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Chapter 3
Fiscal Projections

Highlights

• The Government is planning on balanced budgets for the current and next five years, although given the downside risks, balanced budgets cannot be guaranteed.
• Weaker economic growth has significantly reduced expected revenues.
• Program expenses in 2008–09 are expected to be lower than projected in Budget 2008, but in 2009–10 they are expected to be higher than projected in the budget, largely reflecting increased transfers to persons and other levels of government. Public debt charges are lower than projected in both years due to lower projected interest rates.
• After taking into account the actions proposed in this Economic and Fiscal Statement, the projected surplus is $0.8 billion in 2008–09, $0.1 billion in 2009–10 and $0.1 billion in 2010–11. The projected surplus rises to $1.1 billion in 2011–12, $4.2 billion in 2012–13 and $8.1 billion in 2013–14.
• The tax burden, as measured by total revenues as a share of gross domestic product (GDP), is projected to decline from 15.8 per cent in 2007–08 to 15.2 per cent by 2013–14—its lowest ratio in nearly 50 years.
• Program expenses are projected to increase temporarily from 13.0 per cent of GDP in 2007–08 to 13.4 per cent in 2009–10, reflecting weaker economic growth. Over the medium term, program spending is projected to grow in line with the economy.
• Public debt charges are projected to be relatively flat as a share of GDP over the forecast horizon, at around 2.0 per cent, before falling to 1.8 per cent in 2013–14.

Introduction

This chapter presents the Government’s fiscal projections for 2008–09 to 2013–14.

• The fiscal projections reflect financial results through September 2008 and were based on the average private sector economic forecast of November 14, 2008.
• 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. These forecasts were prepared in early November. Private sector projections are presented for the current and next five years.
• An analysis of the sensitivity of the fiscal projections to economic changes and to specific fiscal risks is also presented in this chapter.

Changes in the Fiscal Outlook Since the February 2008 Budget

Table 3.1
Summary of Changes in the Fiscal Outlook Since the February 2008 Budget

	Actual	Projection
	2007–08	2008–09	2009–10
	(billions of dollars)
February 2008 budget underlying surplus	10.2	2.3	1.3
Impact of economic and fiscal developments
Budgetary revenues
Personal income tax	0.5	0.3	-4.0
Corporate income tax	-1.8	-2.8	-3.5
Other income tax	-0.2	-0.1	-0.6
Goods and services tax	-0.8	-0.7	-1.2
Other revenues	0.1	0.0	0.4
Total revenues	-2.1	-3.2	-8.9
Program expenses1
Major transfers to persons	0.1	-0.4	-1.2
Major transfers to other levels of  government2	-0.4	-0.1	-0.4
Direct program expenses	2.0	1.3	0.4
Total program expenses	1.7	0.9	-1.1
Public debt charges	-0.2	0.2	2.8
Total economic and fiscal developments	-0.6	-2.1	-7.2
Impact of actions in this Statement		0.6	6.0
Revised surplus	9.6	0.8	0.1
Note: Totals may not add due to rounding. 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. 2 Includes putting Equalization on a sustainable growth path.

The Government’s fiscal situation is now weaker than projected at the time of the February 2008 budget. This is primarily due to downward revisions to the economic forecast, which has resulted in lower projected revenues. The negative impact is lessened by actions the Government is taking to protect its fiscal position. Table 3.1 shows the changes to the Government’s fiscal position as a result of both economic and fiscal developments since the February 2008 budget and the actions taken in this Statement.

In Budget 2008, the underlying surplus was estimated at $10.2 billion for 2007–08, $2.3 billion for 2008–09 and $1.3 billion for 2009–10. The final budgetary surplus for 2007–08, at $9.6 billion, was $0.6 billion lower than forecast, as lower-than-expected tax revenues were largely offset by lower-than-expected program expenses.

