: Ontario's Long-Term Report on the Economy
Chapter 3: Long-Term Sustainability of Ontario Public Services

Introduction

This chapter outlines some of the implications of the economic and demographic projections presented in earlier chapters on the demand for public services. The chapter first discusses the impacts of an aging population and other factors on the demand for health care services. Next, the chapter describes the key factors that will determine future demand for education and training, children’s and social services, and other government expenditures. It then outlines potential implications of an aging population for government revenue. Next, it summarizes the findings of long-term reports released by the University of Toronto and reports from other jurisdictions. Finally, it discusses the importance of fiscal sustainability for the long-term provision of public services.

Chart 1, line graph: Ontario Government Program Spending

Demand for Health Care

Key drivers of demand for health care services

There are a number of key drivers of the demand for, and cost of, health care services. These are broadly understood to include demographics (population growth and aging), and changes in other factors such as population health status, patients’ expectations, inflation, technology and medical practice. All these variables can have mixed impacts in the way they affect overall demand for health care services.

Health care costs make up 42 per cent of the Ontario government’s total program spending and in the near future that could rise to 50 per cent if health care costs grow faster than other areas of government spending. Like Ontario, other provinces are experiencing similar challenges that are likely to continue into the future.

Aging population a key cost driver

Ontario’s aging population is a key cost driver because use of health care rises significantly after age 65. Studies have shown that over an individual’s lifetime, the greatest amount of spending on health care services will usually occur within the last years of life.

Table 1
Per-Capita Provincial Government Health Spending, by Age Group,
Ontario, 2007, Current Dollars
Age Group Spending Per Person ($)1 Share of Population, 2007 Actual (Per Cent) Share of Population, 2030 Projection (Per Cent)
<1 9,188.0 1.1 1.1
1–4 1,292.6 4.4 4.3
5–14 1,047.6 12.0 11.2
15–44 1,706.3 42.8 37.3
45–64 2,823.6 26.5 24.2
65+ 10,330.7 13.2 21.9
65–74 6,883.1 6.9 11.7
75–84 11,843.7 4.7 7.4
85+ 20,702.4 1.6 2.8
Total 3,127.0 100.0 100.0
1 Weighted average.
Sources: Canadian Institute for Health Information, Statistics Canada and Ontario Ministry of Finance population projections (Fall 2009).

In Ontario, many health care programs and services are directed at seniors. As shown above, health care expenditures for seniors are about three times higher than the average for the overall population of Ontario. By 2030, seniors’ share of Ontario’s total population will rise from 13.2 per cent in 2007 to 21.9 per cent. Ontario’s population aged 65 and over will more than double to 3.7 million in this same period. As a result of these demographic shifts, demand for health care services is expected to increase.

Chart 2, line graph: Population Aged 65–74, 75–84 and 85+ in Ontario, 1989 to 2030

Healthy eating, regular physical activity and public education can help prevent illness and avoid costly medical care in the future. This could help offset the impact of an aging population. At the same time, medical experts are raising concerns about rising obesity, especially for younger generations. Obesity is associated with many chronic diseases such as diabetes, high blood pressure, coronary heart disease and some cancers.

Public expectations and societal influences are other factors affecting demand for health care. For example, people may require more services such as hip replacements to support more active lives as they age. An individual’s use of health care is also shaped by broader societal influences. For instance, reduced social acceptability of smoking and driving under the influence of alcohol can improve people’s health and thereby lower system costs.

Inflation higher in health care

In addition to demand factors influencing health care costs, as outlined above, inflation is a key driver of health care expenditures. Inflation in health care tends to be higher than in the rest of the economy. This is because health care services are generally labour intensive and can be affected by the high costs associated with the introduction of new medical technology and drugs.

Chart 3, line graph: Price Increases in Health Care – Ontario

Price increases will likely continue in the future but the impact could be offset by increased efficiencies. Medical progress, which can enhance people’s life span and quality of life through investments in research and development towards new medical treatments, may also offer the possibility of long-term savings in the health care system. For example, advances in genetics may help to alleviate health care costs by identifying potential health risks, which can lead to earlier and more targeted treatments. Furthermore, the dissemination of evidence-based best practices in health care can reduce unnecessary treatments and testing and increase the effectiveness of services for patients. Ultimately, this factor can work towards generating efficiencies that lead to lower costs and a more sustainable health care system.

Demand for Education and Training

Demographics drive elementary and secondary school enrolment

Enrolment in elementary and secondary schools is determined primarily by the number of children aged 4 to 17. The number of children in this age group has been declining recently in Ontario as the large cohorts of the baby boom echo move out of this age group. From 2011 to 2030, however, the number of elementary school-age children is projected to rise by about 1.3 per cent annually on average — a pace close to the overall population growth rate. This age group is projected to grow by 26 per cent from 1.48 million in 2009 to 1.87 million in 2030 — significantly greater than the 11 per cent growth seen over the past 20 years. There will be regional variations in the growth of children’s population so that school enrolment will rise in some regions and fall in others.

