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Chapter 1
Overview

Introduction

The Government of Canada has proposed a comprehensive multi-year plan to shape Canada's response to emerging economic challenges and opportunities. The plan, presented in the companion document released with this Update, A Plan for Growth and Prosperity, is aimed at realizing a vision of Canada where quality of life is second to none. It builds on four pillars:

• Creating opportunities for all Canadians to ensure that every Canadian has the opportunity to acquire the necessary skills and no Canadian faces insurmountable barriers to achieve personal fulfillment through work.
• Advancing Canada as an innovative economy to take greater advantage of Canada's human potential and primary research excellence, the ever-increasing pace of technological changes and growing commercialization opportunities.
• Positioning Canada at the centre of global commerce and networks to fully benefit from emerging global opportunities.
• Building the right environment for private investment to foster ongoing increases in the country's prosperity.

This Update proposes a number of initiatives for inclusion in Budget 2006 to begin implementing the Plan. The Update also summarizes recent economic developments, reviews the updated economic forecasts for Canada by private sector economists, and presents five-year fiscal projections as developed by four private sector organizations.

Economic Growth Is Stronger and More Balanced

Canadian economic growth strengthened in 2004 and 2005 and has become more balanced as net exports have begun to recover despite a significant appreciation of the Canadian dollar. Higher energy prices have boosted profits and encouraged investment in the energy sector. Consumer spending remains strong, reflecting a robust job market and healthy income growth.

The Canadian labour market has continued to strengthen. Over 200,000 new jobs have been created so far this year and the unemployment rate fell to 6.6 per cent in October, its lowest level in the last 30 years.

Private sector economists expect real gross domestic product (GDP) to grow by 2.8 per cent in 2005 and to pick up to 2.9 per cent in 2006 and 3.1 per cent in 2007.

Continued Fiscal Strength

The Government recorded its eighth consecutive budget surplus last year and is committed to maintain a balanced budget or better this year and over the next five years.

Canada was the only Group of Seven (G7) country to report a total government surplus in 2004 and is projected to be the only G7 country to be in surplus again in 2005 and 2006.

As in the past, projections of the surplus have been prepared by four private sector forecasting firms, based on the average of private sector economic forecasts.

Including the measures proposed before the November 2005 Economic and Fiscal Update, and after adjusting for the Contingency Reserve and normal economic prudence, fiscal surpluses for planning purposes are projected at $8.2 billion for the 2005-06 fiscal year, rising to $11.3 billion by 2010-11. The initiatives proposed in this Update will be funded within this planning surplus.

The upward revisions to the surplus projections reflect a number of developments since the 2005 budget, including:

• Higher projected corporate income tax receipts, reflecting the carry-forward of the better-than-expected 2004-05 outcome and the recent run-up in energy prices, which is boosting the profitability of a significant portion of the Canadian corporate sector.
• Stronger-than-expected growth in personal income tax receipts, in part reflecting the strong growth in employment.
• Lower public debt charges over the planning period due primarily to lower projected interest rates since the time of the budget.
• The economic prudence included in the Budget 2005 projection, which has been eliminated for the 2005-06 fiscal year and reduced in the following years, as is the normal practice in the fall Update.

Implementing the Plan for Growth and Prosperity

As first steps in implementing the challenges outlined in the Plan, the Government has proposed measures on four fronts.

Creating Opportunities for All Canadians

To help realize the potential of all Canadians, the Government proposes:

• $2.2 billion over five years to improve student financial assistance and help make post-secondary education more affordable for lower- and middle-income Canadians.
• $550 million over five years to extend Canada Access Grants to 55,000 students from low-income families in all years of undergraduate education.
• $3.5 billion over this year and the next five years to increase workplace-based training.
• $1 billion in 2005-06 for provinces and territories for the Post-Secondary Education Innovation Fund.
• $265 million over five years to assist Canadians with disabilities in participating in the workforce.
• $1.3 billion over five years to improve settlement and integration services for new immigrants.

