August 29, 2024 – Canada’s aging population will tighten the budgets of provinces and territories, creating an implicit liability of more than $2 trillion over the next four-and-a-half decades, according to a new C.D. Howe Institute report.
In “Another Day Older and Deeper in Debt: Fiscal Implications of Demographic Change for Canadian Governments,” William B.P. Robson and Parisa Mahboubi take a closer look at the major implications of Canada’s growing ratio of older adults to working-age Canadians on provincial budgets. They find that with a smaller share of people in the workforce and more requiring healthcare and income support, provinces face the dual challenge of rising expenditures and stagnant or shrinking tax revenues.
“The financial sustainability of Canada’s provincial governments is at a critical juncture,” Robson and Mahboubi say. “Without strategic policy interventions, the mounting costs driven by an aging population threaten to outpace revenue growth, leaving provinces with difficult choices about service levels and tax rates.”
The report highlights that by 2067, healthcare costs as a percentage of GDP are expected to nearly double in some provinces. For instance, Ontario could see healthcare costs rise from 7.7 percent to 12.6 percent of GDP and Nova Scotia from 11.6 percent to 20.5 percent. Funding these increases from their own taxes will strain the finances of some jurisdictions. The territories would need to double or even triple their own-source revenues. Only in Saskatchewan, where it is one-sixth, is the required increase in provincial tax rates less than one-third.
Further, economic growth is expected to slow due to the decline in the working-age population relative to older adults, which will further restrict provincial revenue streams.
Provinces with older populations, such as those in Atlantic Canada, will also experience more severe fiscal pressures, necessitating substantial adjustments to tax policies or spending programs. “For example, Nova Scotia would need to raise its aggregate tax rate by one-half, while Alberta and Newfoundland and Labrador would need to raise theirs by two-thirds to meet these demands,” Mahboubi says.
The Commentary offers detailed projections and policy recommendations to guide provincial and federal governments in navigating this complex issue.
In addition, the report explores the potential for increased federal transfers to alleviate provincial fiscal stress but cautions against over-reliance on federal support. It advocates for enhanced provincial autonomy in managing finances, particularly by increasing consumption taxes and improving spending efficiency.
Robson and Mahboubi suggest that provinces consider prefunding certain future liabilities, particularly in healthcare, to spread the financial burden more evenly across generations. Like the reforms to the Canada and Quebec Pension Plans in the 1990s, this approach could mitigate the long-term impact of an aging population on provincial budgets and address concerns about intergenerational unfairness—young people paying far more for a given package of services and transfers than their predecessors did.
“Canada is facing a looming geriatric crunch, where the rapid growth of the aging population risks overwhelming provincial budgets,” Robson says.
For more information, contact: William B.P. Robson, President and Chief Executive Officer, C.D. Howe Institute; Parisa Mahboubi, Senior Policy Analyst, C.D. Howe Institute; Percy Sherwood, Communications Officer, C.D. Howe Institute, 416-865-9935 Ext. 9935, psherwood@cdhowe.org
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada’s most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.