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Archived - Chapter 2
Fiscal Projections

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Highlights

Approach to Budget Planning and Fiscal Forecasting

The Government's approach to budget planning involves a number of important elements.

The economic assumptions that underlie the Government's fiscal projections are based on the average of private sector forecasts.

While the Government's projection is the basis for fiscal planning, the fiscal projections of four private sector organizations are presented separately, allowing a comparison between different views on the fiscal outlook. The four private sector organizations used their own economic assumptions to prepare their fiscal projections. Private sector projections are presented for the current and next five years.

Changes in the Fiscal Outlook Since the March 2007 Budget

Table 2.1 shows the changes to the Government's fiscal position as a result of economic and fiscal developments since the March 2007 budget. The Government's fiscal situation is now significantly stronger than projected at the time of the budget. This is primarily due to the recent unexpected strength of the economy, which is increasing revenues.

Table 2.1
Summary of Changes in the Fiscal Outlook Since the March 2007 Budget


 

Actual

Projection



 

2006-07

2007-08

2008-09


 (billions of dollars)

March 2007 budget underlying surplus

9.2

3.3

3.0

Impact of economic and fiscal developments

 

 

 

  Budgetary revenues

 

 

 

    Personal income tax

-1.2

1.8

2.3

    Corporate income tax

2.7

5.2

4.0

    Other income tax

-0.5

1.2

1.2

    Goods and services tax

0.8

1.6

2.1

    Other revenues

1.8

2.2

2.0


  Total revenues

3.7

12.0

11.6

  Program expenses1

 

 

 

    Major transfers to persons

0.2

0.1

-0.4

    Major transfers to other levels of government

0.4

0.0

-0.1

    Direct program expenses

0.1

1.1

-0.3


  Total program expenses

0.7

1.3

-0.8

  Public debt charges

0.2

-0.2

0.0

Total economic and fiscal developments

4.6

13.1

10.8

Measures announced in this Economic Statement (Table 2.2)

 

-4.8

-9.4

Revised underlying surplus

13.8

11.6

4.4

Planned debt reduction

 

-10.0

-3.0

Planning surplus

 

1.6

1.4


1 A positive number implies a decrease in spending and an improvement in the budgetary balance. A negative number implies an increase in spending and a deterioration in the budgetary balance.

Note: Totals may not add due to rounding.

In Budget 2007, the underlying surplus was estimated at $9.2 billion for 2006-07, $3.3 billion for 2007-08 and $3.0 billion for 2008-09. The final budgetary surplus for 2006-07, at $13.8 billion, was larger than expected, primarily because of higher-than-expected corporate income tax revenues.

Revenues are projected to be $12.0 billion higher in 2007-08 and $11.6 billion higher in 2008-09. Corporate income tax revenues, which represent about 16 per cent of total revenues, account for 35 to 45 per cent of the upward revision to the revenue projections. Projections for personal income tax, other income tax and goods and services tax (GST) revenues have also been revised upward significantly. All other revenues are expected to be $2.2 billion higher in 2007-08 and $2.0 billion higher in 2008-09 than projected in the budget.

Program expenses are expected to be $1.3 billion lower in 2007-08 than projected in the budget, largely reflecting lower-than-expected departmental spending. Higher spending in 2008-09 largely reflects the impact of higher inflation in 2007, which pushes up the cost of statutory transfers to individuals.

At this time of global economic uncertainty, the Government is acting to bolster confidence and encourage investment by providing tax reduction measures totalling nearly $60 billion. These include:

The cost of these measures over the current and next five fiscal years is summarized in Table 2.2.

Taken together, the impact of economic and fiscal developments since the March 2007 budget as well as measures announced in this Economic Statement and planned debt reductions result in a planning surplus of $1.6 billion in 2007-08 and $1.4 billion in 2008-09.

Table 2.2
Proposed Tax Reductions


2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

Total


(billions of dollars)

Business competitiveness

             

  Reduce general corporate
    tax rate1

 

1.3

1.6

1.7

3.4

6.1

14.1

  Accelerate small business 
    rate reduction

 

0.2

0.1

     

0.3


  Total

1.5

1.7

1.7

3.4

6.1

14.4

Tax relief for individuals and families

             

  GST reduced to 5%2

1.4

6.0

6.3

6.6

6.8

7.1

34.2

  Reduce 15.5% rate to 15%

1.6

1.3

1.3

1.4

1.4

1.5

8.4

  Increase to basic 
   personal amount3

1.9

0.6

       

2.5


  Total

4.8

7.9

7.6

7.9

8.2

8.6

45.0

Total proposed tax reductions

4.8

9.4

9.3

9.7

11.6

14.7

59.4


Note: Totals may not add due to rounding.

