Christopher Ragan

1
Canadas Looming Fiscal Squeeze
Christopher Ragan
Department of Economics McGill University and Davi
d Dodge Chair in Monetary Policy C.D. Howe
Institute Halifax, May 25 2012
2
Outline of Talk

1. The basic demographics of aging
2. The looming fiscal squeeze
3. Some non-fiscal solutions?
4. Difficult decisions

2
3
A declining fertility rate has reduced the
population growth rate ...
Current fertility rate 1.6 children per woman
Source Statistics Canada, medium-growth
projection. The 1971 observation is omitted due
to a level change in the definition of the series.
3
4
... which inevitably leads to population aging.
Distribution of the Population By Sex and Age
Group
Source Office of the Chief Actuarys 23rd
Actuarial Report on the Canada Pension Plan and
Statistics Canada.
4
5
Aging will markedly reduce the working-age share
of the population ...
Share of people aged 15-64 in Total Population
Source Office of the Chief Actuarys 23rd
Actuarial Report on the Canada Pension Plan.
5
6
... and will also cause a shift toward groups
with lower LF participation rates
Source Authors calculations based on data from
Statistics Canada, Labour Force Survey.
6
7
resulting in a reduction in the aggregate
labour-force participation rate.
Source Data from 1976-2009, Statistics Canada
projections from 2010-2040, Office of the Chief
Actuary (2010), 25th Actuarial Report on the
Canada Pension Plan.
7
8
Two different directions for this talk
Future path of living standards
Future fiscal implications
GDP/POP (GDP/E) x (E/LF) x (LF/POP)
Per capita income (labour
productivity) X (employment rate) X (LF
participation rate)
Past 40 years
Next 40 years
8
9
Source Authors calculations based on data from
Statistics Canada.
9
10
The looming fiscal squeeze Part 1

• Over the next 30 years there will be
• reduced growth in real per capita GDP
• (for any given rate of productivity growth)
• reduced growth in per capita tax base
• (growth rate will be cut roughly in half!)

10
11
The looming fiscal squeeze Part 2

• 1. Need for more public spending
• Health-Care Spending
• Elderly Benefits
• 2. Offsetting effects expected to be small
• Education, childrens benefits and some social
  services

11
12
Not surprisingly, per capita health-care
expenditures rise rapidly as we age ...
Source Authors calculations based on data from
Statistics Canada and the Canadian Institute for
Health Information.
12
13
... but other factors will also contribute to
rising health-care costs.
FYI Total public spending on HC increased from
5.4 to 7.5 percent of GDP between 1975 and 2008.
Source OECD (2006), Table A2.3, and authors
calculations.
13
14
Rising elderly benefits will also put upward
pressure on government spending as the population
ages.
Source Office of the Chief Actuary (2008), 8th
Actuarial Report on the OAS program, and authors
calculations.
14
15
An illustration of the fiscal squeeze
Change in ppts of GDP
G/GDP
4.2
Fiscal Squeeze
T/GDP
0
2015
2040
2030
2020
16
Some popular non-fiscal solutions?

1. Increase immigration rate?
2. Increase fertility rate?
3. Increase labour-force participation rate?
4. Restrain the growth of health-care spending?
5. Increase the productivity growth rate?

16
17
What broad fiscal choices are available?

• Restrain spending growth
• - especially on non-age-related items?
• Increase tax rates (or the tax burden)
• Defer the problem
• - increase borrowing (public debt)

17
18
How much debt from policy inaction?
Change in ppts of GDP
G/GDP
4.2
Fiscal Squeeze
Area sum of increments to
primary deficit
T/GDP
0
2015
2040
2030
2020
19
But recall the dynamics of debt
?d x (r-g)d
The triangle on the previous page is the
increment to x between 2015 and 2040. The IMF
projects that there will be a primary surplus of
1.5 of GDP in 2015. What will happen to r and
g?
20
Without policy adjustments, there will be a
return to the debt wall of the mid 1990s.
The debt wall?
20
Source Statistics Canada (National Balance
Sheet Accounts) and authors calculations.
21
So, some fiscal adjustment will be needed.
22
Summary and Final Thoughts

1. A two-part fiscal squeeze is heading our way.
2. We must adjust soon but we have many choices.
3. This is not about small versus big government.
4. There will be renewed Fed-Prov tensions.
5. We need to start talking about fiscal priorities!

22
23
(No Transcript)
24
Thank you. Questions?
24