Advancing an Innovative Economy

To help strengthen Canada's innovative capacity to prosper in the global, knowledge-based economy, the Government proposes:

• More than $2.1 billion in new funding in 2005-06 and over the next five years to sustain Canada's leadership in university-based research.
• Close to $200 million over the next five years to provide up to 3,500 internships and up to 500 M.B.A. scholarships for natural and health sciences and engineering graduates, and to support knowledge-based clusters to enhance the capability of firms to perform research and development (R&D), adopt new technologies and commercialize discoveries.
• A goal of devoting 5 per cent of federal R&D to the priorities of the developing world.

Positioning Canada at the Centre of Global Commerce and Networks

To help Canada be at the centre of global commerce and fully benefit from emerging global opportunities, the Government proposes:

• $485 million over five years to implement CAN-Trade, a new international commerce strategy that will better position up to 5,000 Canadian firms, particularly small and medium-sized enterprises, in priority markets such as China and India.
• $590 million over the next five years to support transportation infrastructure investments and other initiatives enhancing Canada's Pacific gateway.
• An additional $100 million over the next five years to continue supporting broadband deployment in rural, remote and First Nations communities.

Building the Right Investment Environment

To create the right investment environment for prosperity, the Government proposes:

• Setting a new objective of reducing the debt-to-GDP ratio to 20 per cent by 2020, to help address pressures associated with an aging population and underscore the Government's commitment to fiscal discipline.
• Introducing a major personal income tax cut plan to improve the rewards from working, investing and saving. This includes:

• Creating a climate for investment and job creation by:

• Promoting regulatory efficiency through a five-year $90-million investment that will reduce the administrative burden on small business and improve access to information on programs and services across all levels of government.

A New Tax Reduction Plan The new tax reduction plan will deliver more than $30 billion in personal and corporate income tax relief over the current year and the next five years, 95 per cent of which will go to individual Canadians. The plan builds on $22 billion of tax reduction measures set out in Budget 2005 and the Government's $100-billion Five-Year Tax Reduction Plan in 2000. As in the past, the Government will deliver more, sooner, as resources permit.

The Way Forward

Through A Plan for Growth and Prosperity, the Government has set out a medium-term economic framework for action.

The Government recognizes, however, that no single initiative or budget can guarantee growth and prosperity, and in the years to come will take further steps to fulfill the priorities set out in the Plan.

Summary of Spending Initiatives and Tax Reductions

Table 1.1 presents the fiscal impact of the spending initiatives and tax reductions proposed since the February 2005 budget. The initiatives in support of the Plan for Growth and Prosperity amount to $43.2 billion over the period 2005-06 to 2010-11. In addition, the Government has proposed other measures since the 2005 budget, notably the Government's response to higher energy costs.

The cumulative cost of all measures proposed since the 2005 budget over the six years from 2005-06 to 2010-11 is $49.8 billion. Of this amount, $10.8 billion reflects decisions and programs already announced (Table 1.2) and $39.0 billion is proposed in today's Update.

Table 1.1
Initiatives Proposed Since the February 2005 Budget

	2005-06	2006-07	2007-08	2008-09	2009-10	2010-11	Total
	(millions of dollars)
A. A Plan for Growth and Prosperity
Creating Opportunities for All Canadians
Enhancing Canada's     World-Class Workforce	1,077	623	1,197	1,568	1,579	1,579	7,622
Meeting the Demographic     Challenge	34	161	246	316	397	397	1,551
Improving Labour Mobility and     Labour Market Efficiency		10	10	15	15	15	65
Total	1,112	794	1,453	1,899	1,991	1,991	9,238
Advancing an Innovative  Economy Leadership in  University-Based Research	500	275	335	335	335	335	2,115
Strengthening International     Research Networks	30						30
Accelerating the    Commercialization of     New Technologies		24	47	49	50	30	199
Total	530	299	382	384	385	365	2,344
At the Centre of Global Commerce and Networks
Positioning Canada in Global    Business Networks		49	94	108	114	120	485
Creating World-Class    Gateways		93	158	160	151	129	690
Total		142	251	268	265	249	1,175
Building the Right Investment Environment
Tax Reductions to     Support Prosperity	5,335	5,050	4,695	4,095	4,290	6,800	30,265
Promoting Regulatory Efficiency	50	18	18	18	18	18	140
Promoting Energy Efficiency		2	3	5	10	30	50
Total	5,385	5,070	4,716	4,118	4,318	6,848	30,455
Total	7,027	6,305	6,802	6,669	6,959	9,452	43,213
B. Government's Response to Higher Energy Costs	1,041	566	238	238	150	150	2,383
C. Canada-Ontario Agreement  (excluding amounts included in the Plan for Growth and Prosperity, as well as the Government's response to higher energy costs)	160	230	450	350	200	100	1,490
D. Other Announced Initiatives	599	708	435	360	302	298	2,702
E. Total	8,827	7,808	7,925	7,617	7,610	10,000	49,788
Of which: F. Initiatives Proposed Before the November 2005 Economic and Fiscal Update (see Table 1.2)	2,258	1,775	1,833	1,851	1,611	1,507	10,835
G. Initiatives Proposed in the November 2005 Economic and Fiscal Update	6,569	6,034	6,092	5,766	6,000	8,493	38,953
Note: Totals may not add due to rounding.

