The Canadian Press

The federal government will face a big structural deficit in the coming years that can only be overcome by taking dramatic action, Canada’s Parliamentary Budget Officer said Wednesday.

In his latest report on Ottawa’s deteriorating fiscal position, Kevin Page said the government will have a structural deficit of $18.9 billion in the 2013-14 year.

That represents the difference between what the government takes in revenues and what it spends, even with the economy recovered from recession.

The most troubling aspect of the report is that Page calculates the government’s structural deficit will grow, rather than shrink, even during the years the Canadian economy is expected to grow.

“What we’re saying to Parliamentarians is, ‘You’ve got tough choices ahead – you’ve got a weak economy (now) … and you have to deal with that,’” Page said.

“We’re also saying, unfortunately, ‘You’ve got to start dealing with a structural fiscal problem that is going to get bigger and bigger and bigger.’”

Page said the current budget deficit of about $56 billion is cyclical – that is, it is being driven by temporary factors such as the recession and Ottawa’s decision to ramp up spending to stimulate the economy.

But the bigger problem going forward is a structural one, where government revenues will continue to shrink relative to the past even when the economy is operating back at capacity in 2013.

The budget watchdog’s numbers are similar to ones released by the Finance Department in the early years of the five-year projection, but start to diverge in outgoing years when the official government projection appears to be heading toward a balanced budget after 2014.

Although Page’s analysis only goes to 2014, he said there is no magic bullet that occurs after mid-decade that will take the government back to balance. In fact, if anything the deficit will likely continue to grow.

For instance, Page sees the structural deficit rising by about $3 billion a year in the last two years of the projection.

Page said the government has no targets about how much of the debt it will be passing on to future generations, or when it will meet its previous target of having debt shrink as a portion of the economy to 25%.

Earlier this week, Prime Minister Stephen Harper said he was not overly concerned about the deficit, saying Canada’s finances would not be problematic as long as the government take in more than it spends once stimulus is removed in the spring of 2011.

But Page’s analysis suggests that the numbers do not, at this point, lead to a balanced budget unless the economy starts performing well above normal historical capacity.

Canada’s population is aging, said Page, and more and more Canadians are moving from producers who pay taxes, to retirees who drain government services, from medicare to old age security.

As a result, he said, the economy’s growth potential will fall from the current 2% to 1.7% in 2014, which means fewer tax revenues.

According to the budget office, labour’s input to potential growth in Canada slides from 1.4% in 2008 to 0.5% in 2014, and will continue to slide after that.

The budget watchdog said it was not his place to advise the government on what to do, but said it should be transparent about whether it intends to balance the budget or live with a structural deficit.

“The government has to decide what is the appropriate target,” he said.

“If they decide they want to have a balance budget in five years, we’re saying they have to raise taxes, and they have to cut spending. If they say they can live with a structural deficit, then they could operate based on that assumption.”

Page says the structural deficit will be in the range of 1% of gross domestic product, which he said was “not a big problem” and much lower compared to other countries.

But he added that Canada lived with structural deficits in the 1970s, 1980s and part of the 1990s, and that did turn into a major problem for the government and the Canadian economy.

“The question is what happens once we get beyond five years with the aging demographics?” Page asked. “If we deal with it sooner, it’s a much easier problem to solve.”