A warning for the provinces

Déséquilibre fiscal

It's a prediction guaranteed to make any provincial finance minister break out in a cold sweat.
A leading research institute has taken a close look at what the greying of Canada's population will mean for different levels of government. The rich federal government, it turns out, gets richer, while the 13 poor provincial and territorial governments get poorer.
The conclusion will certainly lead many provincial politicians to renew their whining about the "fiscal imbalance." What this study should lead to, however, is rather different: It should propel the provinces to get their financial houses in order.
The premise is simple: As the population ages, the federal government is actually a net gainer financially, because "prospective declines in spending on children outweigh increases in its pension obligations."
But provinces, on the other hand, "face sizeable increases in health-care spending, only partially offset by falling education budgets, with the outlook generally worsening as one moves from west to east across the country." That's because young people are moving from east to west in Canada.
Economist William Robson, president of the C.D. Howe Institute, finds that the total net liability of governments due to demographic change will total an eye-opening $810 billion over the next 50 years.
Even over half a century, it's a figure that obviously cannot be covered by increasing transfers from Ottawa to the provinces.
In his bloodless economist's way, Robson offers proposals to defuse this time bomb. He calls on governments to improve the balance of benefits and costs in health and education programs - which means requiring people to pay more. He also suggests governments pay down existing debt, and also perhaps build up balances to pre-fund "foreseeable expenses such as drug programs during the breathing space of the next decade."
Finally, he wants governments to follow "growth-friendly policies," saying if our economy can raise "growth in output per working-age person to 1.9 per cent annually, while holding growth in service intensity to 1.5 per cent" the whole $810-billion problem just vanishes. (Oddly, Robson omitted at least one other partial solution: keeping more people at work past 65.)
Readers will have noticed that his proposals are classic small-c conservative economic doctrine, now dressed up as a solution to our demographic problem. Many will find this unpalatable. But assuming that Robson's math holds up, critics of his proposals will have to come up with an alternative solution to the problem of a greying population. And immigration is not that solution: The C.D. Howe people demonstrated that in a separate paper last month.
The math there is unrelenting: at present there is about one Canadian over 65 for each five Canadians of working age. By 2050, there will be more than two seniors per every five workers. To maintain the current ratio, Canada would have to increase its population at an unheard-of rate.
Canada's provincial governments need to get on the straight and narrow path to fiscal discipline right now, these economic studies tell us, before the jaws of the demographic trap close down upon us and our children.
Both studies can be found at: www.cdhowe.org

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