"Meeting the Future Budget Challenges
of our Federation"
Notes for an address by
the
President of the Privy Council and
Minister of Intergovernmental Affairs
the Honourable Stéphane Dion
at the Canadian Club of Montreal
Montreal, Quebec
September 27, 1999
In recent years, Canada has had a most remarkable recovery in putting its financial house in order. Canadians have made many sacrifices to achieve this result. We have done so while preserving the integrity of our social programs, containing inflation, kick-starting jobs and growth, and maintaining the tax burden in the economy at the OECD average.
It is altogether appropriate that this experience should bring about an increased confidence in our country. This message of confidence is the first thing on which I will emphasize today.
But I want to talk about something else as well. This increased confidence must not lead us to rest on our laurels. On the contrary, it must encourage us to confront the challenges ahead realistically and with determination.
And there is one challenge I will be talking about in particular: the budget pressures that Canada's demographic evolution ? especially the aging of the population ? will exert on both the federal government and the provincial and territorial governments. Because of these upcoming pressures, reducing our collective debt burden must remain one of our priorities.
Since the Annual Premiers' Conference on August 9 to 11, there has been much talk in Canada about the consensus that has been forged among all governments in our federation on the need to strike a fair balance between tax cuts and reinvestment in programs. Today, I will be focussing on the third pillar of our budget policy: the key importance for our governments of reducing our debt burden immediately, so as to enable us to meet the challenges of tomorrow, while maintaining a fair balance with today's needs.
I will do so as the federal minister responsible for intergovernmental relations. At the dawn of the 21st century, our federal government and the provincial and territorial governments must identify the challenges they will be facing together in the coming decades. They need to discuss these challenges with Canadians.
1. Putting public finances in order: the Canadian miracle
We Canadians may have a tendency to forget a problem once it has been solved. I'm not saying that this is a specifically Canadian trait, but it is something that tends to happen a lot in Canada.
Now that our governments are showing a surplus, and we're having a lively debate about how to use that surplus, we must not forget where we've come from. There are lessons to be learned from our success in putting our financial house in order, the speed of which has surprised everyone, without exception, including, as you well know, the finance ministers themselves.
One of those lessons, in my opinion, which is of particular interest to me in terms of Canadian unity, is that we must never underestimate the resilience of our country, the strengths of our federation.
We need to remember that the difficult post-Meech Lake constitutional debates coincided with an economic recession and an accumulation of deficits. With public finances increasingly awash in red ink and while the Wall Street Journal declared us a candidate for Third World status, many people concluded that Canada was an economic basket case.
"Canada doesn't work any more," people kept saying. "The federation is costing us billions in needless duplication." "Duplication in job training alone wastes $250 million," it was seriously claimed in Quebec. "We'll never come out of this without major constitutional change," the constitutional industry shouted, almost unanimously. That was the period in which Mr. Lucien Bouchard, the Leader of the Bloc, campaigned urging Quebecers to leave Canada to avoid "bankruptcy." "If they [Canadians outside Quebec] intend to go bankrupt, too bad for them. But we're going to save our skin," he said on August 14, 1993.
And here we are today, just a few short years later, with every government in Canada – not just Quebec and the federal government – having balanced its budget (or about to do so), and being able to hope for increasing budget flexibility in the coming years, as confirmed recently by a study published by the Royal Bank. Indeed, the 1999 World Competitiveness Yearbook ranks Canada third among 47 countries for the improvement of the management of its public finances. We are ahead of all our main trading partners in that respect. Not bad for a country which one had to leave in order to escape bankruptcy!
Our country was badmouthed and underestimated at that time, but it made a liar out of the doomsayers. Indeed, I would even say that the federal system in general was badmouthed: after all, international comparisons indicate no evidence of any predisposition to public debt on the part of federations.
Our federation has put its finances in order by building on its ability to unite diversity of experience with common action. The strategy undertaken by Quebec to put its financial house in order has not been the same as that adopted by Saskatchewan or New Brunswick. The federal government, for its part, has managed to do so with a team of ministers and MPs elected in every region of the country. I am sure you will allow me to give special credit to the contribution of three great Quebecers: Jean Chrétien, Paul Martin and Marcel Massé.
We have every reason to have confidence in our country, and in our collective ability to take on great challenges, to overcome obstacles which may at first seem insurmountable, or at least very daunting.
And speaking of great challenges, the one I want to draw your attention to today, the financial cost of the aging of Canada's population, is certainly a cause for concern. The tax pressures that this phenomenon will exert in ten or fifteen years time impel us to use the budget flexibility we have today intelligently and responsibly.
2. The challenge posed by an aging population
Since many of you are in the same generation as I am, I'd like to take a few minutes to talk about our responsibility toward our children and our grandchildren.
Between 1946 and 1960, Canada experienced a baby boom that was larger and lasted longer than in most other Western countries.
