Ottawa sees fiscal blue skies despite looming demographics

Forget the aging workforce and soaring demands for health care: as far as Ottawa is concerned, the looming demographic disaster actually looks pretty nice.

The latest federal government long-term analysis of its fiscal future — buried deep in Tuesday's fall economic update — suggests it will enjoy an ever-increasing string of surpluses beginning in 2015, even in the face of the aging baby boom.

By the year 2050, Ottawa's embarrassment of riches will hit $212 billion — about $50 billion in today's dollars — assuming the government does not increase spending proportionally or cut taxes in the meantime, such as introducing income splitting, as the Harper government plans to do.

And the national debt, currently $600 billion and rising, will become a surplus sometime around 2038.

There's more good news: the government says by 2036, the average life expectancy at birth for females will rise to 87.3 years from the current 82.9, and to 84 years from the current 78.2 for males.

The Finance Department update cautions, along with economists, that long-term forecasts are by their nature imprecise and don't account for nasty surprises such as recessions or changes in government policy.

It wasn't too long ago that Finance Minister Jim Flaherty felt so confident about the government's fiscal position that he cut two percentage points off the GST, sliced corporate tax rates and began planning to tackle individual tax burdens.

Then the 2008-09 global recession intervened — government revenues plummeted and spending peaked to help Canadians ride out the storm. The result was a record $55.6 billion deficit in 2009-10. Four years later, Ottawa is still in the hole by almost $18 billion.

"I think we've seen how deficits can throw governments off course. And you would have to believe that governments for the next 30 or 40 years will be successful in maintaining the current spending discipline," Bank of Montreal chief economist Doug Porter said of the vagaries of long-term projections.

Changing demographics

"But the overall message is we shouldn't be overly worried about the aging population. I don't want to say it is easily managed, but it can be managed."

Former parliamentary budget watchdog Kevin Page says the projections should not be seen as prophecies, but as "stress tests" for governments' underlying financial structures and whether they are on a sustainable track.

For Ottawa, the answer appears to be yes, he says, in part because it has downloaded risks tied to health care costs to the provinces, and reined in elderly support programs.

Flaherty has said health care transfers to provinces will be capped at the rate of nominal growth in the economy, ensuring Ottawa's revenues keep pace with health care spending. As well, the minister extended the age of eligibility for collecting old age security to 67, starting in 2023.

But the relatively solid underpinning of the government's books is realistic, Page said, calling into question whether the government even needed to reduce OAS in the first place.

Page drew the ire of Stephen Harper's ministers last year when he disputed their assertions that OAS was "unsustainable" under its existing structure. He welcomed the Finance Department analysis, which came years after he conducted his own, but said it was still not forthcoming enough.

Old Age Security was sustainable before the change to age eligibility- Kevin Page, former budget watchdog

"If the Finance analysis provided analysis on how the federal government got to sustainability, it will highlight some inconvenient truths ... OAS was sustainable before the change to age eligibility," he said.

Page added that the capping of growth in transfers to provinces makes Ottawa's fundamental fiscal structure look sound, but has put many provincial governments —particularly non-resource rich jurisdictions like Ontario — in a fiscal bind. Provinces bear the brunt of health care cost increases.

The issue is expected to come up at the next federal-provincial finance ministers meeting with Flaherty next month, and given Ottawa's latest analysis, will likely embolden the provincial claim.

Porter said the more the relative fiscal positions between Ottawa and provincial governments are out of whack, the greater the pressure will be on the federal government to share the wealth.

The Finance Department's long-term projections do show that aging will have an impact on the economy. For instance, labour supply growth is projected to fall from the current one per cent to 0.4 per cent between 2019 and 2030, recovering modestly to 0.6 per cent between 2031 and 2050.

Fewer workers means less production, even building in a 1.2 per cent average productivity boost, which is why gross domestic product growth is expected to fall from an average 2.3 per cent between now and 2018 to 1.7 per cent in 2019-30.

Throughout the period, the department is assuming that government revenues and spending will be roughly in line with nominal GDP growth — real GDP growth plus inflation.