If the province doesn’t raise taxes or cut spending soon, the Financial Accountability Office says, the debt burden will fall to millennials
An aging population will make it difficult for Ontario to handle its debt and budget challenges over the next 35 years, according to a new report from the province’s Financial Accountability Office.
“Over the next three decades, Ontario will experience major shifts in its population and the economy as the large baby-boom cohort transitions from work into retirement and eventually into old age,” said David Wake, the temporary financial accountability officer, at press conference at Queen’s Park on Thursday. “Without significant changes to Ontario’s fiscal policy, the FAO’s projections suggest that the province will face substantial long-term budgetary challenges.”
The report is the FAO’s first long-term budget outlook, and it contains strong warnings for this and future Ontario governments about the province’s fiscal position.
Baby boomers will put huge pressure on budgets
The number of seniors in Ontario will rise significantly in the next 35 years, reaching 5 million by 2050 — about twice the current number. The majority of baby boomers, though, will have retired long before then: by 2030, the report notes, Ontario’s working-age population will have fallen to 60 per cent of the general population, from 68 in 2016.
“The steady departure of baby boomers from the work force will contribute to slower economic growth over the next 15 years. More moderate growth in the economy will limit the growth in Ontario’s revenues,” said David West, the FAO’s chief economist. “At the same time, the aging baby-boom cohort will place greater demands on Ontario’s health care system, increasing the pressure on government spending.”
The province will also see lower population growth — by the mid-2040s, deaths will outnumber births. The report says that eventually migration will be the sole driver of population growth in Ontario.
As a result, the FAO expects lower economic growth for the province. It predicts that real GDP growth will average 2 per cent from now until 2050, lower than the 2.5 per cent average growth from 1992 to 2015. This estimate is consistent with short-term growth projections included in the 2017 budget.
Ontario won’t be able to meet its debt-reduction goals
In its 2017 budget, the Ontario government established the goal of reducing the net debt-to-GDP ratio — or debt relative to the size of the economy — to 27 per cent by 2029-30 (it currently hovers around 40 per cent).
“Without an adjustment to Ontario’s fiscal policy, these demographic changes will lead to increasing budget deficits and higher levels of provincial debt,” West said. If revenue and spending levels remain the same, he noted, the ratio will actually be closer to 37 per cent in 2030.
By 2050-51, that rate will have reached 63 per cent, meaning that Ontario budgets will have to dedicate 22 cents out of every dollar to servicing the debt (compared to the 9 cents spent today). Debt interest payments in 2050 will therefore account for more of the provincial budget than will all spending on primary, secondary, and post-secondary education, the report says.
“High levels of public debt increase debt interest payments, money which could otherwise be used for priority programs like health and education,” West said. “An elevated level of debt also limits the province’s ability to respond to unforeseen future events, including recessions.”
Delaying action will shift the burden to millennials
In order to lower debt levels, West said, “Beginning next year, the province needs to raise revenue or lower spending by the equivalent of $6.5 billion dollars.” That would be the equivalent of raising the HST by 2 per cent, or eliminating funding for 40 per cent of the province’s hospitals — and the figure will only increase over time.
It may seem tempting to postpone difficult decisions, West said, but if the province delays raising taxes or cutting spending, Ontario’s net debt will continue to accumulate. “This will make it even more costly to meet the province’s debt targets in the future. If these difficult fiscal changes are postponed, the burden of stabilizing Ontario’s public finances would be increasingly, and arguably unfairly, shifted from the baby-boom generation to younger Ontarians.”
When asked at a press scrum today whether he would make any moves to raise revenues or reduce expenditures, Ontario Finance Minister Charles Sousa would say only that Ontario’s economic growth is contributing increased revenues to the province’s coffers. “The growth in our economy is strong. [Wake] references the fact that it’s steady and that we are taking a balanced approach to obtain that growth. That’s appropriate — we’ll continue to do so.”
“We must do everything necessary to control our degree of debt, to ensure that we invest in things that make us competitive long-term, to ensure that our future generations have more opportunity to grow the economy,” Sousa said. “The FAO rightly states those are challenges that we have to overcome … We must continue to be prudent and take the balanced approach to the things we do, to invest not only in infrastructure but also in social programs that matter to people. But we must continue to support health care and education for future generations.”