Based on economic and fiscal developments since Budget 2008, revenues are now projected to be $3.2 billion lower in 2008–09 and $8.9 billion lower in 2009–10. The downward revisions reflect both the weaker-than-expected 2007–08 results and the weaker economic outlook. The downward revisions in 2008–09 are driven by revisions to the corporate income tax forecast. For 2009–10, all major revenue streams have been revised down, reflecting the weaker economic outlook.

Total program expenses before actions are expected to be lower in 2008–09 than projected in Budget 2008, largely as a result of lower-than-expected direct program expenses. In 2009–10, program expenses are higher than projected as increased Employment Insurance costs and elderly benefits outweigh a small downward revision in direct program expenses. Equalization costs in both years are somewhat higher than projected in the budget.

Major transfers to persons are expected to be somewhat higher than projected in the budget in 2008–09 and 2009–10 due to higher projected inflation as well as increased costs for the Employment Insurance program reflecting a weaker projected labour market. Transfers to other levels of government have been adjusted to reflect the changes to the Equalization program outlined by the Minister of Finance at the November 3, 2008 Federal-Provincial-Territorial Finance Ministers Meeting. Specifically, Equalization has been put on a growth path that is in line with the economy, and is projected to be higher than forecast in Budget 2008.

Direct program expenses before actions are expected to be $1.3 billion lower than projected in the budget in 2008–09, as lower-than-expected departmental spending in 2007–08 is expected to continue in 2008–09. Public debt charges are expected to be $0.2 billion lower than forecast in the budget in 2008–09 and $2.8 billion lower than forecast in 2009–10 due to lower projected interest rates.

The Government is taking steps to maintain a balanced budget over the coming period of lower growth, although balanced budgets cannot be guaranteed. The impact of fiscal actions taken over this and the next five years is summarized in Table 3.2.

As noted in Chapter 2, actions have been taken to support the availability of longer-term credit by purchasing up to $75 billion in insured mortgage pools through Canada Mortgage and Housing Corporation under the Insured Mortgage Purchase Program. This program has the effect of increasing public debt and therefore public debt charges. As the interest rate charged by the Government is higher than the federal cost of borrowing, revenues from this program more than offset the increase in debt charges. The net gain from this program is expected to be $0.2 billion in 2008–09, increasing to $1.1 billion in 2009–10, and decreasing thereafter. The projected budgetary balance is also improved by actions taken to ensure effective management of government spending and appropriate public sector compensation, and reduced by a temporary reduction in Registered Retirement Income Fund (RRIF) withdrawals as described in Chapter 2.

In summary, changes since the February 2008 budget result in a revised underlying surplus of $0.8 billion in 2008–09 and $0.1 billion in 2009–10.

Table 3.2
Actions Affecting the Budgetary Balance

	2008– 2009	2009– 2010	2010– 2011	2011– 2012	2012– 2013	2013– 2014
	(billions of dollars)
Insured Mortgage Purchase
Program (IMPP)
Increase in revenue	0.5	3.3	3.3	3.2	3.2	2.4
Increase in public debt     charges1	-0.3	-2.3	-2.6	-2.8	-2.9	-2.2
Net IMPP	0.2	1.1	0.7	0.4	0.3	0.3
Effective management of   government spending1		4.3	1.9	1.6	1.1	1.1
Appropriate public sector   compensation1	0.6	0.6	0.9	1.0	1.0	1.0
Temporary reduction in   RRIF minimum withdrawals	-0.2
Total fiscal actions	0.6	6.0	3.5	3.0	2.4	2.4
Note: Totals may not add due to rounding. 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.

