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Annex 1
Canada's Fiscal Progress

Highlights

• The audited budgetary surplus for 2003-04 was $9.1 billion. This was significantly better than expected at the time of the March 2004 budget, mainly owing to higher-than-expected revenues.
• The Government has recorded seven consecutive budgetary surpluses since 1997-98, and as a result the federal debt has been reduced by more than $61 billion. This has resulted in ongoing savings of public debt charges of over $3 billion annually.
• The federal debt-to-GDP (gross domestic product) ratio fell to 41.1 per cent in 2003-04, down from its peak of 68.4 per cent in 1995-96. As a result of this reduction in the federal debt, public debt charges as a share of revenues have fallen to just over 19 per cent-the lowest level since the late 1970s.
• The "virtuous circle" of improved fiscal and economic performance has resulted in increased government revenues, which have given the Government the means to invest in key priority areas, while at the same time allowing it to continue meeting its fiscal targets. Recently the Government committed to provide new funding of nearly $75 billion over the next 10 years to the provinces and territories in support of health, equalization and Territorial Formula Financing, providing the provinces and territories with a growing and predictable revenue track.
• Canada's fiscal situation is among the strongest in the world. In 2003 Canada was the only Group of Seven (G-7) country to post a total government surplus, and is expected to be the only G-7 country to do so again this year and next.

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Seventh consecutive budgetary surplus

• The Government of Canada posted a budgetary surplus of $9.1 billion in 2003-04, marking the seventh consecutive year in which it has recorded a surplus-the first time this has occurred since Confederation.
• The budgetary surplus was equivalent to 0.7 per cent of GDP in 2003-04.
• As a result, the federal debt (accumulated deficit) has been reduced by more than $61 billion over the past seven years.

Federal Debt (Accumulated Deficit) Since 2002-03 the financial statements of the Government of Canada have been presented on a full accrual basis of accounting. Under the previous accounting standard-modified accrual accounting-net debt and the accumulated deficit were identical. Under the new standard, net debt now includes a comprehensive costing for financial liabilities but excludes non-financial assets. The accumulated deficit includes both. It is the sum of all surpluses and deficits in the past. Federal debt, referred to in the fall Economic and Fiscal Update, the budget documents and the Annual Financial Report of the Government of Canada, is the accumulated deficit. It is the federal government's main measure of debt, as annual changes in this measure determine the budgetary balance.

Surplus in 2003-04 was applied against the federal debt

Generally Accepted Accounting Principles Generally Accepted Accounting Principles for senior levels of government state that the surplus for any fiscal year can only take into account the events, transactions and government decisions that have been made before the end of that fiscal year.

• The practice of applying the surplus against the debt is in keeping with Generally Accepted Accounting Principles set by the Public Sector Accounting Board of the Canadian Institute of Chartered Accountants.
• According to these accounting principles, expenditures for liabilities that have not occurred in a given year cannot be booked in that year.
• As a result, once a fiscal year has ended, the Government cannot retroactively book new initiatives in that year. The year-end surplus must be applied against the federal debt (accumulated deficit).

Federal debt reduced by $61.4 billion since 1996-97

Table 1.1
Federal Government Assets and Liabilities

	1996-97	2003-04	Change
	(billions of dollars)
Liabilities
Accounts payable and accrued liabilities	74.3	80.0	5.7
Interest-bearing debt
Unmatured debt (market debt)	478.8	440.2	-38.6
Pension and other accounts	156.3	180.9	24.6
Total	635.1	621.1	-14.0
Total liabilities	709.4	701.1	-8.3
Financial assets	100.4	144.8	44.4
Net debt	609.0	556.3	-52.7
Non-financial assets	46.1	54.8	8.7
Federal debt (accumulated deficit)	562.9	501.5	-61.4

• The federal debt (accumulated deficit) was $501.5 billion in 2003-04, a reduction of $61.4 billion from its peak of $562.9 billion in 1996-97.
• Federal debt consists of liabilities, financial assets and non-financial assets.
• Total liabilities include interest-bearing debt and other liabilities. Total liabilities have declined by $8.3 billion since 1996-97. This is due to a $38.6-billion reduction in market debt, partially offset by increases in accounts payable and liabilities to the public sector pension and other accounts.
• Financial assets consist of cash and accounts receivable, including tax receivables, foreign exchange accounts, and loans, investments and advances. Non-financial assets consist of tangible capital assets, inventories and prepaid expenses.