1 For federal corporate income tax rates, see Table 3.2, "General Federal Corporate Income Tax Rate Reductions."
2 Costs include adjustments to tobacco excise duties.
3 This represents costs of accelerating previously legislated increases.

 

Tax Back Guarantee

  • To ensure that Canadians benefit directly from reductions in the federal debt, Budget 2007 legislated the Tax Back Guarantee. Under the Guarantee, the Government dedicates the effective interest savings from debt reduction each year to permanent and sustainable personal income tax reductions.
  • The Government plans to reduce the federal debt by $10 billion in 2007-08. As a result, the total debt reduction since 2005-06 is now over $37 billion. From 2008-09, the Government is planning on reducing the debt by $3 billion annually.
  • The additional interest savings secured since the 2007 budget amount to $1.2 billion annually by 2012-13, bringing the total value of tax relief provided under the Tax Back Guarantee to $2.5 billion annually. This additional Tax Back Guarantee will be directed to help fund the personal income tax reductions set out in this Economic Statement.
  • This means that $2.5 billion each year is not going to interest payments, but rather back to Canadian taxpayers.

 

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13


 

(billions of dollars)

Budget 2007

1.1

1.3

1.3

1.3

1.3

1.3

Additional interest savings

 

0.6

0.8

0.9

1.1

1.2


Total Tax Back Guarantee

1.1

1.9

2.1

2.2

2.4

2.5


Note: The effective interest savings resulting from debt reduction will be calculated as the annual reduction in federal debt multiplied by the average effective interest rate on the Government's unmatured debt, currently 5.1 per cent. Additional interest savings include savings from the additional debt reduction of $5 billion in 2006-07, $7 billion in 2007-08, and the planned debt reduction of $3 billion annually starting in 2008-09.

Summary of Fiscal Projections

Table 2.3 summarizes the Government's fiscal projections for the current and next five fiscal years, taking into account the cost of the tax measures announced in this Economic Statement. The underlying surplus is projected to be $11.6 billion in 2007-08, $4.4 billion in 2008-09 and $4.3 billion in 2009-10. It rises to $7.5 billion in 2010-11, $10.2 billion in 2011-12 and $12.8 billion in 2012-13.

The Government plans to reduce the debt by $10 billion in 2007-08. Thereafter, it will plan to reduce the debt by $3 billion in each year as set out in Budget 2007.

Table 2.3
Summary Statement of Transactions
(Including Measures Announced in This Economic Statement)


 

Actual

Projection



 

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13


 

(billions of dollars)


Budgetary revenues

236.0

243.9

245.8

255.4

266.7

277.8

288.9

Program expenses

188.3

198.4

207.6

217.0

225.1

233.7

242.9

Public debt charges

33.9

34.0

33.7

34.2

34.0

33.9

33.3

Total expenses

222.2

232.3

241.4

251.1

259.2

267.6

276.2

Underlying surplus

13.8

11.6

4.4

4.3

7.5

10.2

12.8

Planned debt reduction

 

10.0

3.0

3.0

3.0

3.0

3.0

Planning surplus1

 

1.6

1.4

1.3

4.5

7.2

9.8

Federal debt2

467.3

457.3

454.3

451.3

448.3

445.3

442.3

Per cent of GDP3

             

  Budgetary revenues

16.3

15.9

15.3

15.2

15.2

15.1

15.1

  Program expenses

13.0

13.0

12.9

12.9

12.8

12.7

12.7

  Public debt charges

2.3

2.2

2.1

2.0

1.9

1.8

1.7

  Total expenses

15.4

15.2

15.0

14.9

14.7

14.6

14.4

  Federal debt

32.3

29.9

28.3

26.9

25.5

24.3

23.1


Note: Totals may not add due to rounding.
1 The remaining surplus of $1.6 billion in 2007-08 will be used to reduce federal debt or fund priorities.
2 Based on planned debt reduction.
3 Per cent of GDP calculations do not include the commitment to dedicate interest savings to personal income tax reductions.

