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3. Fiscal Outlook

The Government’s plan to return to balance over the medium term is on track. As a result of the wind-down of the measures in the Economic Action Plan and the implementation of savings measures announced in Budget 2010, the deficit is projected to decline from $55.6 billion in 2009–10 to $29.8 billion in 2011–12. By 2015–16, the federal budget is projected to record a small surplus of $2.6 billion. This projection is based on the average private sector forecast for the economy, adjusted for downside risks, as discussed above.

Table 3.1
Summary Statement of Transactions
Projection
   
  2009–
2010
2010–
2011
2011–
2012
2012–
2013
2013–
2014
2014–
2015
2015–
2016
  (billions of dollars)
Budgetary revenues 218.6 232.5 246.3 261.2 277.7 293.2 305.9
Program expenses 244.8 246.6 242.7 246.1 251.7 257.2 265.4
Public debt charges 29.4 31.3 33.4 36.4 37.5 37.8 37.8
 
Total expenses 274.2 277.8 276.1 282.5 289.2 295.0 303.3
Budgetary balance -55.6 -45.4 -29.8 -21.2 -11.5 -1.7 2.6
Federal debt 519.1 564.5 594.2 615.5 627.0 628.7 626.1
Per cent of GDP              
  Budgetary revenues 14.3 14.4 14.6 14.8 14.9 15.0 15.0
  Program expenses 16.0 15.3 14.4 13.9 13.5 13.2 13.0
  Public debt charges 1.9 1.9 2.0 2.1 2.0 1.9 1.9
  Budgetary balance -3.6 -2.8 -1.8 -1.2 -0.6 -0.1 0.1
  Federal debt 34.0 34.9 35.3 34.8 33.7 32.3 30.8
Note: Totals may not add due to rounding.

Expressed in relation to the size of the economy, the budgetary deficit is projected to decline from 3.6 per cent of GDP in 2009–10 to 2.8 per cent of GDP in 2010–11. The deficit is projected to decline steadily over the forecast period. Indeed, by 2014–15, a small deficit of 0.1 per cent of GDP is projected. In 2015–16, a small surplus of 0.1 per cent of GDP is projected.

On a total government basis, which combines the fiscal positions of the federal, provincial and territorial and local governments, the IMF projects that Canada will be broadly in balance in 2015—the best fiscal position in the G-7.

The federal debt, measured in relation to the size of the economy, is projected to decline steadily from 2012–13 onward as the economy grows and the budget is returned to balance. By 2015–16, the debt-to-GDP ratio is projected to decline to 30.8 per cent.

Canada has an enviable fiscal position—our debt levels are low historically and internationally and are projected to remain low over the coming years. Since peaking in 1995, Canada’s total government net debt-to-GDP ratio fell 48.3 percentage points by 2008, to just 22.4 per cent. Looking forward, the IMF projects that Canada will maintain a low and declining debt-to-GDP ratio that will be far below those of other G-7 nations (Chart 3.1).

Canada’s fiscal advantage will grow going forward
Chart 3.1 - Total Government Net Debt-to-GDP Ratio

Strong fiscal management, founded on the principle that governments should live within their means, is the cornerstone of the Government’s economic strategy. A balanced budget is not an end in itself. Rather, it is a means to better jobs and stronger, sustainable growth. Balanced budgets will minimize the amount of revenues absorbed by interest payments on the debt, allowing for more investment in areas critical to long-term growth and prosperity such as infrastructure, education and training, and health care. Balanced budgets will provide Canadians with the confidence that their tax levels and public services are sustainable over the long term, avoiding future tax increases or reductions in services in the face of population aging. Balancing the budget also helps to keep interest rates low, and will insulate Canada from rising risk premiums and higher borrowing costs witnessed recently in countries with high and rising debt burdens.

Fiscal Planning Framework

To ensure objectivity and transparency in forecasting, the economic forecast underlying the Government’s fiscal projections is based on the average of the private sector economic forecasts. This process has been followed for over a decade, as well as for this Update of Economic and Fiscal Projections. However, as described above, the average private sector forecast for nominal GDP is being adjusted downward for fiscal planning purposes in light of the downside risks to the short-term economic outlook.

