Budget Officer Report Suggests Feds’ Current Fiscal Policy Sustainable Over Long Term

Parliamentary Budget Officer Yves Giroux waits to appear before the House of Commons Finance Committee on Parliament Hill in Ottawa on March 10, 2020. (The Canadian Press/Adrian Wyld)

The Parliamentary Budget Officer (PBO) has released an assessment of the sustainability of Canada’s government finances and concluded that the country’s current fiscal policy is sustainable over the long term.

This refers to “federal and subnational governments and public pension plans combined,” according to Fiscal Sustainability Report 2023, noting “fiscal sustainability means that government debt does not grow continuously as a share of the economy.”

The assessment reflects all measures in federal, provincial, and territorial government budgets in 2023, said PBO Yves Giroux’s news release published July 27.

“Relative to the size of the Canadian economy, total general government net debt is projected to decline steadily over the long term due to fiscal room at the federal level and to rising net asset positions in the public pension plans,” the news release said.

For the federal sector specifically, the report said the PBO estimates that “the federal government could permanently increase spending or reduce taxes by 1.7 percent of GDP ($49.5 billion in current dollars, growing in line with GDP thereafter) while maintaining fiscal sustainability.”

For the subnational government sector as a whole, which includes provincial-territorial, local, and indigenous governments, current fiscal policy is also sustainable over the long term.

However, the report said only five provinces—Quebec, Saskatchewan, Nova Scotia, New Brunswick, and Alberta—have fiscal room to increase spending or cut taxes while maintaining fiscal sustainability. Current fiscal policy is not sustainable in the remaining provinces and territories.

Regarding the country’s public pension plans, Mr. Giroux said “Canada’s aging population will result in more and more Canadians transitioning into their retirement years.”

“This will lead to slower growth in the economy and government revenues. At the same time, population ageing will put financial pressure on government programs such as health care, Old Age Security and public pensions.”

However, his report says the current structure of the Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) is sustainable over the long term.

The contributions and benefits projected under the current structure of the plans “are sufficient to ensure that the net asset-to-GDP position is above its 2022 value after 75 years,” the report said.

Based on Finance Canada data, TradingEconomics.com states that government debt in Canada increased from $1,048.75 billion in 2021 to $1,134.49 billion in 2022.

In February, the Fraser Institute think tank cited a recent study indicating that federal and provincial government debt has nearly doubled, on an inflation-adjusted basis, from $1.1 trillion in 2007–08 to $2.1 trillion in 2022–23.

“Part of this increase is due to the large budget deficits governments ran during the pandemic. However, nearly 60 percent of the run-up in debt occurred before COVID. In other words, this is not a new problem,” the institute said.