiscal Sustainability Report

Ottawa, CanadaFebruary 18, 2010www.parl.gc.ca/pbo-dpb

Fiscal Sustainability Report

Prepared by:Mostafa Askari, Russell Barnett, Jeff Danforth, Chris Matier, Brad Recker and Stephen Tapp

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The authors thank Patrice Dion and Laurent Martel for providing assistance with the demographicprojections and Kevin Page for helpful comments. Any errors or omissions are the responsibility of the authors.

The

Parliament of Canada Act

mandates the Parliamentary Budget Officer(PBO) to provide independent analysis to the Senate and House of

Commons on the state of the nation’s finances, government estimates and

trends in the national economy. The following report provides anassessment of the sustainability of the G

overnment of Canada’s finances

over the long term.

Fiscal Sustainability Report

Summary

In its November 2009 Economic and Fiscal Assessment Update,

PBO projected that the Government’s

structural budget balance would deteriorate over the medium term, resulting in a deficit equivalentto 1 per cent of gross domestic product (GDP) by 2013-14 and federal debt reaching 34 per cent of GDP. To assess whether a g

overnment’s fiscal structure is sustainable, however,

requires lookingbeyond projections of budget deficits and debt over a medium-term horizon to take into account theeconomic and fiscal implications of population ageing. A sustainable fiscal structure is one that doesnot lead to

substantial and sustained increases in a government’s debt relative

to GDP over the longterm.This report

assesses the sustainability of the Government of Canada’s fiscal structure. Such an

assessment requires a long-term perspective because in Canada, as in other industrialized countries,a major demographic transition is underway that will strain government finances. During this time,the ageing of the population will move an increasing share of Canadians out of their prime working-age and into their retirement years. With an older population, spending pressures in areas such ashealth care and elderly benefits are projected to intensify. At the same time, slower labour forcegrowth is projected to restrain growth in the economy, which will in turn slow the growth of government revenue.Responsible fiscal planning, therefore, needs to take account of challenges not only over the next fewyears, but also those anticipated over the long term. Indeed, in the past few decades several OECDcountries have assessed their fiscal sustainability by routinely preparing long-term economic andfiscal projections. This report,

PBO’s first

Fiscal Sustainability Report

, adopts a similar approach tothat used by other OECD countries to assess

the sustainability of the federal government’s fiscal

structure.This report considers two projection scenarios, a baseline and an alternative, that differ with respectto their assumptions about the Canada Health Transfer (CHT). In the baseline scenario, the CHTgrows in line with provincial-territorial government health expenditures projected using a standardapproach, while in the alternative scenario the CHT is assumed to continue to grow at its current rateof 6 per cent per year. For each scenario the report provides an estimate of the

‘fiscal gap’

–

thedegree to which the current fiscal structure is not sustainable. Specifically, the fiscal gap is theamount of fiscal action in terms of increased revenue and/or reduced spending that is required toachieve fiscal sustainability.