Table 1.2
Initiatives Proposed Before the November 2005 Economic and Fiscal Update

	2005-06	2006-07	2007-08	2008-09	2009-10	2010-11	Total
	(millions of dollars)
Government's Response to Higher Energy Costs	1,041	566	238	238	150	150	2,383
Canada-Ontario Agreement
Higher education	400		350	400	400	400	1,950
Housing and infrastructure	150	150	100	100	100		600
Cities	149	149					298
Labour market development and immigration	80	300	400	560	634	634	2,608
Climate change		40	140	158	200		738
Corporate tax collection and meat inspection	10	80	350	250	100	100	890
Total	789	719	1,340	1,468	1,434	1,134	7,084
Less: Funding included in Budget 2005 and the response to higher energy costs	171	218	180	215	275	75	1,334
Net cost	618	501	1,160	1,253	1,159	1,059	5,750
Other Announced Post-Budget Funding Decisions
Airport rents reduction		48	72	97	132	176	525
Wage Earner Protection Program	4	32	32	32	32	32	164
Canadian Museum for Human Rights	10	10	10	20	20		70
Prince Rupert Port upgrade	10	20					30
Global Centre for Pluralism	30						30
International Fishing Governance	6	7	7				20
Quebec City's 400th anniversary celebrations	11	34	45	19			110
Measures to aid Darfur	120	78					198
Afghanistan (extended mission deployment)	286	286	50				622
Pakistan	57						57
Immigration measures	68	93	9	9	11	11	201
Other announced initiatives	165	205	265	248	182	171	1,236
Total	767	814	491	425	377	390	3,263
Less:
Funding included in Budget 2005	168	106	55	65	75	92	560
Net cost	599	708	435	360	302	298	2,702
Total net costs	2,258	1,775	1,833	1,851	1,611	1,507	10,835
Note: Totals may not add due to rounding.
Errata: The following corrections to this electronic version of Table 1.2 were made November 29 2005. In the column for year 2010-11: the amount of $200 million on the Climate change line was deleted; the amount on the next Total line was reduced to $1,134 million from $1,334 million; and the amount on the Funding included in Budget 2005 and the response to higher energy cost line was reduced to $75 million from $275 million.

Summary of Fiscal Projections Including Measures

Table 1.3
Fiscal Outlook Including November 2005 Update Measures

	2005-06	2006-07	2007-08	2008-09	2009-10	2010-11	Total
	(billions of dollars)
Status quo underlying surplus	13.4	15.0	16.4	15.7	16.5	19.8	96.8
Initiatives proposed before the November 2005 Economic and Fiscal Update	2.3	1.8	1.8	1.9	1.6	1.5	10.8
Allocation for prudence
Contingency Reserve	3.0	3.0	3.0	3.0	3.0	3.0	18.0
Economic prudence		1.0	2.0	3.0	3.5	4.0	13.5
Total	3.0	4.0	5.0	6.0	6.5	7.0	31.5
Status quo planning surplus	8.2	9.2	9.5	7.9	8.4	11.3	54.5
Total proposed tax and spending initiatives in the fall update	6.6	6.0	6.1	5.8	6.0	8.5	39.0
Remaining planning surplus	1.6	3.2	3.4	2.1	2.4	2.8	15.5
Note: Totals may not add due to rounding.

