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Canada Without fiscal course correction, Ottawa could be posting deficits until 2070, PBO says

14:19  28 july  2021
14:19  28 july  2021 Source:   nationalpost.com

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OTTAWA — The federal government could be running budget deficits until 2070 if current spending plans are not altered, according to estimates by the Parliamentary Budget Officer that have spurred warning calls over Canada’s fiscal position.

The Liberal government under Prime Minister Justin Trudeau has heaped on numerous new permanent spending programs in recent years, including a planned national childcare program, expanded Employment Insurance, increased elderly benefits, and bigger transfers to provinces for infrastructure, among other things. That, along with drastically weakened fiscal positions in the provinces and territories due to the COVID-19 pandemic, has substantially extended the timeline for when Ottawa might return to balance, according to the PBO’s Fiscal Sustainability Report (FSR). Reaching surplus could now take until 2070, up from 2023 just months before the pandemic struck.

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The FSR report does not present a real-world expectation that Canada will not post a single surplus for almost 50 years, as individual governments could return to balance by cutting spending or hiking taxes. Instead, the PBO says, it seeks to illuminate the public on what would happen if Canada’s current fiscal plans were extended over a long period of time.

The PBO report, released earlier this month, determined that Ottawa’s fiscal situation remains ultimately “sustainable,” but also raised deep concerns about Canada’s fiscal health, particularly amid ballooning elderly benefits costs and a massive fiscal gap in the provinces and territories.

“Overall, it paints a picture of unsustainability for finances, both federal and provincial combined,” Parliamentary Budget Officer Yves Giroux said in an interview. “And that is the big elephant in the room that nobody seems to be worried about or wanting to address.”

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Sizeable new social spending plans by Trudeau, including an estimated $30-billion childcare program over five years, have limited the federal government’s ability to support lower orders of government, he said.

And that trajectory is expected to persist well beyond the COVID-19 pandemic. The PBO projects that temporary spending programs introduced during the pandemic to aid people and businesses, which caused federal spending levels to spike, will quickly fall as public lockdowns are eased.

“The federal government’s fiscal room has been eaten up by additional successive spending initiatives at the federal level, which has not relieved the pressure at the provincial level,” he said.

Still, as long as new spending measures are not introduced, long term debt projections are expected to fall. Canada’s net debt is projected to fall through 2038, according to the report, down to 37.3 per cent of GDP from around 50 per cent today.

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But longer-term issues like Canada’s aging population will continue to weigh on public finances. The PBO expects that annual costs for elderly benefits will peak in 2032 at $115 billion, doubling from $56 billion in 2020. Elderly benefits costs as a percentage of GDP would in turn increase to 3.1 per cent, up from 2.6 per cent today.

That will in turn put immense strain on provincial healthcare systems, which are currently not equipped to handle a sharp uptick in demand for services.

The oil-dependent provinces of Alberta, Saskatchewan, and Newfoundland currently face the most difficult fiscal prospects of the provinces, after commodity markets crashed in mid-2014, sending prices into a nosedive before they began to improve again in 2021. Newfoundland faces a particularly dire fiscal outlook, and recently commissioned a group of experts to propose “transformational” changes that might help get the province back on track.

a man wearing a suit and tie:  Parliamentary Budget Officer Yves Giroux appears virtually before the House of Commons finance committee on March 18, 2021. © Provided by National Post Parliamentary Budget Officer Yves Giroux appears virtually before the House of Commons finance committee on March 18, 2021.

Combined, all provincial and territorial governments in Canada would need to cut spending or raise taxes by $18 billion in order to close their fiscal gap, which has widened significantly as pandemic lockdowns dried up government revenues.

The broader financial situation in Canada prompted the Canadian Taxpayers Federation last week to call for better fiscal prudence from Ottawa, citing the PBO’s estimate for deficits until 2070.

Finance Minister Chrystia Freeland has declined to present a long-term plan to return to balance or cut spending, saying the government has instead been focused on ensuring federal stimulus dollars help spur an economic recovery.

“If things don’t change, Canadians will lose out on a tonne of money to the bond fund managers because of government debt interest charges. That money can’t go to health care or lower taxes because of these huge debt interest costs,” CTF director Franco Terrazzano said in a statement. “Politicians should not be okay with five decades of red ink and families shouldn’t be forced to pay for all the overspending, so we need the feds to roll-up their sleeves and save some money.”

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