With this adjustment, the private sector forecast of nominal GDP has been adjusted down by $2.0 billion in 2010, $10.0 billion in 2011 and 2012, $7.5 billion in 2013, and $5.0 billion in 2014 and 2015. As a result, the revenue projections are lower by $0.3 billion in 2010–11, $1.5 billion in 2011–12 and 2012–13, $1.1 billion in 2013–14, and $0.8 billion in 2014–15 and 2015–16 (Table 3.2).

Table 3.2
Update of Economic and Fiscal Projections Planning Assumption Comparison
  2010 2011 2012 2013 2014 2015
  (billions of dollars)
Nominal GDP level            
  September 2010 private sector survey 1,618 1,692 1,780 1,868 1,954 2,039
  Update 2010 fiscal planning assumption 1,616 1,682 1,770 1,861 1,949 2,034
  Adjustment for risk -2.0 -10.0 -10.0 -7.5 -5.0 -5.0
 
  2010–11 2011–12 2012–13 2013–14 2014–15 2015–16
Revenue effect of risk adjustment -0.3 -1.5 -1.5 -1.1 -0.8 -0.8

Changes in the Fiscal Outlook Since the March 2010 Budget

Table 3.3
Summary of Changes in the Fiscal Outlook Since the March 2010 Budget
    Projection
   
  2009–
2010
2010–
2011
2011–
2012
2012–
2013
2013–
2014
2014–
2015
2015–
2016
  (billions of dollars)
March 2010 budgetary balance -53.8 -49.2 -27.6 -17.5 -8.5 -1.8 n/a
Policy decisions and accounting
 changes since Budget 2010
             
  Accounting change—transitional payments -5.6 3.8 1.9        
  EI premium rate reduction   -0.3 -1.3 -1.9 -1.8 0.3  
  Other measures   -0.5 -1.8 -0.2 -0.2 -0.2  
 
  Subtotal -5.6 3.0 -1.2 -2.1 -1.9 0.1  
Economic and fiscal developments              
  Revenues 4.7 1.8 0.1 -1.8 -2.0 -2.8  
  Program expenses -1.3 -0.8 -1.4 -0.8 -0.2 0.8  
  Public debt charges 0.5 0.1 1.9 2.5 2.3 2.8  
 
  Subtotal 3.8 1.2 0.6 -0.1 0.0 0.7  
Revenue effect of risk adjustment   -0.3 -1.5 -1.5 -1.1 -0.8 -0.8
2010 Update—budgetary balance -55.6 -45.4 -29.8 -21.2 -11.5 -1.7 2.6
Note: A negative number implies an increase in spending or a decrease in revenues and a corresponding deterioration in the budgetary balance. A positive number implies a decrease in spending or an increase in revenues and an improvement in the budgetary balance.

Overall, the Government’s fiscal position is broadly in line with the March 2010 budget. The Government’s plan to return to budgetary balance over the medium term is on track, with projected deficits declining steadily over the forecast horizon (Table 3.3).

The deficit in 2009–10 was $55.6 billion. This result was due primarily to the accrual of $5.6 billion in transitional assistance payments for recent provincial tax decisions to be paid in 2010–11 and 2011–12. In the March 2010 budget forecast, the transitional assistance payments were expensed in annual instalments over 2009–10 to 2011–12. In the process of finalizing the 2009–10 financial statements, and following discussions with the Office of the Auditor General of Canada, it was determined that the total amount of transitional assistance should be expensed in 2009–10 as the provinces had met all eligibility criteria. Absent the impact of this accounting change, the deficit in 2009–10 would have been $3.8 billion lower than forecast in the March 2010 budget. The impact of this change in accounting treatment lowers the projected budgetary deficit by $3.8 billion in 2010–11 and $1.9 billion in 2011–12 compared to the 2010 budget forecast. As a result, the budgetary deficit in 2010–11 is projected to be $3.8 billion lower than in the budget.