• After subtracting the measures proposed prior to the November 2005 Economic and Fiscal Update, the Contingency Reserve and amounts allocated for economic prudence, the surplus for planning purposes is projected to total $54.5 billion through 2010-11.
• After deducting the measures proposed in this Update, the remaining planning surpluses total $15.5 billion over the 2005-06 to 2010-11 period. The remaining surpluses will be used to address other priorities of Canadians.
• Table 1.4 presents the summary statement of transactions for 2005-06 to 2010-11, including the cost of measures announced since Budget 2005.
• 2005-06 will mark the ninth consecutive year in which the budget has been in balance or surplus. The Government is projecting balanced budgets or better through 2010-11.
• The Government's commitment to balanced budgets or better is backed by the $3-billion Contingency Reserve and amounts for economic prudence of $1 billion in 2006-07, rising to $4 billion by 2010-11. If not needed to deal with unforeseen circumstances, the Contingency Reserve will be applied to reduce the federal debt.
• Federal debt as a percentage of GDP is projected to decline from 38.7 per cent in 2004-05 to 29.1 per cent in 2010-11, on track to meet the objective set out in the 2004 budget of reducing the debt-to-GDP ratio to 25 per cent by 2014-15. This Update sets out a new objective of lowering the debt-to-GDP ratio to 20 per cent by 2020.
• The decline in the debt has meant that debt charges continue to absorb less of every revenue dollar collected. Public debt charges are projected to account for 14 cents of every revenue dollar in 2010-11, down from about 17 cents in 2004-05 and a peak of 39 cents in 1990-91.

Table 1.4
Summary Statement of Transactions (Including Measures)

		Projection
	Actual
	2004-05	2005-06	2006-07	2007-08	2008-09	2009-10	2010-11
	(billions of dollars)
Budgetary transactions
Budgetary revenues	198.4	202.3	212.3	222.0	229.9	239.3	247.8
Total expenses
Program expenses	-162.7	-163.7	-170.7	-178.8	-187.2	-195.8	-203.6
Public debt charges	-34.1	-34.0	-34.4	-34.8	-34.6	-34.5	-34.4
Total expenses	-196.8	-197.7	-205.1	-213.6	-221.8	-230.4	-238.0
Budgetary surplus	1.6	4.6	7.2	8.4	8.1	8.9	9.8
Prudence
Contingency Reserve		3.0	3.0	3.0	3.0	3.0	3.0
Economic prudence			1.0	2.0	3.0	3.5	4.0
Total		3.0	4.0	5.0	6.0	6.5	7.0
Remaining surplus		1.6	3.2	3.4	2.1	2.4	2.8
Federal debt
Assuming balanced budget	499.9	499.9	499.9	499.9	499.9	499.9	499.9
Assuming Contingency Reserve     is applied to debt reduction		496.9	493.9	490.9	487.9	484.9	481.9
Per cent of GDP
Budgetary revenues	15.4	14.9	14.9	14.8	14.7	14.6	14.4
Program expenses	12.6	12.1	11.9	12.0	12.0	12.0	11.9
Public debt charges	2.6	2.5	2.4	2.3	2.2	2.1	2.0
Total expenses	15.3	14.6	14.4	14.3	14.2	14.1	13.9
Planning surplus	0.1	0.1	0.2	0.2	0.1	0.1	0.2
Federal debt
Assuming balanced budget	38.7	36.8	35.0	33.4	32.0	30.5	29.1
Assuming Contingency Reserve is       applied to debt reduction		36.6	34.6	32.8	31.2	29.6	28.1
Note: Totals may not add due to rounding.

• Budgetary revenues as a share of GDP are expected to decline by 0.5 percentage point in 2005-06 and by an additional 0.5 percentage point between 2005-06 and 2010-11. The decline is due to both the personal income tax reductions proposed in this Update and the decline in other revenues, which largely reflects the one-time gain from the sale of the Government's remaining shares in Petro-Canada in 2004-05.
• Program expenses as a share of GDP are expected to decline by 0.5 percentage point in 2005-06, reflecting significant one-time expenses in 2004-05. Over the planning period, program expenses are expected to grow in line with nominal GDP, averaging about 12 per cent of GDP, close to a postwar low.

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