OTTAWA (Reuters) - Canada's fiscal structure is not sustainable in the long term and will lead to bigger deficits as the population ages unless the government takes preemptive action, the country's budget watchdog said on Thursday.
A report by the parliamentary budget officer said that to close a looming shortfall, the government would have to raise taxes, reduce spending or a combination of both to make up the equivalent of 1 to 2 percent of gross domestic product.
Ottawa should at least plan now for coping with a future of lower tax revenues and higher health care expenses resulting from baby boomers leaving the work force, the report said.
"The fiscal action required to achieve sustainability does not need to be taken immediately," the report said.
"Implementing the necessary measures may be delayed until the economy has fully recovered without unduly increasing the fiscal gap. However, a significant delay in implementing fiscal actions substantially increases the required amount of corrective measures," it said.
The Conservative government has said it will explain its deficit-reduction strategy in its budget on March 4. So far, Finance Minister Jim Flaherty has said he is counting on a rebound in economic growth, combined with possible curbs on the rate of spending growth, to balance the books.
The deficit is estimated at C$56 billion ($54 billion) in the 2009-10 fiscal year ending March 31, the biggest on record.
Under the more conservative of two scenarios used in the budget officer's long-term projections, the government's debt-to-GDP ratio is expected to rise to 100 percent over the next 40 years from 33.8 percent in 2013-14 if no permanent action is taken.
Reporting by Louise Egan; editing by Peter Galloway