On September 30, 2010, the Government acted to support the economic recovery by limiting the increase in EI premium rates to 5 cents per $100 of insurable earnings in 2011 and 10 cents in subsequent years. Under the new limit, the employee rate per $100 of insurable earnings can rise to no higher than $1.78 for 2011. The new limits are projected to lower EI premium rates and revenues over the short to medium term, raising the overall budgetary deficit. As the current rate-setting approach is designed to balance the EI account over time, the negative impact on the balance in the short term is offset by a positive impact on the budgetary balance by the end of the projection period. Based on current economic projections, it is expected that the EI account will return to cumulative balance by 2015. The Government will also undertake consultations on how the rate-setting mechanism can be further improved to ensure more stable, predictable rates going forward, while ensuring that the EI account is balanced over time.

Other policy decisions taken since the budget include measures providing support to prairie farmers dealing with excess moisture and flooding, and improvements in support and care for veterans and their families.

Economic and fiscal developments since the 2010 budget are projected to improve the budgetary balance over most of the forecast period, as lower public debt charges generally offset somewhat weaker revenues and higher program spending from 2011–12 onward.

Revenues in 2009–10 were $4.7 billion higher than projected in Budget 2010, as lower-than-expected personal income tax revenues were more than offset by higher-than-expected corporate income tax revenues. Most of the higher-than-expected corporate income tax revenues do not carry forward over the outer years of the forecast period, as they were due to exceptional one-time factors. On the other hand, the lower-than-projected personal income tax revenues do largely carry forward over the forecast period, lowering the tax revenue projections over the forecast horizon.

Program expenses are expected to be somewhat higher than projected in Budget 2010 over most of the forecast horizon. These changes largely result from the reclassification of the Canadian Commercial Corporation from an enterprise Crown corporation to a consolidated Crown corporation. This reclassification has resulted in increases to both Crown corporation revenues and Crown corporation expenses, with no overall impact on the budgetary balance. This increase in program expenses is offset in the outer years by lower resource revenues projected to be collected under the Atlantic Offshore Accords, which leads to a decline in related transfers to provinces.

Reflecting Canada’s strong labour market performance over the last year, private sector forecasters are now expecting a lower unemployment rate in 2010 and 2011 than at the time of the budget. This affects both EI benefits and premiums, in addition to the policy decision discussed above. A stronger labour market leads to lower EI benefits in the early years of the projections, which results in lower deficits in the EI account over this period. Given the principle of breaking even over time, this lower deficit in the near term results in lower EI premium rates and revenues in the outer years of the projection period compared to what was presented in Budget 2010.

Public debt charges are lower throughout the forecast horizon, due to significantly lower forecast interest rates than at the time of the budget.

In light of downside risks to the global economic outlook, the revenue projections are reduced by $0.3 billion in 2010–11, $1.5 billion in 2011–12 and 2012–13, $1.1 billion in 2013–14 and $0.8 billion in 2014–15 and 2015–16.

Outlook for Budgetary Revenues

Table 3.4
The Revenue Outlook
    Projection
   
  2009–
2010
2010–
2011
2011–
2012
2012–
2013
2013–
2014
2014–
2015
2015–
2016
  (billions of dollars)
Income taxes              
  Personal income tax 103.9 113.1 119.9 128.1 137.0 145.4 151.7
  Corporate income tax 30.4 28.1 31.1 31.4 33.7 35.9 37.5
  Non-resident income tax 5.3 5.7 6.1 6.6 7.1 7.5 7.8
 
  Total income tax 139.6 146.8 157.1 166.2 177.8 188.8 197.1
Excise taxes/duties              
  Goods and Services Tax 26.9 28.5 29.6 31.3 33.1 34.9 36.7
  Customs import duties 3.5 3.4 3.6 3.8 4.0 4.3 4.6
  Other excise taxes/duties 10.1 10.5 10.7 10.8 10.7 10.4 10.4
 
  Total excise taxes/duties 40.6 42.4 43.9 45.9 47.8 49.6 51.7
Total tax revenues 180.2 189.2 201.0 212.1 225.6 238.3 248.7
Employment Insurance premium revenues 16.8 17.5 18.8 20.6 22.6 24.6 25.9
Other revenues 21.7 25.7 26.5 28.6 29.5 30.3 31.2
Total budgetary revenues 218.6 232.5 246.3 261.2 277.7 293.2 305.9
Per cent of GDP              
  Personal income tax 6.8 7.0 7.1 7.2 7.4 7.5 7.5
  Corporate income tax 2.0 1.7 1.8 1.8 1.8 1.8 1.8
  Goods and Services Tax 1.8 1.8 1.8 1.8 1.8 1.8 1.8
 
