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This report assesses the fiscal sustainability of Canada’s federal government, subnational governments and public pension plans. Its goal is to evaluate if policy changes are required to correct the long-term path of public debt, after considering the economic and fiscal impacts of population ageing.
Fiscal sustainability means that government debt does not ultimately grow faster than the economy. To assess fiscal sustainability PBO projects the path of federal and subnational government debt and public pension plan assets over a 75-year horizon. If a government’s debt relative to gross domestic product (GDP) is projected to continue to rise above its current level over the long term, its fiscal policy is not sustainable and may require policy actions. To measure the degree to which fiscal policy is unsustainable, PBO provides an estimate of the fiscal gap. The fiscal gap measures the amount of policy action required, or alternatively the amount of fiscal room available, to stabilize the debt-toGDP ratio at its current level 75 years into the future. To help gauge the sensitivity of the estimates, PBO assesses the fiscal gap under alternative demographic, economic and fiscal policy assumptions.
Considerable uncertainty surrounds any long-term projection, and the projections in this report are not intended to be a forecast of what will happen over the coming decades. They are reported to create a conversation about the adequacy of current fiscal policy to deal with expected longterm demographic and economic challenges. The earlier that a required policy intervention can be identified, the lower will be the cost of its implementation.
The main conclusions reached are:
- Federal net debt is eliminated over the next 35 years under the baseline scenario. To maintain the debt-to-GDP ratio at its current level over the long term, the federal government could permanently increase spending or reduce taxes by up to 1.4 per cent of GDP. This would require setting aside its balanced budget law.
- Recent federal policy changes have little effect on fiscal room. The long-term costs of expanding the Universal Child Care Benefit are small, as monthly cash transfers are not indexed to inflation under current policy. Although the expansion of Tax Free Savings Accounts reduces long-term revenues, the fiscal gap estimate assumes that foregone revenues are offset by increases elsewhere.
- Health care spending has slowed. Spending growth in 2014 is estimated to have reached its lowest level in two decades. Nonetheless, subnational governments cannot meet the challenges of population ageing under current policy. PBO estimates that permanent policy actions amounting to 1.4 per cent of GDP are required to put subnational government debt on a sustainable path.
- The Canada Pension Plan and Quebec Pension Plan can finance the projected increase in retirees while remaining sustainable as a share of the economy.
- The total general government sector in Canada (that is, the combined federal and subnational governments and public pension plans) is fiscally sustainable. However, this is because the fiscal room of the federal government offsets the fiscal gap of subnational governments.