 

Summary of Fiscal Projections

Table 3.3
Summary Statement of Transactions

	Actual	Projection
	2007– 2008	2008– 2009	2009– 2010	2010– 2011	2011– 2012	2012– 2013	2013– 2014
	(billions of dollars)
Budgetary revenues	242.4	239.0	248.5	258.9	270.9	283.9	297.3
Program expenses	199.5	206.6	216.5	224.6	233.4	243.2	253.0
Public debt charges	33.3	31.6	31.9	34.3	36.5	36.5	36.2
Total expenses	232.8	238.2	248.4	258.8	269.8	279.7	289.1
Surplus	9.6	0.8	0.1	0.1	1.1	4.2	8.1
Federal debt1	457.6	456.8	456.7	456.6	455.5	452.5	449.5
Per cent of GDP
Budgetary revenues	15.8	14.9	15.4	15.3	15.2	15.2	15.2
Program expenses	13.0	12.9	13.4	13.3	13.1	13.0	12.9
Public debt charges	2.2	2.0	2.0	2.0	2.1	2.0	1.8
Total expenses	15.2	14.9	15.4	15.3	15.2	15.0	14.7
Federal debt	29.8	28.5	28.3	27.1	25.6	24.2	22.9
Note: Totals may not add due to rounding. 1 Based on planned debt reduction of $3 billion per year in 2012–13 and 2013–14.

Table 3.3 summarizes the Government’s fiscal projections for the current and next five fiscal years. The underlying surplus is projected to be $0.8 billion in 2008–09, $0.1 billion in 2009–10 and $0.1 billion in 2010–11. It rises to $1.1 billion in 2011–12, $4.2 billion in 2012–13 and $8.1 billion in 2013–14.

A useful 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 is a proxy for the overall federal "tax burden."

The revenue ratio is projected to decline from 15.8 per cent in 2007–08 to 15.2 per cent by 2013–14—its lowest ratio in nearly 50 years. In 2008–09, the ratio is projected to decline by nearly a full percentage point, to 14.9 per cent. This sharp decline reflects both corporate income tax and goods and services tax (GST) rate reductions. In addition, the projection assumes a one-time negative impact on corporate income tax revenues this year, due to a significant increase in corporate losses, which can be carried back three years. The increase in 2009–10 is due in part to a sharp increase in revenues from the Insured Mortgage Purchase Program discussed in Chapter 2.

As shown in Chart 3.2, program expenses as a share of GDP rose rapidly between 2000–01 and 2004–05. This trend was reversed in 2005–06. Program expenses are projected to remain below 13 per cent of GDP this year. Program expenses as a share of GDP are expected to increase in 2009–10. However, this reflects weaker projected GDP growth rather than a significant rise in the level of government expenditures. Aside from Employment Insurance benefits, which are one of the economy’s main automatic stabilizers, providing income replacement benefits to individuals who lose their jobs during times of economic weakness, federal program expenses are largely invariant to the economic cycle. Infrastructure spending, however, is expected to increase significantly, accounting for close to one-fifth of the increase in program expenses.

As GDP growth recovers, the ratio falls gradually over each year of the forecast horizon to 12.9 per cent by 2013–14. Public debt charges as a share of GDP are relatively flat over the forecast horizon at around 2.0 per cent before falling to 1.8 per cent in 2013–14.

The Government is committed to limiting growth in program spending, on average, to below the rate of growth of the economy over the medium term. Overall program spending is projected to increase 4.1 per cent annually over the next five years, in line with expected growth in nominal GDP.

