OTTAWA, July 21 (Reuters) - Canada's federal finances are in a solid long-term position but the provincial and municipal government picture is far less rosy, the country's parliamentary budget watchdog said on Tuesday.
The office of the Parliamentary Budget Officer (PBO), which has a mandate to provide independent analysis to lawmakers, issued the report as Canada prepares for an Oct. 19 election.
The federal Conservative government's stewardship of the economy has become a central issue as the election approaches, with the finance minister pledging to eke out a budget surplus this year despite a hit from weaker prices for oil, a major Canadian export.
"Federal government net debt is on a sustainable path and will be eliminated entirely in 35 years," said the PBO report, based on the assumption that current trends hold.
This would mean running budget surpluses eventually, which it projects as possible without tax hikes or cutting spending.
In practice, however, Canadian federal governments have tended not to run large surpluses over the long haul, opting instead to cut taxes or boost spending.
The Conservative government has moved to curb long-term spending with a plan to limit increases in transfers to the provinces for health care to the nominal rate of growth in the economy.
But health spending by the provinces is widely expected to rise faster than that level as the baby-boomer generation retires and lifespans lengthen.
"Subnational governments cannot meet the challenges of population aging under current policy," the report said.
It estimated that "permanent policy actions" amounting to 1.4 percent of gross domestic product will be needed to put subnational government debt on a sustainable path. These actions could entail higher provincial or municipal taxes or spending cuts elsewhere, or higher transfers from Ottawa. (Reporting by Randall Palmer; Editing by Jeffrey Hodgson; and Peter Galloway)