Transcript Department of Finance Canada

Canada’s Looming
“Fiscal Squeeze”
Christopher Ragan
Department of Economics
McGill University
and
David Dodge Chair in Monetary Policy
C.D. Howe Institute
Halifax, May 25 2012
Outline of Talk
1. The basic demographics of aging
2. The looming “fiscal squeeze”
3. Some non-fiscal solutions?
4. Difficult decisions
2
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
... which inevitably leads to population aging.
Distribution of the Population By Sex and Age Group
1970, Population: 21.7 M
2008, Population: 33.3 M
2040, Population: 41.2 M
90-94
90-94
90-94
75-79
75-79
75-79
60-64
60-64
60-64
45-49
45-49
45-49
30-34
30-34
30-34
15-19
15-19
15-19
0-4
0-4
0-4
8
6
4
2
0
2
percent of population
Male
Female
4
6
8 8
6
4
2
0
2
4
6
8 8
percent of population
Male
Female
6
4
2
0
2
4
6
8
percent of population
Male
Female
Source: Office of the Chief Actuary’s 23rd Actuarial Report on the Canada Pension Plan and Statistics Canada.
4
Aging will markedly reduce the working-age share of the
population ...
Share of people aged 15-64 in Total Population
(percent)
75
70
Historical
Projected
Entry of the baby boom generation
into the labour market.
Baby boomers gradually reaching
retirement age.
65
60
55
1966
1972
1978
1984
1990
1996
2002
2008
2014
2020
2026
2032
2038
Source: Office of the Chief Actuary’s 23rd Actuarial Report on the Canada Pension Plan.
5
... and will also cause a shift toward groups with lower LF
participation rates …
Source: Author’s calculations based on data from Statistics Canada, Labour Force Survey.
6
… 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
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
Source: Author’s calculations based on data from Statistics Canada.
9
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
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, children’s benefits and some social
services
11
Not surprisingly, per capita health-care expenditures rise
rapidly as we age ...
Source: Author’s calculations based on data from Statistics Canada and the Canadian Institute for Health Information.
12
... but “other factors” will also contribute to rising
health-care costs.
FYI: Source:
Total public
spending
onandHC
increased
from 5.4 to 7.5 percent of GDP between 1975 and 2008.
OECD (2006),
Table A2.3,
author’s
calculations.
13
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 author’s calculations.
14
An illustration of the fiscal squeeze:
Change in ppts of GDP
G/GDP
4.2
“Fiscal
Squeeze”
T/GDP
0
2015
2020
2030
2040
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
What broad fiscal choices are available?
1. Restrain spending growth
- especially on non-age-related items?
2. Increase tax rates (or the “tax burden”)
3. Defer the problem
- increase borrowing (public debt)
17
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
2020
2030
2040
But recall the dynamics of debt:
Δd = 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?
Without policy adjustments, there will be a return to the
“debt wall” of the mid 1990s.
Total Government Net Debt-to-GDP Ratio
110
100
90
The debt wall?
80
70
60
50
40
30
20
1990
1995
2000
r - g = 0.5 ppt
2005
2010
r - g = 1.0 ppt
2015
2020
r - g = 1.5 ppts
Source: Statistics Canada (National Balance Sheet Accounts) and author’s calculations.
2025
2030
2035
2040
r - g = 2.0 ppts
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So, some fiscal adjustment will be needed.
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
Thank you. Questions?
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