Outlook for Budgetary Revenues

Table 3.4
Revenue Outlook

	Actual	Projection
	2007– 2008	2008– 2009	2009– 2010	2010– 2011	2011– 2012	2012–	2013– 2014
	(millions of dollars)
Tax revenues
Income tax
Personal income tax	113,063	118,685	121,460	127,365	135,445	143,290	151,330
Corporate income tax	40,628	34,080	33,090	35,390	35,750	36,765	38,950
Other income tax	5,693	5,815	5,525	6,015	6,220	6,510	6,860
Total income tax	159,384	158,580	160,070	168,770	177,410	186,560	197,145
Excise taxes/duties
Goods and services tax	29,920	26,840	27,640	29,060	30,485	31,895	33,465
Customs import duties	3,903	4,200	4,355	4,640	4,940	5,240	5,530
Other excise taxes/duties	10,384	10,770	10,520	10,230	10,095	10,285	10,225
Total excise taxes/duties	44,207	41,815	42,520	43,930	45,520	47,420	49,220
Total tax revenues	203,591	200,395	202,590	212,700	222,930	233,980	246,365
Employment Insurance   premium revenues	16,558	16,500	17,350	17,675	17,670	18,110	18,690
Other revenues	22,271	22,135	28,550	28,525	30,340	31,840	32,205
Total budgetary revenues	242,420	239,030	248,490	258,895	270,940	283,930	297,260
Per cent of GDP
Personal income tax	7.4	7.4	7.5	7.5	7.6	7.7	7.7
Corporate income tax	2.6	2.1	2.0	2.1	2.0	2.0	2.0
Goods and services tax	1.9	1.7	1.7	1.7	1.7	1.7	1.7
Total tax revenues	13.3	12.5	12.5	12.6	12.5	12.5	12.6
Employment Insurance     premium revenues	1.1	1.0	1.1	1.0	1.0	1.0	1.0
Other revenues	1.5	1.4	1.8	1.7	1.7	1.7	1.6
Total	15.8	14.9	15.4	15.3	15.2	15.2	15.2
Total absent Insured
Mortgage Purchase Program	15.8	14.9	15.2	15.2	15.1	15.0	15.0
Note: Totals may not add due to rounding.

Table 3.4 sets out the Government’s projection for budgetary revenues. Budgetary revenues are expected to decline by 1.4 per cent in 2008–09, largely due to corporate income tax and GST rate reductions. In addition, the projection assumes a one-time negative impact on corporate income tax revenues this year due to a significant increase in corporate losses, which can be carried back three years. Revenues are projected to increase by 4.0 per cent in 2009–10, boosted by the effect of the Insured Mortgage Purchase Program. With the projected recovery in nominal GDP growth over the remainder of the planning period, revenue growth is projected to average 4.6 per cent per year starting in 2010–11.

Personal income tax revenues—the largest component of budgetary revenues—are projected to increase by $5.6 billion, or 5.0 per cent, to $118.7 billion in 2008–09. 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, which grew 7.6 per cent in 2007–08, are expected to decline by 16.1 per cent, to $34.1 billion, in 2008–09, reflecting the 1.5-percentage-point reduction in the general corporate income tax rate, the acceleration of the reduction in the small business rate to 11 per cent and the elimination of the corporate surtax, all effective January 1, 2008. In addition, corporate income tax refunds are expected to increase sharply this year, as corporations with large losses apply these losses to taxable income from previous tax years. In 2009–10, corporate income tax revenues are projected to decline by 2.9 per cent, mainly reflecting a projected decline in profits in 2009, as well as an additional 0.5-percentage-point reduction in the general corporate income tax rate effective January 1, 2009. Over the remainder of the planning period, corporate income tax revenue growth is projected to average 4.2 per cent per year, as stronger projected growth in profits is partially offset by ongoing income tax rate reductions through 2012.

Other income tax revenues—largely withholding taxes levied on non-residents—are expected to increase by 2.1 per cent to $5.8 billion in 2008–09. Other income tax revenues are projected to decline in 2009–10, reflecting the impact of a slowing economy, the impact 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, and the elimination as of 2008 of the withholding tax on arm’s length interest payments to all non-residents.

GST revenues are expected to decline by 10.3 per cent to $26.8 billion in 2008–09, largely reflecting the reduction in the GST rate to 5 per cent effective January 1, 2008. GST revenues are generally projected to grow in line with the taxable consumption base starting in 2009–10.

Customs import duties are projected to increase by 7.6 per cent to $4.2 billion in 2008–09, consistent with projected growth in imports. Growth in both imports and customs import duties is projected to moderate to below 4 per cent in 2009–10, then to return to an annual average of about 6 per cent over the remainder of the planning period.

