Aging population and historically high spending pre-COVID mean no balanced budget for next 30 years

Canada’s Aging Population and Long-Term Projections for Federal Finances

Summary

• Canada’s fiscal challenges extend far beyond just the short-term impact of COVID-19. An aging population will continue to place upward pressure on federal finances and a new structural imbalance between revenues and spending means deficits and debt are likely to continue growing for decades to come.
• A lower population growth rate coupled with increasing life expectancy means that the share of the population over 65 is projected to increase to 25.6 percent by 2068. This will require greater spending on income transfer programs to seniors like Old Age Security (OAS) and the Guaranteed Income Supplement (GIS).
• Declining population growth combined with an aging population also means that Canada will likely face a declining labour force participation rate, a slower growing labour force, and slower tax revenue growth.
• Spending on elderly transfer benefits is expected to peak at about 3.2 percent of GDP by 2031, an increase of almost 0.5 percentage points from the expected spending level in 2021.
• The long-term projections demonstrate that based on current trends, the federal government is not on track to balance its budget at any point during the next three decades.
• In our baseline scenario, the federal debt-to-GDP ratio might reach 69.6 percent by 2050, which would be the highest ratio recorded since 1948. If interest rates equal or surpass GDP growth, this ratio could exceed 100 percent of GDP between 2034 and 2039 depending on the extent of the difference between interest rates and GDP growth.