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Chapter 3
Canada's Fiscal Progress

Highlights

• The Government of Canada posted a budgetary surplus of $1.6 billion in 2004-05, marking the first time in Canada's history that the federal government has been in surplus for eight consecutive years.
• As a result, the federal debt was $499.9 billion at the end of 2004-05, down $63.0 billion from its peak of $562.9 billion in 1996-97, resulting in interest savings of over $3 billion annually.
• Federal debt as a percentage of the economy was 38.7 per cent in 2004-05, a reduction of 29.7 percentage points from its peak of 68.4 per cent in 1995-96.
• To ensure that the federal debt burden continues to fall, the Government of Canada is announcing a new objective of reducing the federal debt-to-GDP (gross domestic product) ratio to below 20 per cent by 2020.
• The "virtuous circle" of improved fiscal and economic performance has given the Government the means to invest in key priority areas.
• Canada's fiscal situation is the strongest among the Group of Seven (G7) countries. In 2004 Canada was the only G7 country to post a total government surplus. Canada also had the lowest debt-to-GDP ratio among G7 countries in 2004.

Eighth consecutive budgetary surplus

• A budgetary surplus of $1.6 billion was achieved in 2004-05. This marks the eighth consecutive year the federal budget has been in surplus, the first time this has happened in Canada's history.
• As a result, the federal debt has been reduced by $63.0 billion over the past eight years, resulting in interest savings of over $3 billion annually.

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 since Confederation. Federal debt, referred to in the fall Economic and Fiscal Update, the budget documents, The Fiscal Monitor and the Annual Financial Report of the Government of Canada, is the accumulated deficit. It is the federal government's main measure of debt.

The federal debt burden has been reduced significantly.

• The reduction of the federal debt combined with strong economic growth-the best in the G7 since 1997-has resulted in a significant decline in the federal debt-to-GDP ratio.
• This ratio is the most appropriate measure of the debt burden, since it measures the federal debt relative to the ability of the nation's taxpayers to finance it.
• As a share of GDP, federal debt dropped to 38.7 per cent in 2004-05, down from the peak of 68.4 per cent in 1995-96. This is the ninth consecutive year in which the federal debt-to-GDP ratio has declined, bringing it to its lowest level since 1983-84.

.reducing federal debt charges as a share of revenues

• The reduction in the federal debt burden, combined with lower interest rates, has allowed the Government to reduce the share of revenues used to service the debt, leaving a greater share of revenues available to address other priorities.
• Federal debt charges as a percentage of budgetary revenues have declined from 37.6 per cent in 1995-96 to 17.2 per cent in 2004-05, the lowest ratio since the late 1970s.

The Government is committed to continue reducing the debt burden

• With the aging of Canada's population, the country will face increases in aging-related expenditures, such as elderly benefits and health care. In order to meet these future pressures, it is critical that the federal government maintain a strong focus on fiscal discipline and debt reduction over the next several years, before the major impacts of population aging are felt.
• In the 2004 budget, the Government set a long-run goal of reducing the debt-to-GDP ratio to 25 per cent by 2014-15.
• To ensure that the federal debt burden continues to fall, the Government of Canada is now announcing a new objective of reducing the federal debt-to-GDP ratio to below 20 per cent by 2020.
• Reducing the federal debt-to-GDP ratio to below 20 per cent would mean that less than 10 cents of every revenue dollar would go to service the debt, compared to 17.2 cents in 2004-05.

The decline in federal program expenses was the major contributor to fiscal consolidation

• The decline in program expenses as a percentage of the economy was the major contributor to the elimination of the deficit and the emergence of eight consecutive budgetary surpluses.
• The ratio of federal program expenses to GDP has declined significantly from 16.8 per cent in 1992-93 to 12.6 per cent in 2004-05.
• Excluding one-time spending in 2004-05, program expenses as a share of GDP were 11.8 per cent, up slightly from 11.6 per cent in 2003-04.

About half of the increase in program expenses in 2004-05 was due to one-time spending

Table 3.1
Federal Program Expenses

	2003-04	2004-05	Change
	(millions of dollars)
Major transfers to persons	41,960	42,619	659
Major transfers to other levels
of government
Support for health care and other social programs	22,341	23,081	740
Wait Times Reduction Fund		4,250	4,250
Medical Equipment Fund		500	500
Early learning and child care		700	700
Fiscal arrangements and other transfers	9,351	13,340	3,989
Offshore Revenues Accords		2,830	2,830
Other transfers	-2,300	-2,746	-446
Total	29,392	41,955	12,563
Subsidies and other transfers	22,964	25,001	2,037
Other program expenses	47,039	53,097	6,057
Of which: AECL environmental liabilities		2,319	2,319
Total program expenses	141,355	162,672	21,316

• Program expenses amounted to $162.7 billion in 2004-05, an increase of $21.3 billion, or 15.1 per cent, from 2003-04. Increases were recorded in all major components, primarily reflecting the impact of previous budget measures.
• Transfers to the provinces and territories accounted for $12.6 billion or almost 60 per cent of the increase in program spending in 2004-05.
• Approximately half of the $21.3-billion increase, or $10.6 billion, was due to one-time spending, including:

• $4.3 billion for the Wait Times Reduction Fund.
• $2.8 billion for the Offshore Revenues Accords.
• $2.3 billion for Atomic Energy of Canada Limited (AECL) environmental liabilities.
• $700 million for early learning and child care.
• $500 million for medical equipment.

• About 80 per cent of these one-time expenses related to transfers to provinces and territories. Excluding one-time expenses, program spending was up 7.6 per cent.