Tax Burden Declines Due to Tax Relief Measures

Chart 2.1 - Revenue-to-GDP Ratio

One perspective on movements in tax revenues can be obtained by examining the revenue ratio-total revenues collected by the federal government in relation to total income in the economy (GDP). This ratio can be thought of as a proxy for the overall federal "tax burden" imposed on the economy.

The revenue ratio is projected to decline from 16.3 per cent in 2006-07 to 15.1 per cent by 2011-12-its lowest level in nearly 50 years-reflecting the impact of tax reduction measures announced in Budget 2006, the October 2006 Tax Fairness Plan, Budget 2007 and this Economic Statement.

Program Expense-to-GDP Ratio to Decline

Chart 2.2 - Program Expense-to-GDP Ratio to Decline

As shown in Chart 2.2, program expenses as a share of GDP rose rapidly between 2000-01 and 2004-05. This trend was reversed in 2005-06, and program expenses are projected to remain slightly below 13 per cent of GDP for the next two years, with the program expense-to-GDP ratio falling to 12.7 per cent in 2011-12.

The Government is committed to limiting program expense growth, on average, to below the rate of nominal growth of the economy over the medium term. Overall program spending is projected to increase 5.4 per cent this year and on average 4.1 per cent annually over the remainder of the planning period.

Within this spending, transfers to persons, including elderly, children's and Employment Insurance benefits, are projected to grow on average 3.9 per cent annually over the planning period.

Major transfers to other levels of government are projected to grow 4.7 per cent per year on average over the planning period, funding a comprehensive plan that restores fiscal balance. These transfers are now on a long-term principles-based footing.

Direct program expenses are expected to grow 4.4 per cent per year on average over the planning period, funding important investments in infrastructure, the Canada First Defence Strategy and other priorities.

Debt-to-GDP Ratio on Track to 25-Per-Cent Target by 2011-12

Chart 2.3 - Federal Debt-to-GDP Ratio

The Government is planning on reducing the federal debt by $10 billion in 2007-08. This will bring total debt reduction since 1996-97 to over $105 billion, with over 35 per cent ($37.4 billion) taking place in the last three years.

The federal debt-to-GDP ratio, which measures the debt in relation to the size of the economy, stood at 32.3 per cent in 2006-07, its lowest level since 1981-82. Taking into account planned debt reduction, along with the projected growth of the economy, the debt-to-GDP ratio is expected to fall to below 25 per cent in 2011-12, three years ahead of the original target and its lowest level since the late 1970s.

As set out in Advantage Canada, the Government believes that we should aim, as a country, to eliminate Canada's total government net debt by 2021. Canadian governments remain on track to achieve this objective.

Canada Has the Best Fiscal Situation in the G7

Chart 2.4 - Comparison of Total Government Financial Balances

According to the most recent projections from the Organisation for Economic Co-operation and Development (OECD), Canada is again expected to be the only Group of Seven (G7) country in surplus in 2007 and 2008. The OECD forecasts Canada's surplus at 0.8 and 0.7 per cent of GDP in 2007 and 2008 respectively, compared to an expected average deficit of about 2.3 per cent of GDP in all G7 countries during that time.

Outlook for Budgetary Revenues

Table 2.4
Revenue Outlook


 

Actual

Projection 



 

2006-2007

2007-2008

2008-2009

2009-2010

2010-2011

2011-2012

2012-2013


 

(millions of dollars)

Tax revenues

             

Income tax

             

Personal income tax

110,477

113,485

121,280

127,825

135,645

143,375

152,170

Corporate income tax

37,745

41,530

37,860

38,045

39,025

39,260

38,260

Other income tax

4,877

5,860

5,915

5,895

5,695

5,695

5,710

Total income tax

153,099

160,880

165,055

171,765

180,365

188,330

196,140

Excise taxes/duties

             

Goods and services tax

31,296

30,300

27,400

28,635

30,020

31,235

32,430

Customs import duties

3,704

4,070

4,265

4,500

4,715

4,980

5,215

Other excise taxes/duties

10,317

10,080

10,185

10,085

9,700

9,695

9,825

Total excise taxes/duties

45,317

44,450

41,845

43,220

44,435

45,910

47,470

Total tax revenues

198,416

205,330

206,905

214,985

224,800

234,240

243,610

Employment Insurance 
  premium revenues

16,789

16,490

16,470

17,005

17,460

18,030

18,755

Other revenues

20,761

22,075

22,410

23,410

24,430

25,540

26,540

Total budgetary revenues

235,966

243,895

245,780

255,400

266,695

277,810

288,905

Per cent of GDP

             