Chart 4, line graph: Elementary, Secondary and Postsecondary Source Population, 1989 to 2030 - Ontario

The secondary school-age group (ages 14 to 17) is projected to decline by about nine per cent by 2016 before resuming growth to reach 727,000 by 2030, slightly higher than today’s level of 685,000.

In the postsecondary sector, demographics play a somewhat smaller role in determining enrolment because attendance is not universal. Postsecondary enrolment will continue to be highly influenced by a combination of demographics and demand, reflecting both economic conditions and the skills needed for employment.

Growth of postsecondary enrolment projected to continue

Significant funding has been injected into Ontario’s postsecondary sector over the last several years, including an increase in operating grants per student. This funding has helped support an enrolment increase of over 100,000 students at Ontario’s colleges and universities since 2002–03. Enrolment in the postsecondary sector is expected to continue growing.

Chart 5, line graph: Ontario Per-Student Funding for Universities and Colleges, 1991–92 to 2008–09

Strong demand for training and employment services

The current economic downturn has resulted in increased demand for government training programs and other employment services. The Province has met this demand with stimulus funding, with support from the federal government. Although this demand for training and employment services is expected to decline as the economy improves, the medium-term demand for both is expected to remain strong. This reflects Ontario’s continued shift towards a knowledge economy and the recognition that retraining will be required to support this transition. Increased emphasis on services for new immigrants and on lifelong learning will also contribute to demand.

Demand for Children’s and Social Services

Investments to help reduce child poverty

Expenditures on children’s and social services have increased in light of measures taken to support the government’s commitment to reduce poverty1 and the current economic slowdown. As Ontario recovers from the current recession, the cyclical component of demand for these services is expected to moderate. Over the longer term, the demand in this sector is expected to be driven mainly by demographics and performance of the Ontario economy.

Demand for Other Government Expenditures

Measures to reduce impact of global recession

The government has taken decisive measures to reduce the impact on Ontario of the severe global recession and financial crisis by making substantial investments in infrastructure, supporting the automotive sector, investing in skills training, and sustaining public services. Over the long term, the province’s infrastructure needs associated with greater urbanization (such as expansion of railway links between cities, urban transit and highway improvements) are expected to be an important component of these expenditures (see Chapter 5: Addressing Ontario’s Infrastructure Gap for a detailed discussion of infrastructure).

Chart 6, line graph: Ontario Real Government Capital Spending

Ontario Government Revenues

Chart 7, line graph: Ontario Government Revenues

Seniors’ savings withdrawals to increase taxable income base

Taxation revenues represented about 69 per cent of Ontario government revenue in 2008–09. Taxation revenue growth in the future is generally expected to be slower than in the past due to the impact of the aging population on economic growth. However, increasing withdrawals from savings by seniors over time will provide an increasing taxable income base that is not reflected in measured gross domestic product (GDP). Income from savings withdrawals subject to personal income tax (PIT) increased at an average annual pace of 8.4 per cent over the past 20 years, more than double the pace of overall income growth (4.0 per cent), increasing from 3.9 per cent of total income in 1989 to 8.7 per cent in 2008. This trend is likely to be more pronounced in the long term as a larger share of seniors in the population draws on their savings. While this income tends to be taxed at relatively lower effective tax rates due to provisions of the personal taxation system,2 it will still boost revenues above what would be expected based purely on GDP projections.

Chart 8, line graph: Income from Savings Withdrawals Subject to PIT — Ontario

Federal transfers should be responsive to provincial needs

Federal transfers to Ontario constituted about 18 per cent of total Ontario revenue in 2008–09, rising to about 21 per cent in 2009–10. In the near term, federal transfers reflect a short-term increase for stimulus programs and federal funding to support the transition to Ontario’s sales tax harmonization. While the long-term trend in federal transfers is uncertain, future agreements should be responsive to expected provincial expenditure pressures by meeting growth levels in existing agreements while taking into account projected growth in demand for services and national economic growth. A recent study from the University of Toronto projects that “…continued funding pressures at lower levels of government will lead to irresistible pressures for further increases in transfers.”3

Net Income from Government Business Enterprises (GBEs) accounted for 4.5 per cent of total Provincial revenues in 2008–09. Many of these are mature businesses, and over the long term, growth in their net income would be driven by economic growth.

Other Revenues comprised about eight per cent of total Provincial revenues in 2008–09. This category has a variety of revenue sources including vehicle and driver registration fees, other fees and licences, sales and rental revenues, and royalties. These revenues can be expected to grow in line with total population growth and inflation, and as such would increase at a slightly lower rate in the future than in the past.

Other Jurisdictions’ Perspectives

Other jurisdictions face similar challenges

Ontario is not alone. A large number of international jurisdictions are confronting similar long-term challenges, including increasing health care costs due to an aging population and rising debt levels as growth in government revenues is offset by higher spending pressures.

