Question

According to Statistics Canada, by 2056, it is projected (based on a medium growth scenario) that there will be only 2 working age people for every senior in Canada.” Briefly explain the implications of this fact for federal government spending as a percentage of GDP in 2056.

Answer 1

The implications for government spending as a percentage of GDP are that it will increase. The reasons are twofold:

(1) There will be a decrease in the purchasing power in the economy as there are fewer people who work in the economy and earn enough to demand additional goods. In order to avoid slowing GDP and even a subsequent recession, the government will have to raise demand by increasing its expenditure to compensate for the downfall in private expenditure.

(2)The dependency ratio is going to be very high. This will lead to an increase in federal government spending. The primary reason is that there are lot of old people in the economy who will need social security payments. This will be a big portion of government spending. Add to that the additional welfare spending such as healthcare which also increases with more senior citizens.