PACC Committee Report

Pursuant to Standing Order 108(3)(e), the Standing Committee on Public Accounts has the honour to present its

The Standing Committee on Public Accounts has considered Chapter 6 of the Report of the Auditor General of Canada from April 1998 (Population Aging and Information for Parliament: Understanding the Choices) and has agreed to present the following report:

In the next century, once the earliest members of the baby boom have reached normal retirement age, the growth rate of Canada's elderly population will be increasingly rapid while that of the active population will slow down markedly.

This general aging of the Canadian population could have negative effects on public finance. An older average population means greater pressure on public spending, in the form of higher pension payouts and demand for health-care services. Failing a major transformation of our patterns of work, this demographic change will put a considerable brake on the growth of the labour force, which will mean slower economic growth and thus lower public revenues. By the second decade of the coming century, when the full impact of the demographic change will begin to be felt , this combination of factors could have serious consequences for Canada’s public finances, especially if Canada's debt load and taxation rates remain high.

Already many countries are paying attention to the impact of demographics on their public finances. For example, the United States and Denmark publish fiscal balance projections 40 to 50 years ahead. The United States, Argentina, New Zealand and Norway produce "generational" accounts, to give a long-term orientation to the budget process. The United Kingdom recently announced the introduction of a new fiscal stability code that provides for the formulation of financial projections over at least ten years, in order to shed light on the generational effect of the government’s budget strategy.

The financial framework of the Canadian government is based on a short-term outlook horizon.

The federal government does take into account the possible influence of demographics on its public finances. It considered this question when it launched the pre-budget consultation process in the fall of 1997, without however specifically defining the possible future financial impact. In addition, during consultations on reforming the Canada Pension Plan (CPP), the federal government disclosed detailed financial information about the constraints facing the CPP in the years to come, in light of foreseeable demographic trends. To a lesser extent, the government has committed itself to a similar process for the reform of Old Age Security (OAS) and the Guaranteed Income Supplement (GIS). In the opinion of the Office of the Auditor General, the impact of demographic factors on the government's financial health should be determined for all aspects of government operations.

The purpose of analysing demographic trends when planning budgetary and fiscal projections is to obtain a clearer idea of the long-term consequences of each year’s budget decisions.

It was in the context of these issues that the Standing Committee on Public Accounts decided to consider the findings and observations in Chapter 6 of the Auditor General's Report from April 1998, on population aging and information for Parliament. On June 9, 1998, the Committee met with Mr Denis Desautels (Auditor General of Canada), Mr Ron Thompson (Assistant Auditor General) and Mr Basil Zafiriou (Director, Audit Operations). The Department of Finance was represented by Mr Scott Clark (Deputy Minister), Mr Don Drummond (Assistant Deputy Minister) and Mr Peter DeVries (Director, Fiscal Policy, Economic and Fiscal Policy Branch).

In his introductory comments to the Committee, the Auditor General stressed the importance of communicating to parliamentarians and Canadians generally about the impact our aging population will have on economic activity in general and on public finances in particular. His aim was to explain the importance of giving Canadians a better understanding of the possible effects of demographic trends on the long-term situation of the country’s public finances, and to demonstrate the links that exist between demographic trends and the current process of short-term budget decision-making.

According to the Auditor General, the value of demographic projections is not found in the numbers themselves (which are fraught with uncertainty) but rather that they compel people to think about the future impacts of short-term budget decisions (1540). The goal is to introduce greater transparency in the budget process, however without making the government accountable for the accuracy of long-term demographic projections.

In his statement to the Committee, the Deputy Minister for the Department of Finance said that he is in full agreement with the conclusions found in the Auditor General's report; after all, good information is the foundation of good fiscal policy (1541). Any disagreement centres on process. The Deputy Minister of the Department, Mr Scott Clark, expressed concern that the introduction of long-term forecasts would create unrealistic expectations about the government's ability to respect its own demographic projections and would distract it from the important objective of coping with short-term budgetary issues. The witness reminded the Committee that achieving long-term budget goals depends on the ability to achieve short-term budget objectives (1545).

The federal government hesitates to publish long-term projections partly because of a desire to concentrate its attention on immediate problems, but partly because it fears being held accountable for achieving long-term projections, which certain people would consider as long range targets. Mr Clark used as an example the appearance of the Minister of Finance before the Main Estimates Committee to discuss the Department’s budget. In his comments, the Minister alluded to the fact that the debt-to-GDP ratio in the United States was about 40 per cent and said it would be nice if Canada could have a comparable ratio. The next day, according to the witness, one of Canada's financial newspapers announced that the Minister of Finance was about to set a new debt target (1628).

According to Mr Clark, the government's approach at the present time consists in establishing two-year mobile fiscal targets, which are then embedded in a medium-term fiscal framework. The first medium-term strategy anchor was the elimination of the budget deficit. Implicit in this objective was the need to halt the rise in the public debt and to put public finances on a sounder footing, so that the debt/GDP ratio could be kept on a permanent downward track (1548). The Department is not planning to change this approach, which it considers as an effective formula in light of recent improvements in the health of Canada’s public finances. The time may come, however, when longer-term fiscal projections again become part of the broader discussion of fiscal policy issues (1550).

The Committee questioned the witness about the conditions that would lead the government to consider re-introducing long-term projections. Without describing any specific conditions, the Deputy Minister of Finance, Mr Clark, said he would like the government to build up more successes in meeting its short-term fiscal targets and to make public finances even healthier before thinking of introducing longer-term financial analysis (1555).

The Committee, after hearing the comments and observations of the Auditor General and the representatives of the Department of Finance, proposes the following recommendations:

The Standing Committee on Public Accounts recognises that the Department of Finance has achieved success in placing Canada's public finances on a sounder footing. However, the Committee is of the opinion that it is becoming important to study demographic trends when planning fiscal and budgetary policy. Given that there is scarcely a decade remaining before the first waves of the baby boom arrive at retirement age, it is important that the federal government ensure that it will be able to continue to deliver essential public services to Canadians .

Measures taken in response to the Auditor General's recommendations and those of the Committee should be adequate to meet the concerns raised by the Auditor General’s Report.

Pursuant to Standing Order 109, the Committee requests that the government table a comprehensive response to this report.

A copy of the relevant Minutes of Proceedings (Meetings Nos. 37 and 40) is tabled.

Respectfully submitted,

JOHN WILLIAMS