Christopher Ragan, "Canada's Looming Fiscal Squeeze," November

more slowly in the future than they have since 1971. even with significant increases in future productivity
growth rates, real per capita GDP will grow at roughly half its pace from the previous forty years.
Two separate policy conclusions emerge from these projections. The first is that
productivity growth will be a relatively more important source of growing living
standards in the future than it has been in the recent past (ragan 2010b). From
1971-2010 productivity growth accounted for roughly two-thirds of the growth
in real per capita GDP whereas it is likely to account for more than 100 percent of
such growth over the next few decades. The policy imperative is clear: Canadians
and their governments need to think carefully about how to increase the growth of
productivity. 5 The second policy conclusion is that the reduction in the labour
force participation rate, taken by itself, will reduce the growth rate of real per capita
GDP (for any assumed productivity growth rate) and thus reduce the growth rate of
Canadian governments’ per capita tax base. This brings us to the fiscal squeeze.
The Looming Fiscal Squeeze
Living standards
will grow much more
slowly in the future
than they have
since 1971.
Canadian governments will face a two-part fiscal challenge in the coming few decades. First, the aging of
the population will lead to a slowing of national income, which is the primary tax base for governments.
Second, major Canadian public spending programs will become more costly as a share of GDP, especially
those providing healthcare and income support for the elderly. This fiscal challenge will likely create political
tensions between provincial and federal governments and will force governments at all levels to make some
difficult fiscal decisions.
Slowing Tax Revenues
Canadian governments levy all kinds of taxes, including personal and corporate income taxes, the federal
Goods and Services Tax (GST), provincial sales taxes, municipal property taxes, and various excise taxes
such as those that apply to the sale of gasoline, cigarettes, and liquor. Since the revenues raised by the most
important Canadian taxes tend to fluctuate with income and spending, we can view national income (GDP)
as a good approximation to governments’ overall tax base.
We have seen in Figures 5 and 6 that an important effect of Canada’s population aging will be a significant
decline in the labour force participation rate over the next thirty years, with the important consequence
that real per capita GDP will grow more slowly than it did over the past four decades. The implications
for government tax revenues are clear: without changes in tax rates, the slowing of the growth in per capita
income will lead to a slowing of Canadian governments’ per capita tax revenues. From Figure 6, one can
project that the annual growth rate of per capita income for the next thirty years will be lower by about 1
percentage point than it was over the past few decades; for unchanged tax rates, the annual growth rate of
governments’ per capita tax revenues will also fall by about 1 percentage point.
5 For a comprehensive and very readable review of Canadian productivity and related policies, see TD Economics (2010b); see Sharpe (2004)
for some remaining puzzles.
2011
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