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Ottawa is on track to balance the budget, but the Macdonald-Laurier Institute warns worrying pressures lurk beneath the headline numbers.

Numerous pressures are going to squeeze federal budgets in the years to come, says Philip Cross, a senior fellow with MLI and a former chief economic analyst with Statistics Canada.

Read: Shrinking deficit raises prospect of tax breaks

The deficit has dropped from $40 billion to $9 billion over the last four quarters, but the aging population will present financial problems on a number of fronts, Cross says.

A big area of concern is revenue, since there will be more retirees and therefore fewer of our highest-earning workers paying income tax.

An older population will also force the federal government to spend. There will be increased demands on the health care system and unfunded portions of the retirement system, such as OAS and GIS, and the pension benefits for federal civil service retirees.

Read: Annuities hurt pension plan funding in Q3

Ottawa will also need to keep an eye peeled for how provincial budgets fare. Most provinces – including Ontario and Quebec – are running deficits. Without fundamental changes to how they do business, the potential for a default increases, says Cross.

That would pressure federal finances, since financial markets would expect Ottawa to bail those provinces out.

Cross advises the federal government to avoid chasing short-term budgetary surpluses and instead stabilize government spending by innovating in areas such as health care and educational services.

Read: Ontario’s economy no longer lagging

Originally published on Advisor.ca

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