As Canada’s giant baby boom demographic continues to age, provincial governments are going to feel a severe financial strain, according to a recent report by the C.D. Howe Institute.
The shortfall expected to pay for rising health care costs and income support could reach a staggering $2 trillion, according to report authors William B.P. Robson and Parisa Mahboubi in, “Another Day Older and Deeper in Debt: Fiscal Implications of Demographic Change for Canadian Governments.”
“Without strategic policy interventions, the mounting costs driven by an aging population threaten to outpace revenue growth,” wrote the authors, “leaving provinces with difficult choices about service levels and tax rates.”
By 2067, health care costs as a percentage of GDP are expected to almost double, according to the report, with Ontario seeing health care costs rising to 12.6 per cent of GDP from 7.7 per cent.
And provinces with older populations, like those in Atlantic Canada, will be hardest even harder, according to the report, and may need to raise taxes to bridge the gap.
“Everyone’s paying attention to this generation because it’s so big and so influential in Canada,” said James Orlando, director and senior economist at TD. “(They are a) big source of spending power, a big source of the workforce. And as people get older the propensity to work reduces.”
The issue will take some time to come to fruition, because baby boomers are living longer, working longer, and retiring later, said Orlando. Immigration has also masked the issue because immigrants tend to be younger and in their prime working years.
When things eventually come to a head, Ottawa could transfer funds to support the provinces, but the authors caution against overreliance on federal support. This would only reinforce the existing fiscal imbalances between provinces, they say.
“This imbalance blurs accountability,” the report reads. “When citizens of a given province have concerns about their publicly funded health care, for example, each level of government can — and often does — blame the other.
Instead, provinces might consider “prefunding” areas like health care, to “spread the financial burden more evenly across generations,” notes the press release.
Further complicating the situation, the report notes, economic growth is expected to slow as Canadians exit the workforce.
“We need to be careful with our spending because we know there are going to be challenges in future,” said Orlando. “This transition is going to impact the workforce, our families, taxes, savings, investments, all these things.” It will have a “huge” impact on the economy and will affect people at many different levels, he said.
Robson added, “If you’re a young person now, as time goes by, you’re going to see a much bigger increase in taxes and a much smaller increase in services than your parents did.” He suggests that the government charge a little bit more for essential services like pharmaceutical drugs, and bank it away for the future.
“Do a little bit now, and in 20 years time, you’ll be glad you did,” said Robson.