Personal income tax

7.6

7.4

7.6

7.6

7.7

7.8

8.0

Corporate income tax

2.6

2.7

2.4

2.3

2.2

2.1

2.0

Goods and services tax

2.2

2.0

1.7

1.7

1.7

1.7

1.7

Total tax revenues

13.7

13.4

12.9

12.8

12.8

12.8

12.7

Employment Insurance 
  premium revenues

1.2

1.1

1.0

1.0

1.0

1.0

1.0

Other revenues

1.4

1.4

1.4

1.4

1.4

1.4

1.4

Total

16.3

15.9

15.3

15.2

15.2

15.1

15.1


Note: Totals may not add due to rounding.

Table 2.4 sets out the Government's projection for budgetary revenues. Taking into account the measures announced in this Economic Statement (see Table 2.2), budgetary revenues are expected to grow by 3.4 per cent in 2007-08 and by 0.8 per cent in 2008-09. Revenue growth is projected to average about 4.1 per cent starting in 2009-10. Over the planning period, revenues are expected to grow by less than growth in the overall economy. As a result, the revenue-to-GDP ratio is projected to fall from 16.3 per cent in 2006-07 to 15.1 per cent for 2012-13.

Personal income tax revenues-the largest component of budgetary revenues-are projected to increase by $3 billion, or 2.7 per cent, to $113 billion in 2007-08. This is much lower than the 6.3-per-cent projected growth in the personal income tax base, reflecting the impact of the increase in the basic personal amount and the reduction in the lowest personal income tax rate, announced in this Statement, as well as tax relief introduced in Budget 2007 and the October 2006 Tax Fairness Plan. Starting in 2008-09, 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.

Recent growth in corporate income tax revenues has been well in excess of growth in profits. This likely reflects a decline in pools of losses and credits from prior periods available to apply against corporate tax liabilities. Detailed data to confirm whether or not these factors occurred will only become available with a two-year lag. Corporate income tax revenues, which grew 19 per cent in 2006-07, are expected to increase 10 per cent, to $41.5 billion, in 2007-08. Over the planning period, two primary factors affect the projection of corporate income tax receipts: ongoing growth in profits and tax relief measures. In 2008-09, in particular, corporate income tax revenues are projected to decline by 8.8 per cent, reflecting the reduction in the general corporate income tax rate, the elimination of the corporate surtax and the acceleration of the 1-percentage-point reduction in the small business rate, all effective January 1, 2008.

Other income tax revenues-largely withholding taxes levied on non-residents-are expected to increase by 20.2 per cent to $5.9 billion in 2007-08, reflecting strong collections through the first five months of 2007-08. Other income tax revenues are projected to remain relatively flat in 2008-09 and then decline in 2009-10 and 2010-11, reflecting the impact of the elimination of the withholding tax in respect of both arm's-length interest and non-arm's length interest with the U.S., implemented by the Canada-U.S. Tax Treaty, and the Budget 2007 initiative to eliminate the withholding tax in respect of arm's-length interest paid to lenders resident in other countries.

GST revenues are expected to decline by 3.2 per cent to $30.3 billion in 2007-08, primarily reflecting the reduction in the GST rate to 5 per cent beginning on January 1, 2008. GST revenues are projected to decline further, by 9.6 per cent in 2008-09, once the full cost of the reduction in the GST rate to 5 per cent is fully reflected. GST revenues are projected to grow in line with the taxable consumption base starting in 2009-10.

Customs import duties are projected to increase 9.9 per cent to $4.1 billion in 2007-08, consistent with strong growth through the first five months of 2007-08. Over the remainder of the planning period, customs import duties are projected to grow at an average rate of about 5 per cent.

Other excise taxes and duties are projected to decline by 2.3 per cent in 2007-08, to $10.1 billion, after an increase of 5.2 per cent in 2006-07. The increase in 2006-07 largely reflected the introduction of an export charge on softwood lumber exports to the U.S. effective October 12, 2006, consistent with the Canada-United States Softwood Lumber Agreement, as well as a one-time charge on returned duty deposits under the Agreement. Other excise taxes and duties are projected to continue to decline, on average, over the remainder of the planning period.