Total tax revenues 11.8 11.7 11.9 12.0 12.1 12.2 12.2
Employment Insurance premium revenues 1.1 1.1 1.1 1.2 1.2 1.3 1.3
Other revenues 1.4 1.6 1.6 1.6 1.6 1.6 1.5
 
Total 14.3 14.4 14.6 14.8 14.9 15.0 15.0
Note: Totals may not add due to rounding

Table 3.4 sets out the Government’s projection for budgetary revenues. Following a decline of 6.2 per cent in 2009–10, budgetary revenues are expected to increase 6.3 per cent in 2010–11 and to grow at an average annual rate of 5.6 per cent thereafter as the economy recovers.

Personal income tax revenues—the largest component of budgetary revenues—are projected to increase 8.8 per cent in 2010–11. This increase reflects growth in personal income, combined with the expiration of the Home Renovation Tax Credit. Over the planning period, personal income tax revenues increase somewhat faster than growth in GDP, reflecting the progressive nature of the income tax system combined with real income gains.

Corporate income tax revenues are projected to decline by 7.6 per cent in 2010–11, due primarily to one-time factors that boosted revenues in 2009–10. Absent these factors, corporate income tax revenues are projected to grow as the economy recovers, partially offset by additional reductions in the general corporate income tax rate of 1.0 percentage point in 2010 and of 1.5 percentage points in each of 2011 and 2012. After the full implementation of these reductions, corporate income tax revenues are projected to grow at an average rate of 5.4 per cent per year, broadly in line with the growth in profits.

Non-resident income tax revenues are projected to grow at an average rate of 6.8 per cent over the planning period, boosted by the recovery in profits but dampened in 2010–11 by the completion of the phase-out of the withholding tax on non-arm’s length interest payments to the U.S. under the Fifth Protocol to the Canada-U.S. Tax Treaty.

GST revenues are expected to grow on average by 5.3 per cent over the forecast horizon, broadly in line with growth in taxable consumption.

Customs import duties are projected to decline by 2.8 per cent in 2010–11, reflecting tariff relief on manufacturing inputs and machinery and equipment announced in Budget 2010 and the new duty remission framework for certain imported ships announced on October 1, 2010. Growth in customs import duties is projected to average around 6 per cent over the remainder of the planning period, consistent with growth in imports.

Other excise taxes and duties are projected to remain virtually flat over the planning period.

For planning purposes, EI premium revenues are projected to increase by 4.6 per cent in 2010–11 and to grow on average by 8.2 per cent from 2011–12 to 2015–16. This forecast reflects growth in earnings and the action announced by the Government on September 30, 2010 to limit the potential increase in EI premium rates to 5 cents per $100 of insurable earnings in 2011 and 10 cents in subsequent years. Based on current economic projections, it is expected that the EI account will return to cumulative balance by 2015.

Other revenues include those of consolidated Crown corporations, net income from enterprise Crown corporations, foreign exchange revenues, returns on investments and proceeds from the sales of goods and services. These revenues are volatile, owing partly to the impact of exchange rate movements on the Canadian-dollar value of foreign-denominated interest-bearing assets and to net gains/losses from enterprise Crown corporations. Other revenues are projected to increase 18.5 per cent in 2010–11, due in part to one-time accounting adjustments that lowered 2009–10 results, as well as stronger projected growth in the profits of enterprise Crown corporations following the recession. Growth in other revenues is projected to average 4.0 per cent over the remainder of the forecast period.

Outlook for Program Expenses

Table 3.5
The Program Expenses Outlook
    Projection
   
  2009–
2010
2010–
2011
2011–
2012
2012–
2013
2013–
2014
2014–
2015
2015–
2016
  (billions of dollars)
Major transfers to persons              
  Elderly benefits 34.7 36.3 38.1 40.1 42.3 44.5 46.7
  Employment Insurance benefits1 21.6 21.1 19.4 18.8 18.5 18.6 18.9
  Children’s benefits 12.3 13.0 13.4 13.7 13.8 13.9 13.9
 
  Total 68.6 70.3 70.9 72.6 74.7 77.0 79.5
Major transfers to other levels
 of government
             
