Life in Canada

OTTAWA - The fiscal conundrum that experts have long warned of has arrived: rising government costs linked to aging and to a growing public debt are truncating Ottawa's ability to cut overall spending.

A new report from the parliamentary budget officer which Harper will not agree with of course, shows while government spending has fallen slightly since last year, it is still 15 per cent higher than before it launched its massive stimulus program in 2009.

The federal government has imposed several cost-cutting exercises that seem to be picking up some steam. But the biggest cost drivers are persistently beyond its control, according to tables in the PBO's analysis of the latest tranche of supplementary estimates.

"This is the beginning of the tough decisions that need to get made," said Chris Ragan, an economist at McGill University who has long warned about the pending fiscal squeeze.

"I think they're starting to realize how tough cutting is."

In figures for government budgeting for the fiscal year to date, the PBO shows health care allocations up by $1.6 billion. That transfer will continue to increase at a six-per-cent clip every year for at least the next four years if the government sticks to its election promises.

Servicing charges on the public debt have also jumped $1.4 billion from the same period a year earlier because higher deficits are more than offsetting the benefits of low interest rates. Those costs, too, will continue to grow as long as the government keeps adding to its debt.

And old-age security payments rose $1.1 billion from last year — partly because of a growing number of beneficiaries and partly because the benefit has been enriched.

The baby boomers have only begun to reach the age to qualify for OAS and their numbers are set to soar, Ragan points out.

"It's really going to kick in starting now."

And despite a hiring freeze in the public service, personnel costs jumped 5.5 per cent this year as the aging workforce places more demands on benefits and requires compensation for experience. Those, too, are trends that are poised to persist, Ragan says.

On the other side of the ledger, the largest cost-reducers are mainly one-time events tied to the end of the government's Economic Action Plan to deal with the last recession.

The single biggest reduction comes from one-time transfers related to the Harmonized Sales Tax.

Only the Department of National Defence showed any sign of finding major savings that would endure, the PBO report said.

As the Afghanistan mission winds up, the department's capital budget is down $700 million and its operating budget is down $600 million compared to the same period the previous year.

Finance Minister Jim Flaherty said last week he is trying to eliminate the $31-billion deficit by 2015-2016 — a year later than previous commitments. A key component of his deficit reduction plan is to cut government spending by $4 billion a year.

But the details of spending released so far suggest cuts to operations won't be enough, said Parliamentary Budget Officer Kevin Page in an email.

"I think 2011-12 was supposed to be a pivot or watershed year in the government's fiscal strategy," he said.

"The elimination of fiscal stimulus and the onset of spending control on operations with economic recovery was deemed to be sufficient in Budget 2010 and 2011 to turn the corner and restore balance over the medium term."

But with spending still 15 per cent above pre-recession levels and with no way to manage age-related spending, "this plan may not suffice," Page says.

The report also shows that even as the government is struggling to cut costs in many areas, it is not able to get budgeted money out the door in other areas.

The Green Infrastructure Fund in particular has only dished out 10 per cent of its budgeted $1 billion, despite being three years into its five-year plan, the PBO notes.

But insiders note that infrastructure programs are notoriously slow at booking federal money, mainly because the government does not pay until receipts for projects start coming in.

Also, the Green Infrastructure Fund has had to compete for attention with all the other more short-term infrastructure funds that the government used to deliver stimulus over the past two years.

The fund's website states that the majority of the funding has now been allocated, and it has more than enough project proposals on its desk to use up all the money productively.