Government costs outpace economic growth, report finds

Canada's federal, provincial and municipal governments must be prepared to address a $93 billion shortfall by 2025 if they hope to keep pace with the needs of the country's rapidly aging population, a global consulting giant said Tuesday.

A report from Accenture said demands for public services will outpace Canada's economic growth over the next 13 years, leaving all levels of government unable to provide public services at present-day standards.

The country's growing group of senior citizens would bear the brunt of the shortfall, Accenture said.

'We have to get smarter about how we deliver services' Accenture managing director Joel Marchildon

People aged 65 or older currently make up 14.1 per cent of Canada's population, according to Statistics Canada. Accenture projects that number will increase to 20.6 per cent by 2025.

Joel Marchildon, a managing director in the federal group at Accenture Canada, said this demographic trend does not bode well for the public purse.

"That portion of the population just does demand more in terms of public services," Marchildon said in a telephone interview from Ottawa. "That's what's going to largely create this gap. We're going to have more people in that age bracket, and delivering services to that group is going to increase in cost."

Canada currently spends about 28 per cent of its gross domestic product on providing public services such as health care, pensions and social supports that benefit the country's seniors, Marchildon said.

GDP is on pace to grow 2.3 per cent between 2010 and 2025, but the report found that wouldn't be enough to sustain the country's elderly residents.

Provinces and territories spend an average of $10,700 on people over 65, more than five times higher than the average of $2,000 required to care for those 64 or younger, the report said.

Marchildon said Canada would need to spend a larger chunk of its GDP in order to maintain the status quo. Programs are expected to cost $745 billion, or 32 per cent of GDP, by 2025.

Cost-cutting commitment needed

Canada's total expenditure gap of 4.1 per cent of GDP is third highest among 10 countries analyzed for the report, trailing only the United Kingdom and United States. Italy boasted the narrowest gap of 1.3 per cent.

Marchildon said Canada's governments are well-positioned to address the shortfall if they commit to long-term cost-cutting measures.

The report found that reducing inefficiencies at all levels of government by 0.9 per cent each year would be enough to close the expenditure gap by 2025 and provide public services that stack up to today's standards.

Marchildon said the onus is on the public sector to avoid widespread tax hikes.

"We have to get smarter about how we deliver services to help close that gap, because the alternative is really either raising more revenue or changing the services and level of services that are available," he said.

Marchildon said Ottawa has already taken steps to streamline its operations by creating departments such as Shared Services Canada, a centralized information-technology provider that aims to bring all ministries' infrastructure needs under one roof.

He also singled out Ontario and British Columbia as provinces that have laid the groundwork for effective cost-cutting strategies, adding the rise of digital government would likely help most jurisdictions follow suit in time.

Calls for tax hikes

But not all observers believe cost-reduction is the answer.

David Macdonald, senior economist with the Canadian Centre for Policy Alternatives, said Canada's business community is well-positioned to shoulder some of the burden.

The changing nature of Canada's economy prevents tax-leery businesses from relocating too readily if corporate rates were to rise, he said. Companies that want to maintain access to the country's oil, minerals and other natural resources have little choice but to remain and do their share, he said, adding Canada's tax rates are already among the lowest among G-8 countries.

"I don't see what the big reticence is. It's not actually a dramatic estimate across all levels of government," Macdonald said of the projected shortfall.

"Increasing corporate income tax rates by about three or four per cent would cover that."