Employment Insurance (EI) premium revenues are expected to decline 1.8 per cent to $16.5 billion in 2007-08, reflecting the decline in the premium rate from $1.87 to $1.80 per $100 of insurable earnings effective January 1, 2007. Consistent with the EI premium rate-setting mechanism, implemented in 2005, EI premiums are assumed to match projected EI program costs from 2008 to 2013. The projection assumes that the EI premium rate is reduced to $1.73 per $100 of insurable earnings in 2008. Accordingly, the rate for employers is assumed to drop by 10 cents per $100 of insurable earnings in 2008. These are the rates forecast by the Chief Actuary to generate just enough premium revenue in 2008 to cover the projected payments during the year.

Other revenues include those of consolidated Crown corporations, net gains/losses 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. In 2007-08, other revenues are expected to increase by 6.3 per cent to $22.1 billion.

Outlook for Program Expenses

Table 2.5
Program Expenses Outlook


Actual

Projection



 

2006-2007

2007-2008

2008-2009

2009-2010

2010-2011

2011-2012

2012-2013


(millions of dollars)

Major transfers to persons

             

  Elderly benefits

30,284

32,030

33,590

35,090

36,685

38,505

40,545

  Employment Insurance (EI) benefits1

14,084

14,495

15,100

15,590

16,015

16,530

17,195

  Children's benefits

11,214

11,880

11,955

12,040

12,130

12,220

12,325


Total

55,582

58,405

60,650

62,720

64,825

67,255

70,065

Major transfers to other levels of government

             

  Federal transfers in support of 
    health and social programs

28,640

31,315

33,190

35,105

36,865

38,720

40,675

  Fiscal arrangements2

13,066

14,465

14,770

15,385

16,025

16,675

17,320

  Clean Air and Climate Change 
    Trust Fund

1,519

           

  Patient Wait Times Guarantee Trust

612

           

  Transition Trust

614

           

  Alternative Payments for 
    Standing Programs

-3,177

-3,085

-3,235

-3,405

-3,610

-3,850

-4,115

  Early learning and child care

650

           

  Canada's cities and communities

590

800

1,000

2,000

2,000

2,000

2,000


  Total

42,514

43,495

45,725

49,085

51,280

53,545

55,880

Direct program expenses

90,173

96,465

101,255

105,165

109,040

112,895

116,940

Total program expenses

188,269

198,365

207,625

216,970

225,145

233,695

242,880

Per cent of GDP

             

  Major transfers to persons

3.8

3.8

3.8

3.7

3.7

3.7

3.7

  Major transfers to other levels 
    of government

2.9

2.8

2.8

2.9

2.9

2.9

2.9

  Direct program expenses

6.2

6.3

6.3

6.3

6.2

6.2

6.1

  Total program expenses

13.0

13.0

12.9

12.9

12.8

12.7

12. 7


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 program costs (amounting to $1.7 billion in 2006-07) relate to administration costs.
2 Fiscal arrangements include Equalization, Territorial Formula Financing, the Youth Allowances Recovery and statutory subsidies.

Table 2.5 provides an overview of the Government's projections for program expenses. Program expenses are expected to grow by $10.1 billion, or 5.4 per cent, in 2007-08. Growth is expected to average 4.1 per cent over the remainder of the planning period.

Program expenses consist of three major components: 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.

Major ongoing transfers to other levels of government are projected to increase by $4.4 billion or 11.2 per cent in 2007-08 (see Chart 2.5), reflecting a $2.7-billion increase in transfers in support of health and social programs and a $1.4-billion increase in fiscal arrangements. Once one-time transfers are taken into account, major transfers in 2007-08 are projected to be $1.0 billion, or 2.3 per cent, higher than in 2006-07. The one-time payments in 2006-07 total $3.4 billion and are in support of clean air and climate change, patient wait times, post-secondary education and training, and early learning and child care.

Over the next five years, major transfers to other levels of government are projected to increase from $43.5 billion in 2007-08 to $55.9 billion in 2012-13, averaging 5.1-per-cent growth per year.

