Fiscal Sustainability Report 2017

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Summary  
Medium-term budget plans are insufficient to evaluate the sustainability of current fiscal policy. To assess whether a government’s fiscal policy is sustainable requires projecting current policy beyond a budget’s medium-term planning horizon. Fiscal sustainability means that government debt does not grow continuously as a share of the economy.

Total general government sector

Taken from the perspective of the government sector as a whole (that is, federal and subnational governments and public pension plans combined), current fiscal policy in Canada is sustainable over the long term. Relative to the size of the economy, total government net debt is projected to remain below its current level over the long term (Summary Figure 1).

However, this perspective masks unsustainable fiscal policy at the subnational level. While federal net debt is projected to be eliminated entirely in just over 40 years, we project that subnational government net debt will rise from 28.0 per cent of gross domestic product (GDP) to over 100 per cent of GDP within the next 75 years under current fiscal policy.

Federal government

Current fiscal policy at the federal level is sustainable over the long term. To maintain net debt at its current (2016) level of 33.2 per cent of GDP over the long term, PBO estimates that the federal government could permanently increase spending or reduce taxes by 1.2 per cent of GDP ($24.5 billion in current dollars) while maintaining fiscal sustainability. This is up from 0.9 per cent of GDP in last year’s assessment. The upward revision to the amount of federal fiscal room largely reflects downward revisions to interest rate assumptions.

Subnational governments

For the subnational government sector as a whole, current fiscal policy is not sustainable over the long term. PBO estimates that permanent tax increases or spending reductions amounting to 0.9 per cent of GDP ($18.7 billion in current dollars) would be required to stabilize the consolidated subnational government net debt-to-GDP ratio at its current level of 28.0 per cent of GDP over the long term.

The amount of required policy actions has decreased from 1.5 per cent of GDP in last year’s assessment. This revision reflects, in part, changes to PBO’s assumption regarding excess cost growth in health care spending (that is, growth exceeding combined growth in nominal GDP and growth due to population ageing).

PBO’s subnational government sustainability assessment concludes:

•              With the exception of Quebec and Nova Scotia, current fiscal policies across provinces and territories are not sustainable over the long term (Summary Figure 2).

•              We estimate that the subnational governments in Quebec and Nova Scotia have fiscal room amounting to 3.0 per cent and 0.4 per cent of provincial GDP, respectively, to increase spending or reduce taxes while maintaining sustainability.

•              Based on our estimates, the amount of policy actions required to achieve fiscal sustainability ranges from 0.4 per cent of provincial GDP in Ontario to 7.2 per cent of territorial GDP for the Territories.

•              We estimate that Alberta makes the largest contribution to the consolidated subnational fiscal gap:  0.8 percentage points of Canadian GDP, or 92 per cent of the total (Summary Figure 3).

•              Achieving fiscal sustainability for the subnational government sector in each province and territory would require policy actions at the subnational level, such as reductions in spending on programs or higher taxes, and/or increased transfers from the federal government.

Canada Pension Plan and Quebec Pension Plan

PBO has incorporated the 2016 additions to the Canada Pension Plan (CPP) that increased the replacement rate for retirement benefits and increased the annual maximum for pensionable earnings. As well, new contribution rates were legislated to fund these additions. We estimate that the CPP, including these additions and new contribution rates, is sustainable over the long term. Expressed as a percentage of Canadian GDP, the fiscal gap for the CPP is zero.

PBO estimates that the Quebec Pension Plan (QPP) is sustainable over the long term and that its fiscal gap, expressed as a percentage of Quebec’s GDP, is also zero.

Sensitivity of results

To help gauge the sensitivity of our baseline fiscal gaps, we consider alternative demographic, economic and fiscal policy scenarios. On balance, we find that our qualitative assessments of fiscal sustainability for the federal and subnational governments are unchanged across the range of scenarios considered. However, in some instances (for example, the alternative health spending scenarios) sustainability assessments for Nova Scotia, Ontario and British Columbia are reversed.

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