Ottawa’s Budget Watchdog Urges Government to Consider Tax Reduction or Increased Spending in Light of Available Fiscal Room
The Parliamentary Budget Officer (PBO) report suggests that the federal government could increase spending or cut taxes by 1.5 percent of GDP annually for the next 74 years while maintaining fiscal sustainability.
According to PBO Yves Giroux, this translates to a $46 billion increase or decrease in spending in current dollars, all while stabilizing net debt in the long term as outlined in the fiscal sustainability report for 2024.
The report indicates that if no policy changes occur, the federal government’s net debt of 29.1 percent of GDP in 2023 would be eradicated by 2058.
The latest report’s 1.5 percent estimate represents a decrease from the previous year’s 1.7 percent evaluation due to increased spending offsetting revenue gains and higher interest rates limiting fiscal flexibility.
The report’s primary goal is to assess long-term economic growth to determine the necessity of fiscal policy adjustments to avoid excessive debt levels.
The report affirms the sustainability of current fiscal policy in Canada over the long term, but notes variations in results across provinces and territories.
Provincial Positions and Pension Plans
The provincial fiscal gap, indicating the room for spending increases or tax reductions without compromising long-term sustainability, is lower than the federal level, ranging from 0 to 1.4 percent of GDP across provinces and territories.
Currently, only Quebec, Saskatchewan, Ontario, and Nova Scotia have the capacity to adjust spending or taxes, while Alberta operates at a break-even point.
For provinces needing policy action to achieve sustainability until 2098, adjustments range from 0.5 percent of GDP in Newfoundland and Labrador to 5.9 percent combined for the three territories.
The report also ensures the long-term viability of the Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) frameworks, allowing for adjustments in benefits or contributions if the net asset-to-GDP ratio remains stable after 75 years.
