aging population

Why we need reform to support entrepreneurship in Canada

The rate of small business startups in Canada has declined by almost 13 per cent since the early 2000s.

Stemming the demographic tide on entrepreneurship in Canada

The share of Canadians between the ages of 30 and 39 has declined 16.6 per cent since the 1980s.
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Entrepreneurship is widely acknowledged as the basis for innovation, technological advancement and economic progress—and subsequently, a driving force for improved living standards. Yet there’s little discussion, let alone action, among governments in Canada to stem the adverse effects on entrepreneurship of demographic change, specifically, the aging of our population.

Most of us are generally unaware that as our population ages, the share of the population best positioned to be successful entrepreneurs—individuals in their late-20s through to their early-40s—will shrink. People in this age group drive entrepreneurship because they are both willing to take risks to start their own business while also possessing real-world business experience, which increases the likelihood of success.

The share of Canadians between the ages of 30 and 39 has already declined 16.6 percent since the 1980s, and is expected to decline by another 11.4 percent by the 2040s. In that time, there has also been a corresponding decline in the rate of small business start-ups, a key measure of entrepreneurship. This is not a uniquely Canadian experience. Almost all industrialized countries have seen declines in small business start-ups.

While there’s little that governments can do to halt the aging of their populations, a number of policy initiatives could strengthen the incentives for entrepreneurship and improve the likelihood of successful new business start-ups. This book, which contains essays by leading scholars in Canada, the US and Europe, explores some of the possible policy reforms that will promote and improve entrepreneurship.

Key among potential policy reforms is tax relief, both in the form of reductions in marginal tax rates for individuals and businesses and reductions (or even the elimination) of capital gains taxes. These reforms were broadly determined to strengthen the incentives for people to start and grow businesses (i.e. take risks) and expand the pool of entrepreneurial capital.

Other key potential reforms include reducing red tape to make it easier to start new businesses and grow existing ones, changes to banking and financial regulations that would make it easier for entrepreneurs to access the financial capital needed to start and grow their businesses, and policies encouraging increased immigration of individuals with skills and other attributes that make them potential entrepreneurs.

The various policy initiatives to encourage entrepreneurship put forth by scholars in the essay series will apply to different countries in varying degrees. It’s clear, however, that developed countries, including Canada, face a long-term decline in entrepreneurship that is at least partially driven by demographics. Since demographic trends cannot be easily reversed, countries will have to improve the environment in which entrepreneurs and businesses operate, to encourage more and better entrepreneurs.

Canada’s aging population will strain government coffers

Health-care costs are expected to increase by 57 per cent by 2045.

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Canada’s Aging Population and Implications for Government Finances

Despite broad public awareness that our society is aging, very little has been done by governments across the country to prepare for the marked aging that has already begun. This study examines the fiscal pressures, specifically the demand for greater spending on seniors-related programming coupled with a weakened ability to generate tax revenues, that governments will face for the foreseeable future from an aging population.

Data abounds illustrating the aging of our population. Statistics Canada estimates that from 2010 to 2063, the seniors’ share of Canada’s population will increase from a little under 15 percent to over 25 percent.

Similarly, unlike most of the period from the early 1970s through to 2010 (or so), labour force participation is now expected to decline. Indeed, expectations are that labour force participation will return to its pre-1970s level by mid-century. More specifically, from 2017 to 2063, Canada’s labour force participation rate is expected to fall from about 65 percent to 61 per­cent. This decline is akin to millions of fewer Canadians participating in the labour force.

This decline in labour force participation will adversely affect growth in per-capita income. Per-capita income grew, on average, by 1.3 percent between 1981 and 2016. However, expectations for the 2017 to 2045 period are that per-capita income will grow by only 0.9 percent, and almost the entirety of this decline in growth is expected to be due to lower labour force participation. The lower rates of per-capita income growth will mean the economy in general will grow more slowly, making it harder for government to collect revenues compared to its current capacity.

This slowdown in per-person income and economic growth more broadly comes at the same time that governments will face pressure for higher spending on a wide range of programs. This study examines both health care spending and income transfer programs to seniors.

Health care spending on a per-person basis is heavily skewed towards a person’s first year of life (birth and related) and their retirement years (post 65). For instance, in 2014, the latest year of available data, the average per-person government spending on health care for Canadians between the ages of 15 and 64 was $2,664. Compare that to the cost for those 65 and over who had average annual per-capita health care costs of $11,625, which was 4.4 times greater than the 15–64 average. The higher proportion of Canadians expected to be in the over-65 category means higher and higher health care costs.

In addition to increased health care spending, an aging population will also require governments to direct more resources to senior income transfer programs like Old Age Security (OAS) and the Guaranteed Income Supplement (GIS). Currently, spending on these programs costs about $48.3 billion, which represents 2.4 percent of GDP. In 2045, spending on Elderly Benefits is projected to be approximately 1.1 to 1.2 percentage points of GDP higher than in 2017. This means that Elderly Benefits will represent between 3.5 and 3.6 percent of GDP by 2045, an increase of 47.0 percent from 2017. Using 2016 nominal GDP figures, the latest year for which we have complete data, this increase would be equivalent to $22.6 billion more being spent on Elderly Benefits.

Simply put, population aging will contribute to a large increase in future levels of government spending. When combined, projected government spending increases related to health care and Elderly Benefits are expected to be 5.3 percentage points of GDP higher in 2045 compared to 2017. In dollar terms, this additional spending would be equivalent to an increase of $107.1 billion using 2016 nominal GDP figures.

To illustrate the potential size of the looming fiscal imbalance, the study includes an analysis of probable revenues (conservatively estimated) with higher spending on health care and income transfer programs to seniors. Based on certain assumptions, by 2045, it is projected that there will be a 7.1 percent of GDP gap between government revenues and expenditures, in other words a deficit. For perspective, government deficits in 2016 would have been more than $143 billion based on 7.1 percent of GDP. Depending on interest rate assumptions, the accumulation of debt over this period could be substantial. The estimates in the paper of debt accumulation by Canadian governments range between 170 percent and 250 percent of GDP.

These rather worrying fiscal outcomes are not inevitable. Proactive steps can and should be undertaken to reform program spending and encour­age stronger economic growth, both of which would mitigate the adverse effects from the aging of our population that are outlined in this paper.

Entrepreneurship, Demographics and Capital Gains Tax Reform in Canada

A number of prominent Canadians, including Bank of Canada Governor Stephen Poloz, have raised concerns about the state of business start-ups and entrepreneurship in Canada. There is no question that entrepreneurship is critical to a well-functioning, prosperous economy.