Unlike Canada’s previous episode of extended fiscal pressure, which came at a time of workforce growth, today’s deficits are accompanied by an aging population that could exacerbate the challenge, suggests a new report from the Fraser Institute.
The Vancouver-based think tank is sounding the alarm about government spending, which it warns could return Canada to the state of fiscal turmoil that prevailed from the mid-1960s through the mid-1990s, before the government finally got its budget back in balance.
In particular, the report worries about government spending habits, noting that actual spending has exceeded budgeted spending since 2015.
“We saw similar trends during the 1965-1975 period when the federal government routinely spent every dollar of its higher-than-expected revenues,” it notes.
A crucial difference this time is demographics. The previous period of spending-induced fiscal turmoil was accompanied by a growing workforce, which supports economic growth.
Now, with an aging population, the labour-force participation rate is declining.
This is expected to pressure government finances by increasing healthcare costs and transfers to seniors while also curbing the economy’s growth potential.
“Put simply, demographics worked in favour of government finances during the period from the mid-1960s to the 1990s while it is working against government finances now and will do so for the foreseeable future,” the report notes.
It says that similarities between the current state of government finances and past periods of fiscal turmoil, “should be worrying, particularly given the shift in demographics and the Department of Finance’s own estimates of the long-term fiscal health of the federal government.”