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"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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