The current Canadian fiscal policy is sustainable over the long term, with general government net debt projected to decline steadily relative to the size of the Canadian economy, the Parliamentary Budget Officer (PBO) said in a report released Wednesday.
The report aims to identify whether changes to current fiscal policy are required to avoid unsustainable government debt accumulation. It comes amid growing concerns over the nation’s aging population. The demographic shift will move an increasing share of Canadians into retirement, slowing the growth of the Canadian economy and the tax base while putting upward pressure on government programs and pension benefits.
At the national level, the federal government could permanently increase spending or reduce taxes by 1.5% of GDP while stabilizing the net debt at its initial level of 29.1% of GDP over the long term, the PBO suggested.
The estimate is lower than the PBO’s previous assessment of 1.7% of GDP. This revision reflects increased spending that more than offsets higher revenues as well as higher interest rates, which reduce the amount of fiscal room, the report said.
While the current fiscal policy is also sustainable at the provincial, territorial, local and Indigenous levels as an aggregate, regional differences exist, the PBO noted.
Currently, Quebec, Saskatchewan, Nova Scotia, Ontario and Alberta are fiscally sustainable and have room to increase spending or reduce taxes, ranging from 1.4% of provincial GDP in Quebec to 0.3% of GDP in Ontario, the report noted.
The remaining provinces and territories are deemed fiscally unsustainable and have fiscal gaps ranging from 5.9% of territorial GDP for the territories to 0.5% of provincial GDP in Newfoundland and Labrador.
The PBO also analyzed the fiscal sustainability of the Canada Pension Plan (CPP) and Quebec Pension Plan (QPP).
The current structure of the CPP and QPP is sustainable over the PBO’s 75-year projection horizon, the report said. There is fiscal room to increase benefits or reduce contributions by 0.2% of Canadian GDP for the CPP and 0.3% of Quebec’s GDP for the QPP, so long as the net asset-to-GDP position remains at its initial value after 75 years, the PBO noted.
Fiscal room has improved by 0.1 percentage points of GDP for the CPP since the PBO’s last assessment, reflecting a higher rate of return assumed over the long term.
Fiscal room for the QPP, meanwhile, has deteriorated by 0.2 percentage points of GDP for the QPP. Despite a higher rate of return, the deterioration in the fiscal gap reflects upward revisions to benefit payments.