Module 4 Readings
Ragan-Canada's Looming Fiscal Squeeze
-The current fiscal squeeze: the acceleration of public spending on age-related programs and the
slowing of tax revenues. It will force governments at all levels to make difficult fiscal decisions, choosing
reductions in expenditure programs, increases in tax rates, and higher budget deficits.
-Falling fertility rate and rising average age.
-Expected increase in old-age expenditures
-Falling labour worker rates will result in a decline in growth of material living standards.
(GDP/POP)=(GDP/E)x(E/LF)x(LF/POP) (increase of about 0.1%)
*Over past 40 years
*Next 40 years optimistic view
-(GDP/POP)=Per capita income
-E=level of employment, so (GDP/E)=measure of labour productivity (annual increase of about
0.4%) Increase Increase
-LF=size of labour force, so (E/LF) is the employment rate (long run stability result in little long run
effects) Stable Stable
-(LF/POP)=LF participation rate. Expected to decrease
Significant Increase (more females in workforce and coming of age of baby boomers) Decrease--
>will become a drag on growth. Argument for faster productivity growth.
-Overall, the decrease in the labour force will result in a slower rate of growth of GDP
-Increase in number of people willing to work increases GDP per capita. Also due to productivity growth
(workers get better)
-Productivity growth will become will become a more important source of growing living standards
-GDP is a good approximation of Canada's overall tax base
-the slowing of the growth in per capita income will lead to a slowing of canadian governments’ per
capita tax revenues
-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
governments’ per capita tax revenues will also fall by about 1 percentage point.
-Increase of 3.5% of annual GDP spent on health care in 2040 (up from 7.6% in 2015)
-Aging pop accounts for about half of the expected increase in health care expenditure, while the other
half comes from an expected increase in demand as well as
-Aging population will lead to increase in demand for spending on elderly benefits (from 0.4% of GDP in
2015 to 0.9% of GDP in 2040)
-Fiscal Squeeze= (G/Pop)-(T/Pop)
-Debt to GDP ratio: delta(d)=x+(r-g)d, where delta (d) is the change in this ratio over time, x is the
primary budget deficit as a share of GDP, r is the advantage real interest rate applying to existing
government debt, and g is the growth rate of real GDP.