Thank you, Mr. Chair.
I'd like to summarize. The MLI has done a couple of research reports in the area of federal deficits. One result that I think most members would be familiar with is the impact of aging on future deficits. Another impact I'll be discussing is the implications of provincial deficits, an impact that is rarely discussed. I'll start with the aging.
The rapid aging of the population is going to put pressure on federal finances through at least four mechanisms. One is that there will be fewer workers paying income tax. Second, there will be increased demands on the unfunded portion of our pension plans, notably the OAS and GIS. Third, there will be increased demand from the growing number of federal employees for the unfunded portion of federal government employees' pensions. Finally, there will be increased demands to fund the health care system.
One estimate we've published is that from now to 2030 the aging of the population by itself will add 52.5% of GDP to federal government debt outstanding. That's more than all federal government debt today.
The other thing I'd like to discuss is that while you look at federal finances—and they've come down from a peak deficit of over $40 billion at the worst of the recession to a negligible deficit over the last four quarters—what's rarely discussed is how there has been almost no improvement in provincial deficits over that time. In fact, provincial government debt today is higher than it was at the worst of the recession, totalling something on the order of over $40 billion at the moment.
The largest deficits are being run by Ontario and Quebec, the provinces that also have the highest provincial debts. Quebec's debt outstanding is 48.1% of GDP. Ontario is next at 37.4%. Ontario's is growing much more rapidly.
On the other hand, with regard to Quebec's deficit, they've had more ability to bring down their deficit, but it's worrisome that they haven't been able to eliminate it completely. In 2013, then finance minister Marceau gave an “engagement ferme”, in his words, that the deficit would be eliminated. Instead, the deficit came in at $1.7 billion and, by the Quebec government's own estimates these days, it is heading up to $3 billion.
Why am I talking about provincial deficits? In the fall of 2012, we published a study showing that financial markets regard the federal government as giving an implicit guarantee to bail out the provinces that get into debt. This happened regularly during the Depression, but we don't have to go back that far.
One of the interesting chapters in Chantal Hébert's recent book, The Morning After, was about then Saskatchewan premier Roy Romanow saying that when he took over the province they were “flat broke” and adding, “I don't think I'm overstating it.” He then recounted how he got a call from Brian Mulroney, then the prime minister:
...he phoned me about the gravity of the Saskatchewan and Newfoundland situations. The essence of the conversation was that we had to take dramatic action and if we did not, the federal government would have to act and the Bank of Canada governor would have to intervene.
That I think very explicitly says that the federal government is perceived correctly by financial markets as backstopping provincial debts. So to the degree that provincial government deficits continue to be a problem, this is something that can't be ignored when assessing the future outlook for federal finances.
Thank you.