Chart 2.5 - Major Transfers to Other Levels of Government

This growth reflects the impact of rising transfers for health, Equalization and Territorial Formula Financing, as well as growing support for cities and communities. Revised Equalization figures for 2008-09 are based on data available at the time the forecast was prepared, and include the impact of recently announced measures related to the implementation of Budget 2007. Final estimates for 2008-09 Equalization entitlements will be released in December 2007. As the data required to calculate Equalization payments for 2009-10 to 2012-13 is not yet available, it is assumed that Equalization will grow at the rate of growth in the private sector forecast of nominal GDP, adjusted for changes in the share of recipient provinces' population. Estimates of Equalization entitlements for those years will be made once the required data becomes available.

Direct program expenses include expenses for National Defence, Crown corporations, transfers administered by departments (for example, transfers for farm income support and Aboriginal programming) and departmental operating costs. In 2006-07, direct program expenses increased by 10.3 per cent largely as a result of one-time accrual adjustments for public sector pension liability and a change in the creditworthiness of outstanding tax debts owed to the Government. For 2007-08, the total amount of direct program expenses is $1.1 billion lower than expected at the time of the budget, reflecting tight control over the implementation of programs announced in previous budgets. Direct program expenses are expected to grow on average by 3.9 per cent over the following five years.

Private Sector Five-Year Fiscal Projections

Chart 2.6 - Private Sector Projections of Underlying Surplus on a Public Accounts Basis

To provide context for the Government's fiscal projections, four private sector organizations developed their own fiscal projections. The four organizations are the Conference Board of Canada, the Institute for Policy Analysis of the University of Toronto, Global Insight and the Centre for Spatial Economics.

The four private sector organizations prepared their fiscal projections based on their own individual economic forecasts and information publicly available as of the end of September. The forecasts for direct program expenses and transfers to other levels of government were provided by the Department of Finance. In preparing its fiscal projections, the Government had access to financial results for August and partial revenue results for September 2007, which were not available to the four private sector organizations when they completed their projections.

In addition, the private sector projections were adjusted to reflect the cost of measures proposed in this Economic Statement, which rise from $4.8 billion in 2007-08 to $14.7 billion in 2012-13 (Table 2.2). While these adjustments do not have an impact on the variation among the private sector projections, they lower the projected surplus levels.

The range of the private sector projections is larger than in the past. The range between the lowest and highest projection is $4.2 billion in the first year of the planning period and increases to $14.9 billion by 2012-13. This range is considerably higher than that presented in the 2006 Economic and Fiscal Update, when the high point of the range was only $3.5 billion by the final year of the projection. The significant range between projections in this Economic Statement reflects differences in both forecasts of GDP growth and the rate at which growth in GDP translates into tax revenues.

The range in the private sector fiscal forecasts provides an example of the uncertainty around the economic and fiscal forecasts. Small changes in revenues and expenses can lead to significant changes in the Government's budgetary balance. For example, if both revenues and expenses differ by 1 per cent from what was projected, the impact on the Government's budgetary balance would be $4.6 billion.

Chapter 1 describes the risks to the economic forecast. Changes in economic conditions have a direct impact on the Government's budgetary balance. In addition, the translation of economic developments into changes in spending and tax revenues includes a degree of uncertainty. The following two sections provide an overview of the sensitivity of the fiscal situation to both of these sources of uncertainty.

Table 2.6
Private Sector Projections of Underlying Surplus on a Public Accounts Basis


2007-2008

2008-2009

2009-2010

2010-2011

2011-2012

2012-2013


 

(billions of dollars)

Conference Board of Canada

15.3

10.8

11.8

14.2

15.9

17.2

University of Toronto

11.5

2.4

0.7

2.3

3.0

2.3

Global Insight

11.0

2.8

2.6

3.9

5.4

5.0

Centre for Spatial Economics

13.6

7.7

6.0

8.3

11.5

14.1

Range of private sector projections

4.2

8.4

11.1

11.9

13.0

14.9

Average of private sector projections

12.9

5.9

5.3

7.2

8.9

9.7

Government of Canada projection based on private sector economic assumptions

11.6

4.4

4.3

7.5

10.2

12.8

Difference between Government of Canada projection and the average private sector projection

-1.3

-1.5

-1.0

0.4

1.3

3.1


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. EI premium rates are assumed to be fixed during the first calendar year in which the shock occurs, and to adjust for subsequent years, such that EI revenues exactly offset program expenses, consistent with legislation governing EI rate setting. Equal and opposite impacts would result from an increase of equal magnitude in real or nominal GDP growth and interest rates.