Our population is now younger than that of other countries. According to the OECD, the proportion of Canada's population that was 65 years or older was only 12% in 1996, compared with 17% in Italy and Sweden, 15% in France, the United Kingdom and Japan, and 13% in the US. In Quebec, the proportion of the population aged 65 or older was also 12% in 1996, according to the Institut de la statistique du Québec.
Our relative youth also contributes to the budget flexibility that our governments enjoy today, because our generation is at an age where we depend the least on government assistance: generally speaking, our student days are over, we are less affected by unemployment and economic instability, and we have less need for health services than our elders.
However, the overall aging of Canada's population will be especially pronounced in the coming decades: from 12% today, the proportion of Canadians 65 or older will double by 2050 – again according to the OECD. One Canadian in four will be over 65 by the middle of the next century. According to the Institut de la statistique du Québec, 29.4% of Quebec's population will be 65 or older by 2051.
This means that, although we have one of the youngest populations among the wealthy countries, we will experience one of the greatest increases in the relative proportion of elderly citizens.
It will be especially important for us to take into account the impact of this aging population on pension plans and government budgets: Canada Pension Plan (CPP) spending will increase dramatically: from around $18 billion a year in 1998 to double that amount by 2011, and doubling again by 2021. The Quebec Pension Plan (QPP) will face a similar challenge.
To preserve the financial integrity of the CPP, the federal government has had to take appropriate action, including a gradual increase in CPP contribution rates (from 7% today to 9.9% by 2003).
And that's not all. In addition to its impact on the CPP and the QPP, the aging of our generation will require budget increases for old age pensions, which fall under federal jurisdiction. Spending will rise from $23 billion today to $40 billion by 2011 and over $70 billion by 2021.
At the same time - and even though the projections vary greatly in magnitude because of the technology changes affecting the health care sector - it is estimated that this phenomenon of aging will generate an increased demand for health services, an area that falls largely under provincial jurisdiction. For example, according to the "average" projection by the Auditor General, total health care spending could increase from around $60 billion today to around $120 billion by 2011 and $200 billion by 2021.
It is possible that decreased growth in the active population could also contribute to a certain slowdown in economic growth, and thus decreased growth in government revenues.
These pressures will increase in the coming years, although we will not feel their full effect for another 10 to 15 years, when the first members of our generation reach 65.
Considering the advantages that our generation of baby boomers enjoys, I believe we have a responsibility toward our children and our grandchildren to adopt a balanced strategy that will protect their interests as well as ours.
That is why the governments with the highest debt levels – the federal government and, to a lesser extent, some of the provincial governments, including Quebec – must make a commitment to reduce the burden of this debt.
This is a key element in our preparations to meet the challenges posed by our aging population. The Government of Canada currently devotes 27% of its revenues to debt servicing. For the provinces, this figure is 13% on average, and around 17% for Quebec.
It is especially important to reduce this part of our debt servicing costs now, before the effects of our aging population reduce our budget flexibility, because we will need the sums thus freed up.
Prudence compels us, among other things, to ensure a continuous reduction in the size of our debt to GDP ratio. For example, with nominal GDP growth of around 4% a year over the next 10 years, the total debt to GDP ratio of our governments would decrease from 86% today to around 58%, if all governments managed to maintain balanced budgets during this period. However our debt level would still be higher than the current US level. And these forecasts assume there will be no major recession in the next decade.
And so, driven by a sense of prudence and a desire to guarantee the budget flexibility we will need in the future, the federal finance minister, Mr. Paul Martin, is committed to a plan to pay down the debt – based on prudent economic forecasts – under which any unused portion of the contingency reserve will be used to pay down the debt.
Conclusion
We need to reduce our debt burden today so that we can better face our future responsibilities while taking into account our aging population. All governments in our federation must act now, employing the same sense of responsibility that enabled them to put their public finances in order.
This sense of responsibility is ingrained in the Government of Canada. It knows that it has, admittedly, the highest surplus of all our governments, but it has also the highest debt, and is thus the most vulnerable to interest rate increases. Its revenues have grown at the same rate as those of the provinces over the past 20 years, not more quickly, at 8% a year on average.
The Government of Canada also knows that when spending associated with the aging population will increase significantly, in ten or fifteen years time, the provinces and territories will feel the pressure, especially in the enormous health care field. They must be able to meet those challenges. The federal government will also feel the pressure, especially in connection with old age pensions. Our two orders of government must assume their own responsibilities, while working in partnership to prepare themselves.
But I am certain that our governments, our entire federation will show foresight and will act accordingly to reduce their debt burden, thus freeing up future revenues for purposes other than debt servicing.
The Government of Canada, for its part, is committed to a sound and balanced policy, comprising strategic reinvestment, tax cuts and paying down our collective debt, a policy that addresses both the needs of today and the needs of tomorrow.
I am therefore confident that we will be able to hold our heads high when we account to our children and our grandchildren for the decisions we make today.
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