OTTAWA - Canada's governments face a return of a heavy 1990s-style debt burden unless tough decisions are made soon to eliminate growing deficits, says an academic working on contract for the Finance Department.
Some combination of tax hikes and spending cuts will eventually become unavoidable unless governments want to hand over a massive debt problem to the next generation, says Chris Ragan, who is on leave from McGill University in Montreal.
Ragan presented his arguments to federal officials in August. A version of his paper, obtained by The Canadian Press, will be published in the journal Policy Options on Monday.
Both the federal Conservatives and Liberals have promised to eliminate the deficit and set Canada on a sustainable fiscal path without raising taxes or cutting spending.
"Canada has a number of real economic challenges in its future, and it is crucial that we face them head on, rather than pretending they do not exist," Ragan writes.
Canada's deficits are growing because of large stimulus programs to fight the recession but the challenges of the future will be even more costly, Ragan says.
He points out that the population is aging. Health care demands are set to soar. And the labour force is expected to grow only slowly. So government costs will rise just as the tax base shrinks.
At the same time, combating climate change will probably impose slower economic growth as the country learns to adjust, says the paper.
Taken together, the effects of aging, rising costs, a smaller tax base and slower growth mean policy makers can't conduct business as usual.
"There will be a large impact on our governments' fiscal position - Canada's coming 'fiscal squeeze'," Ragan says.
He calculates that if governments hold taxes and regular spending steady, the cost of the fiscal squeeze would increase the size of the national debt by 35 per cent between 2020 and 2040.
In other words, he says, failure to get the debt down "significantly" by 2020 "could lead within 20 years to a return of the mid-1990s fiscal situation."
Back then, government debt was about 90 per cent of the size of the country's gross domestic product, and officials believed the country was about to hit a 'debt wall' that would make future borrowing so expensive as to be prohibitive.
Ragan figures that if Canadian governments can eliminate their deficits within about five years, and then run surpluses for several years, the country should have enough fiscal room to finance rising costs when the demographic crunch hits in 2020.
"This will be challenging, but certainly possible," he writes. "The longer we delay in making this fiscal adjustment, the more difficult it is likely to be."
Ragan declined to be interviewed.
Last month, Flaherty announced that he expected the deficit to rise to $56 billion in the current fiscal year, but that he would gradually mop up the red ink and reduce the deficit to just $5 billion by 2014-2015.
"We agree that the country faces a challenging fiscal situation that will be affected further by demographic changes, but we remain in a far better fiscal situation than our international counterparts," Flaherty spokesman Chisholm Pothier said.
"Our commitment is to not raise taxes. The government has made that very clear."
The government projections do not show exactly when Flaherty aims to balance the budget. Nor has the minister addressed how to pay for an aging population, a smaller workforce and climate change.
By 2015, the deficits that started last year will have totalled $170 billion, according to the latest Finance Department estimate.
Ragan's paper does not directly challenge Flaherty's plan for the next five years. Rather, it challenges governments to think more clearly about the next 20 years, and start planning now for a fiscal crunch that is coming relatively quickly.
"There is no time like the present to begin the necessary work," he says.