Table 2.7
Estimated Impact of a One-Year, 1-Per-Cent Decrease in Real GDP on Federal Revenues, Expenses and Budgetary Balance


 

Year 1

Year 2

Year 5


 

(billions of dollars)

Federal revenues

     

Tax revenues

     

  Personal income tax

-1.2

-1.5

-1.8

  Corporate income tax

-0.4

-0.5

-0.5

  Goods and services tax

-0.3

-0.4

-0.4

  Other tax revenues

-0.2

-0.2

-0.2


  Total tax revenues

-2.2

-2.6

-3.0

Employment Insurance premium revenues

-0.1

0.7

0.7

Other revenues

0.0

0.0

0.0

Total budgetary revenues

-2.3

-1.9

-2.3

Federal expenses

     

Major transfers to persons

     

  Elderly benefits

0.0

0.0

0.0

  Employment Insurance benefits

0.6

0.6

0.7

  Children's benefits

0.0

0.0

0.0


  Total

0.6

0.6

0.7

Other program expenses

-0.1

-0.1

-0.3

Public debt charges

0.1

0.2

0.5

Total expenses

0.5

0.6

0.8

Budgetary balance

-2.8

-2.6

-3.1


Note: Totals may not add due to rounding.

A 1-per-cent decrease in real GDP reduces the budgetary balance by $2.8 billion in the first year, $2.6 billion in the second year and $3.1 billion in the fifth year:

Table 2.8
Estimated Impact of a One-Year, 1-Per-Cent Decrease in the GDP Deflator on Federal Revenues, Expenses and Budgetary Balance


 

Year 1

Year 2

Year 5


 

(billions of dollars)

Federal revenues

     

Tax revenues

     

  Personal income tax

-1.7

-1.7

-1.7

  Corporate income tax

-0.4

-0.5

-0.5

  Goods and services tax

-0.3

-0.4

-0.4

  Other tax revenues

-0.2

-0.2

-0.2


  Total tax revenues

-2.7

-2.7

-2.9

Employment Insurance premium revenues

-0.1

-0.1

-0.1

Other revenues

-0.1

-0.1

-0.1

Total budgetary revenues

-2.8

-2.9

-3.1

Federal expenses

     

Major transfers to persons

     

  Elderly benefits

-0.2

-0.4

-0.4

  Employment Insurance benefits

-0.1

-0.1

-0.1

  Children's benefits

-0.1

-0.1

-0.1


  Total

-0.4

-0.5

-0.6

Other program expenses

-0.3

-0.3

-0.7

Public debt charges

0.0

0.1

0.4

Total expenses

-0.6

-0.7

-1.0

Budgetary balance

-2.2

-2.2

-2.2


Note: Numbers may not add due to rounding.

A 1-per-cent decrease in nominal GDP resulting solely from lower GDP inflation (assuming that the Consumer Price Index moves in line with GDP inflation) lowers the budgetary balance by $2.2 billion in the first, second and fifth years:

Table 2.9
Estimated Impact of a Sustained 100-basis-Point Decrease in All Interest Rates on Federal Revenues, Expenses and Budgetary Balance


 

Year 1

Year 2

Year 5


 

(billions of dolllars)

Federal revenues

-0.4

-0.5

-0.9

Federal expenses

-1.2

-1.8

-2.4

Budgetary balance

0.8

1.3

1.5


Note: Totals may not add due to rounding.

A decrease in interest rates raises the budgetary balance by $0.8 billion in the first year, $1.3 billion in the second and $1.5 billion in the fifth. The improvement stems entirely from decreased expenses associated with public debt charges. The impact on debt charges rises through time as longer-term debt matures and is refinanced at lower rates. Moderating the overall impact is a fall in revenues associated with the decrease in the rate of return on the Government's interest-bearing assets, which are recorded as part of non-tax revenues. This becomes significant in the fifth year, rising to almost $1 billion.

Risks to the Fiscal Projections

Additional uncertainty also arises from the translation of economic forecasts into spending and tax revenue projections, as growth in tax bases does not always translate in a predictable way into tax revenues.

The following are the key sources of uncertainty:

 

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