  Federal transfers in support of health
   and social programs
35.7 37.2 38.7 40.7 42.7 44.7 47.0
  Fiscal arrangements2 16.2 16.4 16.9 17.7 18.6 19.5 20.3
  Alternative Payments for Standing Programs -2.7 -2.9 -3.1 -3.3 -3.5 -3.7 -3.9
  Canada’s cities and communities 1.9 2.0 2.0 2.0 2.0 2.0 2.0
  Other3 6.0 0.5 0.0 0.0 0.0 0.0 0.0
 
  Total 57.0 53.3 54.5 57.1 59.8 62.4 65.4
Direct program expenses              
  Transfer payments 39.9 40.1 35.7 33.1 31.8 30.3 30.5
  Capital amortization 4.3 4.5 4.8 5.0 5.2 5.4 5.5
  Other operating expenses 21.7 21.9 23.2 24.3 25.3 25.8 26.7
  Operating expenses subject to freeze 53.4 56.4 53.6 53.9 55.0 56.3 57.8
  Operating expenses subject to freeze
   (net of Canadian Commercial Corporation)
51.8 54.9 52.1 52.4 53.5 54.8 56.3
 
Direct program expenses 119.2 122.9 117.3 116.3 117.2 117.7 120.5
Total program expenses 244.8 246.6 242.7 246.1 251.7 257.2 265.4
Per cent of GDP              
Major transfers to persons 4.5 4.4 4.2 4.1 4.0 4.0 3.9
Major transfers to other levels of government 3.7 3.3 3.2 3.2 3.2 3.2 3.2
Direct program expenses 7.8 7.6 7.0 6.6 6.3 6.0 5.9
 
Total program expenses 16.0 15.3 14.4 13.9 13.5 13.2 13.0
Note: Totals may not add due to rounding
1 EI benefits include regular EI benefits, sickness, maternity, parental, compassionate care, fishing and work-sharing benefits, and employment benefits and support measures. These represent 90 per cent of total EI program expenses. The remaining EI costs relate mainly to administration costs.
2 Fiscal arrangements include Equalization, Territorial Formula Financing, the Youth Allowances Recovery and statutory subsidies.
3 Includes transfer protection and transitional payments.

Table 3.5 sets out the main components of program expenses: major transfers to persons, major transfers to other levels of government and direct program expenses.

Major transfers to persons consist of elderly, EI and children’s benefits, including the Universal Child Care Benefit.

Major transfers to other levels of government include transfers in support of health care and social programs, as well as Equalization. Current legislation has these transfers on a growing track out to 2013–14. For planning purposes, major transfers to other levels of government are projected to grow at current legislated rates over the full forecast period. From 2014–15 onward, these growth rates have not yet been legislated and are therefore subject to change.

About one-half of program spending consists of direct program expenses. Direct program expenses include operating expenses for National Defence and other departments, transfers administered by departments for farm income support, natural resource royalties paid to provinces, student financial assistance and expenses of Crown corporations. The projected growth in direct program expenses reflects the impact of past budget measures, as well as initiatives since Budget 2010.

Within direct program expenses, transfers administered by departments are projected to decline over most of the projection period. This reflects the expiration of Economic Action Plan measures, a projected decline in transfers of natural resource revenues and the reduction in activity under the Building Canada initiatives.

Amounts for capital expenses are presented on an accrual basis. The amount of capital amortization is expected to increase modestly over the next five years as a result of investments in new machinery and equipment, and upgrades to existing capital.

Other direct program expenses include costs for employee pensions and other benefits, non-wage expenses of National Defence and accrual amounts for items such as the allowance for bad debt. Employee pension and other benefits are not subject to the general operating budget freeze announced in Budget 2010.

Expenses subject to the operating freeze are up about $1.5 billion per year from the Budget 2010 projections, reflecting the consolidation of the Canadian Commercial Corporation with the Government’s accounts starting in 2009–10. Net of this change, the expenses subject to the operating freeze are in line with those projected in the budget.

Program expenses as a share of GDP decline in all years of the forecast horizon, reflecting the winding-down of the stimulus measures under the Economic Action Plan and the savings measures introduced in Budget 2010. As a share of GDP, spending is projected to decline from 16.0 per cent in 2009–10 to 13.0 per cent in 2015–16. This would bring the program spending ratio in line with spending ratios in the 2006–07 to 2008–09 period.

