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Comparing the Long-term Fiscal Outlook for Canada and the United States Using Fiscal Gaps

Listed author(s):
  • Suzanne Kennedy
  • Chris Matier

The goal of this paper is to compare the long-term fiscal outlook in Canada and the United States using a simple measure of the sustainability of federal fiscal policy. The paper begins by explaining that standard Canada-US fiscal comparisons can be misleading because they do not take account of the very different treatment of public pension plans in the two countries. As an alternative to such comparisons, the paper presents a framework based on the “fiscal gap”, which is the amount by which taxes must be increased, or program spending decreased, in order to ensure that the debt-to-GDP ratio will return to its current level by a given point in the future. Using this framework, the paper presents a comparison of fiscal prospects in Canada and the US over three time frames: through 2025, 2050 and 2075. We find a sharp contrast between the estimated Canadian and US fiscal gaps over all three time horizons. The US fiscal gap estimates, based on projections made by the US General Accounting Office, indicate that current federal fiscal policy in the US is unsustainable over the long term, necessitating future tax hikes and/or cuts in program spending in order to control the debt-to-GDP ratio. By contrast, we find that the finances of comparable sectors in Canada - the federal government and the CPP/QPP - are sustainable over the long term Ce document a pour but de comparer les perspectives budgétaires à long terme du Canada et des États-Unis à l’aide d’une mesure simple de la soutenabilité de la politique budgétaire fédérale. Le document explique d’abord que les comparaisons budgétaires courantes entre le Canada et les États-Unis sont trompeuses parce qu’elles ne tiennent pas compte du traitement très différent réservé dans les deux pays aux régimes de retraite universels. Comme solution de rechange à ces comparaisons, le document présente un cadre fondé sur l’« écart fiscal », soit le montant de l’augmentation nécessaire des impôts ou de la diminution nécessaire des dépenses de programmes pour assurer que le ratio de la dette au PIB reviendra à son niveau actuel sur une période donnée. Grâce à ce cadre, le document présente une comparaison des perspectives budgétaires du Canada et des États-Unis selon trois échéanciers : jusqu’en 2025, 2050 et 2075. Nous observons un fort contraste entre les écarts fiscaux estimatifs au Canada et aux États-Unis sur ces trois horizons prévisionnels. Les estimations de l’écart fiscal aux États-Unis, selon des projections réalisées par le General Accounting Office, indiquent que la politique budgétaire fédérale actuelle aux États-Unis est insoutenable à long terme, ce qui nécessitera des augmentations d’impôt ou des réductions des dépenses de programmes pour contrôler le ratio de la dette au PIB. Par contre, nous constatons que les finances des secteurs comparables au Canada - le gouvernement fédéral et le RPC/RRQ - sont soutenables à long terme.

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Paper provided by Department of Finance Canada in its series Working Papers-Department of Finance Canada with number 2003-04.

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Date of creation:
Handle: RePEc:fca:wpfnca:2003-04
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