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Pay a little now or more later: deficit crisis won't go away without pain

OTTAWA - Hospital lineups, federal-provincial squabbles, crumbling infrastructure, a military starved of equipment, and stagnating living standards.

OTTAWA - Hospital lineups, federal-provincial squabbles, crumbling infrastructure, a military starved of equipment, and stagnating living standards.

That may sound like a description of Canada in the mid-1990s as the then-Liberal government struggled with deficits and debt that were swallowing 36 cents out of every taxpayer dollar just to pay the interest.

But it may also describe the country in a few years, say analysts who have looked at the long-term implications of Canada's fiscal gap as the country's baby boomers retire.

And many believe Finance Minister Jim Flaherty should start planning how to head-off the train wreck in Thursday's federal budget, although they doubt he will. Flaherty continues to insist that economic growth and limiting government spending increases will eventually eliminate the deficit.

"So far, the government has basically said there isn't a problem," said Scott Clark, a former deputy minister of finance.

"The thing about demographics is that they are pretty reliable because you can't change fertility rates overnight. You cannot deny the reality that it's coming."

Parliamentary budget officer Kevin Page laid out the broad outlines of the dilemma confronting the Conservative government - and by extension provinces - a week ago. Over the next 40 years, the ratio of retirees to workers will go from one in five to one in two, decimating government revenues and increasing health-care and other social costs.

The current annual deficit of $56 billion, caused mainly by a weak economy, will give way to a permanent one of between $20 and $40 billion in as little as five years, experts predict. And that shortfall would go on year after year even when the economy is operating at full strength. There's no telling how big annual deficits could reach during future downturns.

Taken to its logical conclusion, in seven decades, Canada's debt overhang could grow to 350 per cent the size of the entire annual economy. By way of comparison, it's about 34 per cent now.

It won't get to that point - Canada would be bankrupt long before and no one would be lending it money.

The question is: what are Canadians prepared to do and when to stop it?

TD chief economist Don Drummond hopes the Tories don't repeat the mistakes of the 1970s and 1980s, when politicians assured Canadians that economic growth would solve the problem.

"The experience of the '60s and '70s and '80s shows it is very easy to let this slip away from you," Drummond said.

"It's not that there's a sign that gets flashed on some particular day that you have transferred from a cyclical (temporary) problem to a structural (permanent) problem and you are not coming back."

Drummond was at Finance when successive ministers, much like today, argued that growth and a little trimming of spending would take care of the problem.

It never did. It just kept adding to the debt load until it became so heavy - 68 per cent of the economy - that the International Monetary Fund told Canada to get its act together.

Drummond and Clark say Canadians may have already forgotten how painful reining in the deficit was then - and that was with demographics working in the government's favour.

The long hospital lineups and waiting lists of the '90s were caused when then-finance minister Paul Martin cut transfers to provinces for such things as health-care and post-secondary education. The military was set back 10 years, starved of funding, personnel and equipment.

Other government programs were slashed, including the size of the public service.

Then-industry minister John Manley has talked about losing a quarter of his staff, including some neighbours and friends.

And the government raised taxes.

"In one fell swoop in 1995, the government did what it should have done over a 20-year time frame. If they had done it over 20 years, it wouldn't have been so bad," said Drummond.

Some agencies have already begun to offer advice to Flaherty on how he can keep history from repeating at some date in the future. The C.D. Howe Institute has advanced a menu of choices, including reducing the civil service, cutting military spending, and - most controversial - freezing transfer rates to provinces.

Others, such as economist Dale Orr, have argued that raising the GST back to seven per cent would solve a big part of the problem.

To Clark, the issue is that Canadians must decide what they want from government. Transferring costs from Ottawa to the provinces won't save taxpayers money - only where they send the cheque.

"Canadians are going to have to get used to living with a little less or paying more for what they want," he said.

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