Recent changes to Canada's immigration policies, while aimed at easing pressures on housing and the economy, could have unintended consequences, including higher taxes for Canadians. This is according to a report by RBC, which highlights the critical role immigration plays in offsetting the economic impact of Canada's aging population.
The report emphasizes that Canada's retirees continue to consume goods and services, including healthcare and pension benefits, while a shrinking workforce contributes less to the tax base that funds these programs. This imbalance between demand and production, exacerbated by low birthrates, could widen the gap between government revenue and expenditures. As costs for healthcare, OAS (Old Age Security), and social programs continue to rise, governments may face larger deficits, leading to potential tax hikes to cover the shortfall.
Economists warn that a shrinking workforce could lead to labor shortages and increased government deficits. To offset these shortfalls, governments may be forced to raise taxes.
The report acknowledges recent scalebacks to immigration policies are projected to result a smaller population over the next several years. This could further strain the workforce and worsen the dependency ratio – the number of dependents per 100 working-age people. Based on the Statistics Canada report, the projected rate of immigration for 2021/2022 was 12.5 immigrants per 1,000 population, which is expected to go down to 11.1 in 2027/2028, and 8.3 in 2041/2042 .
Canada's fertility rate compared to its aging population does not help either. Natural population growth is falling to the point where by 2030, overall population growth is expected to be fueled entirely by immigration. According to Statistics Canada, this is partially because Canada's fertility rate is projected to slightly increase from 1.41 children per woman in 2021 to 1.47 children per woman in 2026. While there is a projected slight increase, it is essential to note that this still falls significantly below the replacement level of 2.1 children per woman, which is needed to maintain a stable population without immigration.
According to the report, the current immigration system is focused too much on the labour market’s short-term demands to fill the demand in sectors where low-skilled occupations have been experiencing acute shortages since the pandemic. This resulted in a surge of non-permanent residents, which poses a strain on housing and social services, and erodes public support for immigration.
The report argues that a more effective solution to the challenges posed by an aging population lies in attracting working-age immigrants while also providing for the infrastructure to accommodate newcomers. The solution, it suggests, lies in building more housing and attracting skilled labor to the construction sector.
The report points to the U.S. as a cautionary tale, where low immigration levels have resulted in a significantly higher age-related unfunded liability compared to Canada. This liability refers to the gap between pension fund assets and estimated benefit obligations, and in the U.S., it's almost three times the size of the government debt held by the public.
In conclusion, while reducing immigration may seem like a solution to immediate economic pressures, it could have long-term consequences for Canadians, including the potential for higher taxes. A more sustainable approach, according to the RBC report, involves a targeted immigration strategy that attracts working-age individuals and addresses the root causes of the housing crisis.
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