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.
Across all provinces and territories, the ageing of the population will move an increasing share of Canadians out of their prime working-age years and into their retirement years, resulting in slower growth in the Canadian economy.
Slower economic growth will put downward pressure on government revenues as growth in the tax base slows. At the same time, population ageing will put upward pressure on government programs such as health care, Old Age Security and public pension benefits.
The objective of this report is to identify if changes to current fiscal policy are required to avoid unsustainable government debt accumulation and to estimate the magnitude of these changes.
Total general government sector
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 Canadian economy, total government net debt is projected to remain below its current level over the long term
Current fiscal policy at the federal level is sustainable over the long term. PBO estimates that the federal government could permanently increase spending or reduce taxes by 1.4 per cent of GDP ($29 billion in current dollars) while maintaining net debt at its current (2017) level of 31.1 per cent of GDP over the long term.
The federal government’s sizeable medium-term primary surpluses and lower spending on children’s benefits and the Canada Social Transfer (relative to the size of the economy) are primary contributors to federal fiscal room.
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 0.8 per cent of GDP ($18 billion in current dollars) would be required to stabilize the consolidated subnational government net debt-to-GDP ratio at its current level of 25.7 per cent of GDP over the long term.
Rising health care costs due to population ageing drive the deterioration in subnational government finances over the long term.
- Except for Quebec, current fiscal policies across provinces and territories are not sustainable over the long term (Summary Figure 2).
- We estimate that the subnational government sector in Quebec has fiscal room amounting to 1.6 per cent of provincial GDP 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 0.1 per cent of provincial GDP in British Columbia to 12.0 per cent of territorial GDP for the Territories.
- We estimate that Alberta makes the largest contribution to the consolidated subnational fiscal gap: 0.5 percentage points of Canadian GDP (Summary Figure 3).
- In addition to rising health care costs, some subnational governments face significant budgetary pressures in the near term, as well as reduced federal transfers (relative to the size of their economies), that compound their fiscal challenges.
Public pension plans
The current structure of the Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) is sustainable over the long term. We estimate the fiscal gaps for the CPP and QPP to be, respectively, -0.1 per cent of GDP (in Canada) and ‑0.2 per cent of GDP (in Quebec). That is, CPP and QPP contributions could be reduced, or benefits increased, respectively, by 0.1 per cent of GDP and 0.2 per cent of GDP, while maintaining fiscal sustainability.
Sensitivity of results
To help gauge the sensitivity of our baseline fiscal gaps, we consider alternative demographic, economic and fiscal policy scenarios. We find that our qualitative assessments of fiscal sustainability for the federal and subnational governments are essentially unchanged across the range of scenarios considered. Our sustainability assessment is only reversed under alternative scenarios for one province, British Columbia, which is close to being sustainable under current policies (0.1 per cent of GDP).