Better-than-expected results for 2003-04 due to higher revenues and lower program expenses

Table 1.2
Comparison of Actual Outcomes for 2003-04 to March 2004 Budget Forecast

	(billions of dollars)
March 2004 budget projected surplus	1.9
Changes
Budgetary revenues	5.1
Program expenses	2.0
Public debt charges	0.0
Net change	7.2
Outcome for 2003-04	9.1
Note: Figures may not add due to rounding.

• In the March 2004 budget, a surplus of $1.9 billion was projected for 2003-04. Thefinal audited budgetary surplus for 2003-04 was $9.1 billion.
• Most of this improvement is attributable to $5.1 billion in higher-than-expected budgetary revenues, which reflect, in part, the strong growth in nominal income in the last quarter of 2003-04, confirmed by the National Accounts figures released by Statistics Canada at the end of August.
• As well, information received well after the end of the fiscal year indicated that tax revenues with respect to the 2003 taxation year were higher than expected due to a higher revenue yield-the revenues the Government collects from each dollar of income.
• The very strong growth in income tax revenues in part reflected one-time factors affecting corporate income tax revenues.

• In addition, personal income tax revenues rose more rapidly than underlying personal income despite the impact of the $100-billion Five-Year Tax ReductionPlan. Other revenues were also higher than expected.
• Program expenses were $2.0 billion lower than expected in the March 2004 budget, mainly attributable to higher-than-expected lapses in direct program expenses.

Other countries also recorded better-than-expected results in2003-04

• Several other major industrialized countries also reported better-than-expected results for the 2003-04 fiscal year, primarily reflecting higher-than-expected revenues.
• Eight of the ten major countries that have to date released final or preliminary results for 2003-04 recorded a better budgetary balance in 2003-04 than estimated in theirrespective 2004 budgets. Higher-than-expected revenues were the main source of theimprovement. Nevertheless, lower spending also had an impact formostcountries.
• Only France and Germany realized worse-than-expected fiscalresults in 2003-04.

The federal debt burden has been reduced significantly.

• The federal debt-to-GDP ratio is the most appropriate measure of the debt burden, as it measures the federal debt (accumulated deficit) relative to the ability of the nation's taxpayers to finance it.
• As a result of the $61.4-billion reduction in the federal debt (accumulated deficit) over the last seven years and sustained economic growth, the federal debt-to-GDP ratio has fallen by 27.3 percentage points to 41.1 per cent in 2003-04, down from its peak of 68.4 per cent in 1995-96.

.reducing federal debt charges as a share of revenues.

• The reduction in federal debt since 1996-97 has resulted in ongoing savings in interest payments of over $3 billion annually.
• In 1995-96, 37.6 cents of every revenue dollar went to service the federal debt. In 2003-04, this ratio fell to just over 19 cents, the lowest level since the late 1970s.

.leaving more federal revenues for key priorities

Major Investments in the Priorities of Canadians $100-billion Five-Year Tax Reduction Plan-the largest tax cut in Canadianhistory Investments in key social and economic programs $75 billion in new funding for health care, equalization and Territorial FormulaFinancing

• The Government of Canada has turned chronic annual deficits into sustained annual surpluses and a lower federal debt. This, combined with low inflation, has led to low interest rates, strong consumer and business confidence, and renewed growth in the standard of living of Canadians.
• This "virtuous circle" of improved fiscal and economic performance has resulted in increased government revenues-which have given the Government the means to invest in key priority areas, including:
• The $100-billion Five-Year Tax Reduction Plan announced in 2000, which is fully implemented as of 2004-05.
• Key social and economic programs, such as:
• Measures in support of low- and modest-income families.
• Initiatives to support and encourage the acquisition of skills and learning.
• Investment in innovation and research and development.
• Nearly $75 billion in total new funding recently announced as part of the 10-YearPlan to Strengthen Health Care and the new framework for equalization and Territorial Formula Financing (TFF).

