Age crunch to gut government budgets

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Tax hikes likely needed: report

The federal government is headed for a financial train wreck if it doesn't start planning for the country's aging population, says Canada's budget watchdog.

That's the conclusion of a report by the parliamentary budget officer on how aging will impact Canada's economy, its living standards and Ottawa's fiscal position.

An elderly nursing home resident gazes from the window of his room. As boomers grow older, the federal government must plan to provide services and support for the country's aging population. A report released today warns the government to get its plans i

Ottawa -

The federal government is headed for a financial train wreck if it doesn't start planning for the country's aging population, says Canada's budget watchdog.

That's the conclusion of a report by the parliamentary budget officer on how aging will impact Canada's economy, its living standards and Ottawa's fiscal position.

Kevin Page's report, to be released today, is the first in Canada to take a long-lens approach - 75 years - to the economy and government finances.

The outlook isn't pretty. Fewer Canadians working to support an increasing number of the retired will mean reduced improvements in living standards and gutted government finances.

In the long term, Canadians can expect to see the growth in their living standard, defined as per capita real gross domestic product, to be cut in half from the two per cent annual growth they've enjoyed since the 1960s.

"We think we need to get this information out because it looks beyond the five-year medium term. It looks at the issue 'Do we have a fiscal structure in place that can sustain aging demographic pressures?"' Page told The Canadian Press.

The conclusion is that fiscal structure is not in place, and the most practical way to deal with the shortfall is to raise revenues - likely through tax increases.

"It's dangerous to stick our heads in the sand and ignore the longer-term pressures," he says.

"There's all kinds of pressures we know are coming, like aging demographics, and you have to put some numbers on this to know what you are dealing with."

He gives the example of the sovereign debt problems now confronting the economies of Greece, Spain, Portugal and Italy as an object lesson of what can happen if governments postpone hard choices.

Page has long been a thorn in Finance Minister Jim Flaherty's side because of his penchant to undercut the minister's assurances that the budget will one day be balanced - and he isn't likely to make new friends with this current release.

The stark findings could give additional weight to the argument the government plans to advance in the March 4 budget in support of cuts to the public service and some programs.

But the key conclusion - that Ottawa has a chronic budgetary deficit that will only get worse as the population ages, and that cuts won't be enough - is not what the Harper government wants to hear.

Both the prime minister and Flaherty have repeatedly said they would not raise taxes to deal with deficits expected to add close to $200 billion to the national debt in five years.

"No one is saying you have to act right away," Page says, "(but) if you wait five, 10 years, then the actions needed grow quite significantly."

The good news, says Page, is that Ottawa is in a relatively strong position to tackle the coming fiscal squeeze, with a debt-to-GDP ratio expected to peak at about 35 per cent.

TD chief economist Don Drummond, a former senior Finance official, says the Page exercise can be useful if it makes allowances for a variety of scenarios. A small change in annual economic growth, or productivity, can make a lot of difference over 75 years, he notes.

Page agrees long-term projections can result in wide variations, but notes the government did precisely that in setting the Canada Pension Plan on a sustainable path in the 1990s.

The demographic outlook hasn't changed much since, he says, although now it is government finances that need to be put on a sustainable path.

The report estimates the proportion of the retired to the employed will grow from the current 20 per cent, to 27 per cent in the next decade; to 37 per cent in 2020; and to about 50 per cent at mid-century. As a result, there will be far fewer Canadians paying taxes as a percentage of the population.

"It's very hard to offset demographic pressures," Page says.

"What people are starting to realize is that this is biting now and it's going to bite significantly in terms of budgetary revenues and expenditures."

Organizations: Canadian Press, Toronto-Dominion Bank

Geographic location: Ottawa, Canada, Greece Spain Portugal Italy

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