It’s by two former senior finance department mandarins, Scott Clark and Peter DeVries, and brings badly needed clarity to the debate sparked by Prime Minister Stephen Harper’s surprise remark about his intention to reform pensions in his “major transformations” speech last week at the World Economic Forum in Davos, Switzerland.
Clark and DeVries argue that since the government has already clamped down on spending growth in big-ticket areas like defence and health, the projected rise in OAS costs isn’t by itself large enough to pose any real threat to federal finances.
Their commentary is well worth reading, but I also took the opportunity to interview Clark this morning for a less formal sense of how he sees this volatile debate unfolding. He brings the unique perspective of a former deputy minister of finance, and a key insider during the fight to eliminate the deficit back in the 1990s—when the Liberals decided against cutting seniors benefits as too politically risky.
Here’s part of our conversation, edited and condensed:
Q What’s your complaint about the way the government is framing its decision to make changes to Old Age Security?
A The way it’s been played by the government is that spending on seniors, mainly the OAS and the Guaranteed Income Supplement, which is only a little over two per cent of gross domestic product, isn’t sustainable. Well, nobody’s ever defined what that means.
Q How would you define sustainable?
A You have to have a context. It means in some sense that it’s not affordable. In policy terms, the way you define sustainability is in terms of your overall spending and revenue framework and your debt burden. You say, ‘Are we in a situation where our debt is rising faster than our economy is growing?’ That’s what happened throughout the 1980s and the early 1990s.
Q So is today’s fiscal situation unsustainable?
A Well, according to the government, and I think they’re right, the overall debt-to-GDP is very low by historical and international standards. It’s going down for the next five years. The debt burden is actually falling. Most of the spending that the federal government does is growing slower than the economy.
Q They recently informed the provinces that federal health transfers will, over the long run, be held to the nominal growth in GDP. That’s key, right?
A Both the Parliamentary Budget Officer and ourselves have said is that prior to that change on health, the government was entering a period of a structural deficit that was rising. But the PBO has said now that they’ve cut health transfers, that’s not a problem anymore.
Q And you’re saying that limiting growth in health transfers puts them in a position where they could leave OAS alone if they wanted to?
A It’s sustainable. Overall spending by the federal government is falling as a share of GDP. And on the revenue side, taxes are going to be rising as a share of GDP, because as income grows people go up through the tax brackets and you have a gradual increase in the overall effective income tax rate. That’s progressivity—our tax system works that way.
Q You make a strong case that OAS isn’t a problem. Yet the situation the Prime Minister and senior cabinet ministers keep pointing to—a growing retired population being supported by a proportionately shrinking workforce—does sound serious. What do you make of the way this debate is unfolding?
A Why would a Prime Minister go to Davos and even think about saying what he said? If you’re thinking about all the issues of an aging demographic situation—which is what the Parliamentary Budget Officer has been talking about for years—then good policy would be to put out a document on it last fall with the economic update. Say, ‘Here are a lot of demographic issues that we have to deal with,’ and then everybody starts thinking intelligently.