MLI Commentary by Philip Cross: Despite expected surplus, Canada isn’t as rich as you think

Ottawa is for the first time in years on track to balance the budget, but a new commentary from the Macdonald-Laurier Institute warns that worrying pressures lurk beneath the headline numbers.

OTTAWA, Oct. 8, 2014 – A soon-to-be-declared federal budget surplus does not mean that Ottawa can diagnose its finances as healthy, according to a new commentary from the Macdonald-Laurier Institute.

Philip Cross, a senior fellow with MLI and a former chief economic analyst with Statistics Canada, warns that numerous pressures are going to squeeze federal budgets in the years to come.

The deficit has leveled off from $40 billion at its peak to $9 billion over the last four quarters, but, he says, the aging of the population will present problems on a number of fronts.

A big area of concern is on the revenue side, since there will be more retirees and therefore fewer of our highest-earning workers paying income tax.

However an older population will also force the federal government to spend.

There will be increased demands on Canada’s health care system as well as the unfunded portions of the retirement system (particularly Old Age Security and the Guaranteed Income Supplement) and the pension benefits for federal civil service retirees.

“While the current state of federal finances has improved significantly since the recession, there is no room for complacency”, says Cross in the commentary paper, titled “You’re Not As Rich As You Think: Federal finances and the fiscal dividend”.

Ottawa will also need to keep an eye peeled for how provincial governments fare in wrestling their budgets back into surplus.

Most Canadian provinces – including Ontario and Quebec – continue to run deficits. Without fundamental changes to how they do business, Cross notes, the potential for a default increases.

That would place an additional pressure on federal finances, since financial markets anticipate an implicit guarantee that Ottawa will bail them out if necessary.

Cross advises the federal government to avoid chasing short-term budgetary surpluses and instead erect a steadier structure for government spending by introducing innovation in areas such as health care and educational services.

“Fiscal rectitude is not measured by short-term budgetary surpluses, which can prove to be bogus or ephemeral, but by an ongoing commitment to root out obsolete government programs and boost productivity within government”, Cross says.

In his new paper, Cross cites the findings of an MLI paper titled “Provincial Solvency and Federal Obligations”, which warns that Ottawa will need to bail the provinces out if they default on their loans and that this in effect subsidises risky provincial borrowing.

The commentary is based on testimony Cross delivered to the House of Commons’ Standing Committee on Finance on Sept. 29 during pre-budget consultations.

Click here to read the full commentary.

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Philip Cross is a senior fellow with the Macdonald-Laurier Institute and a former chief economic analyst with Statistics Canada.

The Macdonald-Laurier Institute is the only non-partisan, independent national public policy think tank in Ottawa focusing on the full range of issues that fall under the jurisdiction of the federal government.

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