By Taylor Jackson,
and Jason Clemens
The Fraser Institute

The latest Finance Department fiscal update signals the federal government’s continued preference for running budget deficits, regardless of the state of the economy. Similarly, eight of 10 Canadian provinces are running budget deficits in 2016-17.

The lack of fiscal prudence coast to coast raises serious concerns about the ability of Canadian governments to deal with future headwinds, including pressures on government finances due to Canada’s aging population.

Taylor Jackson

Taylor Jackson

From 2010 to 2063, according to Statistics Canada, seniors will go from a little under 15 per cent to more than 25 per cent of Canada’s population. So the share of Canadians working compared to those in retirement will decrease significantly.

Canada’s aging population will affect government finances in two major ways:

  • Most economists expect slower rates of economic growth and thus slower growth in government revenue. That isn’t surprising given the expectation that a larger share of the population will be of retirement age. Fewer people working will reduce economic growth rates.
  • Pressure will grow on programs sensitive to demographics, like health care and income support for seniors such as Old Age Security (OAS). In fact, the cost of income transfer programs for seniors is expected to increase by 47 per cent by 2045. A larger percentage of seniors means more benefits supplied by government.

Health-care spending is heavily skewed towards a person’s first year of life (birth and related) and their retirement years (post 65). For example, in 2014, average per-person health-care spending for Canadians 65 and over was almost 4.5 times greater than for Canadians aged 15 to 64. So health-care costs are expected to increase by 57 per cent by 2045.

Jason Clemens

Jason Clemens

When combined, the higher projected government spending related to health-care and income support programs for seniors would be equivalent to spending $107 billion more on these programs that what governments in Canada spent in 2016.

In response to this dramatic demographic shift, and the resulting higher spending and slower revenue growth, governments across Canada will face stark choices. They’ll have to reform spending programs, enact policies to improve economic growth, run deficits and accumulate debt, and/or raise tax rates.

If federal and provincial governments continue to choose deficits and debt, Canada’s net-debt-to-gross-domestic-product ratio (a metric economists use to measure the sustainability of government debt by comparing it to the size of the economy) could increase to between 167 and 252 per cent by 2045.

But this dire fiscal situation isn’t inevitable.

Proactive steps can and should be made to reform government program spending and encour­age stronger economic growth across the country.

That would mitigate the adverse effects of Canada’s aging population.

Taylor Jackson and Jason Clemens are coauthors of the Fraser Institute study, Canada’s Aging Population and Implications for Government Borrowing.

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