The University of Toronto’s Policy and Economic Analysis Program estimates that if Ontario’s population in 2006 had had the same age/sex structure as projected for 2025 and the same age cohort cost structure as in 2006, total Provincial health expenditures would have been 20.3 per cent ($7.6 billion) higher.4 Another study by the same program states for Canada: “Over the longer term, expenditures are seen to grow more quickly than GDP…the long-term projection allows for major increases in health-care and elder-care spending, but the bulk of the increases will not be felt for a decade.”5

The U.S. Congressional Budget Office estimates that total spending on Medicare and Medicaid programs will double from about five per cent of GDP in 2009 to almost 10 per cent by 2035. Meanwhile, it estimates that the total U.S. federal government debt held by the public will grow from 55 per cent to 79 per cent of GDP over the same period.6

Reports point to impact of aging on expenditures

The United Kingdom’s recently released 2009 long-term report as well as its 2008 long-term report both point to the impact of aging on fiscal spending, including on health. For instance, the 2008 report projects total age-related spending will rise from 20.1 per cent of GDP in 2007–08 to 26.6 per cent by 2057–58, of which health spending will rise from 7.4 per cent of GDP to 9.9 per cent over the same period.7

Australia’s 2007 long-term report identifies aging as the primary challenge facing public finances. Australian government spending on health is projected to increase from 3.8 per cent of GDP in 2006–07 to 7.3 per cent by 2046–47, mainly driven by the development of new drugs and greater use of medical technology.8

New Zealand’s 2009 long-term report identifies fiscal costs associated with aging as an important challenge. By 2050, while the total population is projected to grow by around 25 per cent, the population over age 65 is projected to increase by about 150 per cent.9

The International Monetary Fund’s (IMF) medium-term fiscal projections (as of November 2009) suggest continued spending pressures, particularly in Japan (reflecting increased social security outlays) and the United States (from higher health and pension spending). The IMF stresses the importance of containing the growth of pension and health spending in line with GDP in advanced countries.10

Fiscal Sustainability

Fiscal sustainability important

The Province is currently projecting a deficit of $24.7 billion in 2009–10, decreasing to $19.4 billion by 2011–12, as published in the 2009 Ontario Economic Outlook and Fiscal Review. These projections reflect lower revenues due to the deep global recession, as well as the impact on expenditures of policy measures including stimulus spending and funding of key priority areas such as health care. The government will ensure that Ontario returns to a firm and sustainable fiscal footing. If fiscal sustainability is not restored, it would mean a cycle of worsening budget deficits and increasing interest expense on public debt.11 This would leave little fiscal space for other key government priorities and potentially crowd out private-sector investment.12

Over the long term, Ontario, like other major economies, will need to continue providing key public services in the context of growing demographic pressures, notably an aging population. Long-term fiscal sustainability must also be ensured so that the burden of public debt is not passed on to future generations.

Comprehensive expenditure review

This report has highlighted key challenges for the upcoming years that reveal the need for dialogue among all stakeholders in the province to restore and strengthen fiscal sustainability. In addition, the Treasury Board/Management Board of Cabinet is conducting a comprehensive expenditure review and the government will deliver its plan in the 2010 Budget.

1 The government’s Poverty Reduction Strategy was introduced in December 2008 and builds on the historic introduction of the Ontario Child Benefit in 2007.

2 In Ontario, there are non-refundable tax credits (for 2010) for the first $1,237 of pension income and up to $4,366 of income for people aged 65 and over who have low to middle incomes. Seniors also have the option of transferring pension income to their spouse for tax purposes.

3 Peter Dungan and Steve Murphy, “Long Term Outlook for the Canadian Economy: National Projection Through 2040,” University of Toronto: Policy and Economic Analysis Program, Policy Study 2009–04, October 2009.

4 Peter Dungan and Steve Murphy, “A Population Projection for Ontario with an Updated Application to Health Care Expenditures,” University of Toronto, Policy and Economic Analysis Program, Policy Study 2009–03, June 2009.

5 Peter Dungan and Steve Murphy, “Long Term Outlook for the Canadian Economy: National Projection Through 2040,” University of Toronto: Policy and Economic Analysis Program, Policy Study 2009–04, October 2009.

6 United States Congressional Budget Office, “The Long-Term Budget Outlook,” June 2009.

7 United Kingdom HM Treasury, “Long-Term Public Finance Report: An Analysis of Fiscal Sustainability,” December 2009 and March 2008.

8 Australian Treasury, “Intergenerational Report 2007.”

9 New Zealand Treasury, “Challenges and Choices: New Zealand’s Long-term Fiscal Statement,” October 2009.

10 International Monetary Fund, “The State of Public Finances Cross-Country Fiscal Monitor: November 2009,” Washington: IMF Fiscal Affairs Department, 2009.

11 For example, the Ontario government’s interest on debt expense as a share of total expense rose steadily during the 1990s, peaking at 17 per cent in 1999–00. Since then, it has gradually declined to about 9 per cent in 2008–09.

12 Several studies (mainly focusing on countries in the Organisation for Economic Co-operation and Development) find beneficial effects of fiscal adjustments or consolidations (e.g., Alberto Alesina and Roberto Perotti, “Fiscal Expansions and Fiscal Adjustments in OECD Countries,” NBER Working Paper No. 5214, National Bureau of Economic Research, 1995; and Manmohan S. Kumar, Daniel Leigh and Alexander Plekhanov, “Fiscal Adjustments: Determinants and Macroeconomic Consequences,” IMF Working Paper No. 07/178, 2007).

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