The revenue-to-GDP ratio has declined since 2000 as a result of tax cuts

• Budgetary revenues as a percentage of GDP represent an approximate measure of the overall federal "tax burden" in that it compares the total of all federal revenues collected to the size of the economy.
• The ratio stood at 15.4 per cent in 2004-05. It has been relatively stable since 2001-02, but is down significantly from an average ratio of 17.0 per cent over the period 1996-97 to 2000-01.
• This decline is primarily due to the tax reduction measures announced in 2000, which significantly reduced personal and corporate income taxes, as well as reductions in employment insurance premium rates every year.

Improved finances have allowed the Government to make investments in key priorities

Major Investments in the Priorities of Canadians $100-billion Five-Year Tax Reduction Plan Significant new funding for health care Additional funding for less prosperous provinces and the territories Support for early learning and child care Support for post-secondary education and skills development Investments in research and innovation New Deal for Cities and Communities International assistance Defence and security

• The Government's improved fiscal situation, combined with low inflation, has led to low interest rates 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, which was fully implemented by 2004-05. This is the largest tax cut in Canadian history.
• Significant new funding for health care.
• A new framework for equalization and Territorial Formula Financing to support provincial and territorial spending on public services in less prosperous regions of the country.
• Investments in key social programs, such as early learning and child care, housing and Aboriginal programs.
• Strategic investments to build a world-class research environment and develop a highly skilled and educated workforce.
• The New Deal for Cities and Communities, which includes investments in Green Municipal Funds and transferring the equivalent of 5 cents per litre of the federal gas tax by 2009-10.
• Increased funding for international assistance, including debt relief for poor countries towards meeting the Government's pledge to double assistance by 2010-11 from its 2001-02 level.
• New investments in defence, including new equipment and an expansion of the number of troops, as well as funding for key national security initiatives.

The Government has increased its support for health care

• The most significant of recent investments is the $41 billion in new health care funding to be provided to the provinces and territories over the next 10 years in order to ensure quality health care for Canadians.
• Cash transfers for health care will increase by more than 20 per cent in 2005-06, from $16.3 billion to $19.6 billion.
• After 2005-06, the Canada Health Transfer will automatically grow by 6 per cent annually.
• Over the next 10 years, federal cash transfers for health care will almost double, reaching $30.5 billion by 2013-14.
• This represents a major financial commitment by the Government, given that the 6-per-cent annual escalator significantly exceeds the expected 4.5-per-cent growth in nominal GDP, which is the broadest measure of the Government's tax base.
• The Organisation for Economic Co-operation and Development (OECD) has endorsed this new federal funding:

"With a long-term federal contribution to provincial health budgets now agreed, provinces should focus on greater efficiency, instead of seeking additional federal funding, in order to meet health care objectives..To achieve associated efficiency gains, these arrangements should be made impervious to any further renegotiation efforts over the 10 year period. They provide the provinces with a clear basis for long term planning and allow them to concentrate their efforts on delivering better results than achieved under the previous arrangements." (

OECD, Economic Survey of Canada 2004)

The provincial-territorial sector recorded a surplus in 2004-05

• Both the federal and provincial-territorial governments have contributed to the significant turnaround in Canada's fiscal situation over the last 12 years.
• In 2004-05, the provincial-territorial sector is estimated to have recorded an aggregate surplus of $6.8 billion, with seven provinces and one territory recording balanced budgets or better.
• The provincial-territorial sector has now posted surpluses in four of the last six years and is expected to remain in surplus in 2005-06.

The debt burden continues to fall for both orders of government

• The provincial-territorial debt-to-GDP ratio is expected to decline to 22.2 per cent in 2004-05, a decline of 6.5 percentage points from its peak of 28.7 per cent in 1999-2000. This marks the fifth consecutive annual decline in the provincial-territorial debt burden.
• 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.

Provincial debt burdens vary significantly

• Debt burdens vary considerably from one province to another.
• Newfoundland and Labrador and Nova Scotia have the highest debt burdens in the country, at 60.7 per cent and 41 per cent of GDP, respectively.
• All other provinces have a debt burden that is lower than that of the federal government.
• Alberta is the only province in a net asset position, amounting to 8.1 per cent of GDP.

Canada is again expected to be the only G7 country to record a surplus in 2005 and 2006

• According to the OECD, Canada was the only G7 country to record a surplus in 2004 for the total government sector.
• Canada's surplus for 2004 was 1.3 per cent of GDP, compared to an average deficit of 4.1 per cent in the G7 countries.
• Moreover, Canada is expected to continue to be the only G7 country to post a total government surplus again in 2005 and 2006, according to the OECD.

Data for International Comparisons 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 OECD's 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, as well as the public pension systems). In Canada, the total government sector includes federal, provincial-territorial and local governments as well as the Canada Pension Plan and Quebec Pension Plan.

Canada's debt burden has declined from the second highest to the lowest among G7 countries

• Since peaking in 1995, Canada's total government net debt as a share of GDP fell 37.1 percentage points to 32.2 per cent of GDP in 2004.
• As a result, Canada now has the lowest debt burden among G7 countries. In the mid-1990s, Canada's debt burden was the second highest.
• Moreover, Canada is projected to be the only G7 country with a declining debt burden in 2005.

Canada's program spending as a share of GDP is now well below the G7 average

• Between 1992 and 2004, Canada's total government program spending as a share of GDP fell 9.4 percentage points. In contrast, the average for the G7 countries remained virtually unchanged over this period.
• Canada's program spending relative to GDP is now well below the G7 average and is the third lowest in the G7, only slightly greater than in the United States and Japan. The OECD expects that this will continue in both 2005 and 2006.

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