Uncertainty with Respect to the Fiscal Projections

Risks associated with the fiscal projections primarily relate to risks around the strength of the global economic recovery and volatility in the relationship between fiscal variables and the underlying economic activity to which they relate.

Even if the economic outlook were known with certainty, there would still be risks associated with the fiscal projections because of the uncertainty in the translation of economic developments into spending and tax revenues. The following are the key sources of uncertainty:

Sensitivity of the Budget Balance to Economic Shocks

Changes in economic assumptions affect the projections for revenues and expenses. The following tables illustrate the sensitivity of the budgetary balance to a number of economic shocks:

These sensitivities are generalized rules of thumb that assume any decrease in economic activity is proportional across income and expenditure components.

Table 3.6
Estimated Impact of a One-Year, 1-Percentage-Point Decrease in Real GDP Growth on Federal Revenues, Expenses and Budgetary Balance
  Year 1 Year 2
  (billions of dollars)
Federal revenues    
  Tax revenues    
    Personal income tax -1.7 -1.8
    Corporate income tax -0.3 -0.4
    Goods and Services Tax -0.3 -0.3
    Other -0.2 -0.2
 
    Total tax revenues -2.5 -2.7
  Employment Insurance premiums -0.1 -0.2
  Other revenues 0.0 0.0
 
Total budgetary revenues -2.6 -2.9
Federal expenses    
  Major transfers to persons    
    Elderly benefits 0.0 0.0
   
    Employment Insurance benefits 0.6 0.6
    Children’s benefits 0.0 0.0
 
    Total 0.6 0.6
  Other program expenses -0.2 -0.2
  Public debt charges 0.0 0.1
 
Total expenses 0.5 0.5
Budgetary balance -3.1 -3.4
Note: Numbers may not add due to rounding.

A 1-percentage-point decrease in real GDP growth reduces the budgetary balance by $3.1 billion in the first year and by $3.4 billion in the second year (Table 3.6).

Table 3.7
Estimated Impact of a One-Year, 1-Percentage-Point Decrease in GDP Inflation on Federal Revenues, Expenses and Budgetary Balance
  Year 1 Year 2
  (billions of dollars)
Federal revenues    
  Tax revenues    
    Personal income tax -1.7 -1.4
    Corporate income tax -0.3 -0.4
    Goods and Services Tax -0.3 -0.3
    Other -0.2 -0.2
 
    Total tax revenues -2.5 -2.3
  Employment Insurance premiums -0.1 -0.2
  Other revenues -0.1 -0.1
 
Total budgetary revenues -2.6 -2.5
Federal expenses    
  Major transfers to persons    
    Elderly benefits -0.2 -0.4
    Employment Insurance benefits -0.1 -0.1
    Children’s benefits -0.1 -0.1
 
    Total -0.4 -0.6
  Other program expenses -0.4 -0.4
  Public debt charges -0.3 0.0
 
Total expenses -1.1 -0.9
Budgetary balance -1.6 -1.5
Note: Numbers may not add due to rounding.

A 1-percentage-point decrease in nominal GDP growth resulting solely from lower GDP inflation (assuming that the Consumer Price Index moves in line with GDP inflation) lowers the budgetary balance by $1.6 billion in the first year and by $1.5 billion in the second year (Table 3.7).

Table 3.8
Estimated Impact of a Sustained 100-Basis-Point Increase in All Interest Rates on Federal Revenues, Expenses and Budgetary Balance
  Year 1 Year 2
  (billions of dollars)
Federal revenues 0.9 1.1
Federal expenses 1.9 3.1
Budgetary balance -1.0 -2.1

An increase in interest rates decreases the budgetary balance by $1.0 billion in the first year and by $2.1 billion in the second year (Table 3.8). The decline stems entirely from increased expenses associated with public debt charges. The impact on debt charges rises through time as longer-term debt matures and is refinanced at higher rates. The impact on debt charges also rises due to the higher stock of debt. Moderating the overall impact is an increase in revenues associated with the increase in the rate of return on the Government’s interest-bearing assets, which are recorded as part of non-tax revenues.