Rising per capita costs and aging population risk undermining long-term fiscal sustainability
Canada’s fiscal outlook is facing mounting strain as surging health-care costs outpace economic growth, putting provincial finances at increasing risk, according to a new report by Desjardins Group.
Randall Bartlett, the bank’s deputy chief economist, argues that expanding health expenditures, rather than weak revenues, are now the dominant force behind widening provincial deficits.
Recent provincial budgets revealed a clear pattern: shortfalls are growing, driven largely by higher-than-expected spending, particularly in health care. While weaker resource revenues contributed in some regions, the report highlights spending pressures as the primary culprit.
Health-care spending, which surged during the pandemic, has not returned to its previous trajectory. Instead, it continues to climb both in absolute terms and relative to the broader economy, with expenditures rising faster than GDP.
A key driver is cost inflation within the health system, which has often exceeded overall CPI. At the same time, recent population dynamics are shifting: while population growth had previously supported spending increases, a decline in non-permanent residents is now expected to dampen that effect going forward.
Even so, per capita health-care costs are accelerating and are projected to remain the main contributor to future spending growth. Data shows that per-person public health expenditures have already surpassed pandemic-era highs and continue to rise.
Demographics are compounding the issue. Canada’s population is aging rapidly, with the share of individuals aged 65 and older expected to approach nearly a quarter of the population within the next decade. This shift significantly increases health-care demand while shrinking the relative size of the tax base supporting it.
The fiscal implications are stark. Provinces, which bear the bulk of health-care costs, face a growing mismatch between rising expenditures and slower revenue growth. The report notes that health care is already the largest spending category for provincial governments, making them particularly vulnerable to sustained cost increases.
Compounding these pressures are broader economic shocks—including tariffs and commodity price volatility—as well as a trend of widening deficits in recent budget cycles.
While the federal government remains marginally in a sustainable position, its capacity to provide additional support is limited. Transfers such as the Canada Health Transfer are declining as a share of provincial spending and are expected to fall further, leaving provinces with fewer options.
The report concludes that without meaningful improvements in efficiency, governments may be forced into difficult fiscal trade-offs as demand for care continues to rise against constrained resources.