The aging of the population will bring new pressures

• Canada's population will begin to age sharply within the next 10 years, owing mainly to the aging of the "baby boom" generation as well as continued increases in life expectancy and declines in fertility rates. This means that Canada's overall population, which is currently growing by around 1 per cent each year, is expected to begin to decline by the middle of this century. These trends will only be partly offset by continued immigration.
• These factors will have a significant impact on our workforce. Currently there are more than five people of working age for every person of retirement age. Within thenext 15 years, this ratio will fall to four people of working age for every person 65years of age and older.
• Population aging will put significant pressure on Canada's public finances. Government program spending will increase as a result of increased demand for social programs, in particular health care and public pensions.
• Continued debt reduction will help the Government to better deal with the fiscal challenges associated with population aging and will provide it with the flexibility needed to foster long-run economic and productivity growth.

The federal debt remains on a permanent downward track

• The Government announced in Budget 2004 that it was setting an objective of reducing the federal debt-to-GDP ratio to 25 per cent within 10 years.
• The Government is on track to meet or better this long-term debt objective. This would bring the federal debt-to-GDP ratio back to where it was in the mid-1970s.
• Reducing the federal debt-to-GDP ratio to 25 per cent would mean that about 12 cents of every revenue dollar would go to service the debt compared to about 19 cents in 2003-04.

Canada's strong fiscal position reflects a prudent approach to budget planning

Prudent Approach to Fiscal Planning Sound fiscal management Balanced budgets or better Average of private sector economic forecasts Contingency Reserve and economic prudence

• The significant turnaround in Canada's fiscal situation and uninterrupted surpluses since 1997-98 are the result of sound fiscal management based on:
• A commitment to balanced budgets or better.
• The use of the average of private sector economic forecasts for fiscal planning.
• A prudent approach to fiscal planning, which entails including in the budget planan annual Contingency Reserve to guard against unforeseen circumstances, which if not needed reduces the federal debt. Additional economic prudence is also incorporated, which if not needed may be used to fund otherpriorities.

Sound fiscal management has allowed the Government to make long-term commitments

Table 1.3
New Federal Investments Under the 10-Year Plan to Strengthen Health Care and New Frameworks for Equalization and Territorial Formula Financing (TFF)

	Cumulative 10-year investment
	(billions of dollars)
Increased Canada Health Transfer levels	35.3
Wait times reduction	5.5
Medical equipment	0.5
Total new funding for health care	41.3
New equalization framework	28.8
New TFF framework	4.6
Total new equalization and TFF funding	33.4

• Prudent fiscal planning and the significant reduction in the federal debt have allowed the Government to make major investments in the priorities of Canadians, while at the same time allowing it to continue meeting its fiscal targets.
• The most recent example of this is the proposed new funding of nearly $75 billion over the next10 years provided to the provinces and territories in support of health care, equalization and TFF (subject to passage of authorizing legislation), which provides the provinces and territories with a growing and predictable revenue track.
• On September 16, 2004, Canada's First Ministers signed the 10-Year Plan to Strengthen Health Care. Under this plan, the Government of Canada will provide $41.3 billion in new health care funding over the next 10 years to reduce wait times and improve access to care.
• A new framework for equalization and TFF will ensure that payments to the provinces and territories increase by $33.4 billion over the next 10 years relative toBudget 2004 levels for 2004-05. The Government also commits to review the overall funding levels of equalization and TFF after five years.

The federal-provincial-territorial sector is expected to be in surplus forthe sixth consecutive year in 2003-04

• Both the federal and provincial-territorial governments have contributed to the significant turnaround in Canada's fiscal situation over the last 10 years. However, since 2002-03 the provincial-territorial sector has returned to a deficit position. In 2003-04 the provincial-territorial deficit is estimated to be $3.8 billion. This is expected to improve significantly this year and beyond.
• The federal-provincial-territorial surplus is estimated at $5.3 billion for 2003-04, which represents a significant improvement from 1993-94, when the sector posted a$58.9-billion deficit.
• The commitment to balanced budgets or better at the federal level combined with an improving provincial-territorial outlook, particularly in light of recent increases in federal transfers, suggest that Canada's fiscal situation will remain strong.

The debt burden continues to fall across both orders of government

• The provincial-territorial debt-to-GDP ratio is expected to be 23.6 per cent in 2003-04, a decline of 5.1 percentage points from its peak of 28.7 per cent in 1999-2000.
• The federal debt burden remains much higher than the combined provincial-territorial debt burden. As a result, the federal government continues to face much higher debt-servicing charges than the provincial-territorial sector.

Canada's Fiscal Performance: An International Perspective

Comparing Fiscal Results Across Countries Two important factors need to be taken into account in making international comparisons: differences in accounting methods among countries which affect the comparability of data, and differences in financial responsibilities among levels of government within countries. For these reasons, the standardized System of National Accounts definitions and data are used, and the focus is the total government sector (i.e., the combined national and subnational levels) when making comparisons across G-7 countries. The Organisation for Economic Co-operation and Development (OECD) produces acomplete series of estimates based on this system. Unless otherwise indicated, the data presented in this annex are based on the June 2004 OECD Economic Outlook.

 

Comparing Fiscal Results Between the Canadian and U.S. Federal Governments It is also important to note that there are certain fundamental differences in the accounting practices and responsibilities of the Canadian and U.S. federal governments. The U.S. federal budgetary balance includes the substantial surpluses in the social security system, whereas surpluses in the Canada Pension Plan are not included in the Canadian federal figures. For this reason, the Canadian federal balance is more comparable with the "on-budget" balance in the U.S., while U.S. government debt is more comparable with federal market debt in Canada.

Canada is again expected to be the only G-7 country to record a surplus in 2004 and 2005

• In 2003, on a total government basis,^[1] Canada was the only G-7 country to post a surplus. This was the second consecutive year that Canada was the only G-7 country in surplus.
• This was also the seventh consecutive year that Canada has been in surplus on thisbasis-the only G-7 country to have recorded seven consecutive surpluses since 1960, the first year for which comparable international fiscal statistics are available from the OECD.
• Canada is expected to continue to be the only G-7 country in surplus again in 2004, according to OECD estimates of the total government sector financial position.
• The OECD also expects that this will continue in 2005.

Canada is expected to have the lowest debt burden among theG-7countries in 2004

• Between 1995 and 2003, Canada's ratio of total government net financial liabilities toGDP was reduced by 34.4 percentage points, to 34.9 per cent of GDP. This is Canada's lowest debt burden on a total government basis innearly 20 years.
• As a result, Canada is projected by the OECD to have gone from having the second highest total government debt burden among G-7 countries in the mid-1990s to having the lowest debt burden among G-7 countries by the end of 2004. This would be the first time since the OECD started publishing these estimates in 1960 that Canada's debt burden would be the lowest among the G-7 countries.

Unlike the U.S., the federal government in Canada has maintained a budgetary surplus since 1997-98

• The improved federal fiscal situation in Canada is in stark contrast to recent developments in the United States at the federal level. Like Canada, the U.S. federal government achieved a significant turnaround in its budgetary balance in the second half of the 1990s, moving from large deficits to surpluses. However, since 2001-02 Canada has remained in surplus while the U.S. has returned to large deficits.
• The Canadian federal government posted a surplus of C$9.1 billion, or 0.7 per cent ofGDP, in 2003-04, while the U.S. government incurred a record deficit of US$413 billion, or 3.6 per cent of GDP. Moreover, the U.S. government's "on-budget" deficit,^[2] which is more directly comparable to the Canadian federal balance, was US$568 billion or 4.9 per cent of GDP.
• While a balanced budget or better is expected for Canada in 2004-05, a very large U.S. budget deficit is expected.

The federal market debt-to-GDP ratio in Canada fell below thatoftheU.S. in 2003-04

• As a result of continued surpluses at the federal level in Canada and the recent deterioration in U.S. federal finances, the federal market debt-to-GDP ratio in Canada fell below the U.S. figure in 2003-04 for the first time since 1977-78.
• The Canadian federal market debt-to-GDP ratio fell to 36.1 per cent in 2003-04, while the U.S. figure rose for the third consecutive year to 37.3 per cent.
• This gap is expected to widen in coming years.

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¹ Includes federal, provincial-territorial and local governments as well as the Canada Pension Plan and Quebec Pension Plan, measured on a National Accounts basis. The OECD uses the term "financial balance" to mean "budgetary balance." [Return]

²

The U.S. "on-budget" balance is more comparable with the Canadian federal budget balance because it excludes the pension surpluses of the U.S. social security system. The balance of the Canada Pension Plan is not included inthe Canadian federal budget balance figures. [Return]

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