Other excise taxes and duties are projected to increase by 3.7 per cent in 2008–09, to $10.8 billion. Other excise taxes and duties are projected to decline, on average, over the remainder of the planning period, due in part to projected declines in tobacco consumption.

Employment Insurance (EI) premium revenues are expected to decline by 0.4 per cent to $16.5 billion in 2008–09, reflecting the decline in the premium rate from $1.80 to $1.73 per $100 of insurable earnings effective January 1, 2008, and the recent announcement that the rate will be maintained at $1.73 per $100 of insurable earnings in 2009. Consistent with the break-even principle, EI premiums are assumed to match projected EI program costs from 2010 to 2014. Once the legislation governing the new EI financing regime introduced in Budget 2008 is brought into force, the premium rate will be set by the Canada Employment Insurance Financing Board, such that EI revenues and expenditures break even over time.

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 2008–09, other revenues are expected to decrease by 0.6 per cent to $22.1 billion. Other revenues are projected to increase significantly by 29.0 per cent in 2009–10, largely due to the revenues associated with purchasing insured mortgage pools under the Insured Mortgage Purchase Program.

Outlook for Program Expenses

Table 3.5
Program Expenses Outlook

	Actual	Projection
	2007– 2008	2008– 2009	2009– 2010	2010– 2011	2011–	2012–	2013– 2014
	(millions of dollars)
Major transfers to persons
Elderly benefits	31,955	33,495	35,195	36,695	38,565	40,785	42,905
Employment Insurance    benefits1	14,298	15,415	16,575	16,335	16,325	16,720	17,250
Children’s benefits	11,894	11,930	12,065	12,305	12,420	12,475	12,540
Total	58,147	60,840	63,835	65,330	67,315	69,980	72,690
Major transfers to other   levels of government
Federal transfers in support    of health and social    programs	31,346	33,325	35,105	36,860	38,715	40,680	42,750
Fiscal arrangements2	14,603	15,110	15,940	16,490	17,105	17,940	18,850
Other	2,145
Alternative Payments for    Standing Programs	-2,720	-3,155	-3,225	-3,405	-3,610	-3,825	-4,010
Canada’s cities and    communities	778	1,000	2,000	2,000	2,000	2,000	2,000
Total	46,152	46,285	49,820	51,950	54,210	56,790	59,590
Direct program expenses	95,199	99,515	102,865	107,270	111,835	116,425	120,680
Total program expenses	199,498	206,640	216,520	224,550	233,355	243,195	252,965
Per cent of GDP
Major transfers to persons	3.8	3.8	4.0	3.9	3.8	3.7	3.7
Major transfers to other    levels of government	3.0	2.9	3.1	3.1	3.0	3.0	3.0
Direct program expenses	6.2	6.2	6.4	6.4	6.3	6.2	6.2
Total program expenses	13.0	12.9	13.4	13.3	13.1	13.0	12.9
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 3.5 provides an overview of the Government’s projections for program expenses. Program expenses are expected to grow by 3.6 per cent in 2008–09 and 4.8 per cent in 2009–10. Growth is expected to average 4.1 per cent per year over 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.

• Elderly benefits are projected to grow by $1.5 billion, or 4.8 per cent, to $33.5 billion in 2008–09. In the following five years, elderly benefits are projected to grow by an average of 5.1 per cent per year, reflecting the growth in the elderly population and changes in consumer prices, to which benefits are fully indexed.
• EI benefits are projected to increase by 7.8 per cent to $15.4 billion in 2008–09 and by another 7.5 per cent to $16.6 billion in 2009–10, reflecting projected significant increases in the number of unemployed as well as the indexation of maximum insurable earnings to the growth in the average industrial wage, which results in growth in the maximum weekly benefit.
• Children’s benefits, which consist of the Canada Child Tax Benefit (CCTB) and the Universal Child Care Benefit, are expected to remain at $11.9 billion in 2008–09. The growth in children’s benefits is largely determined by the growth in the number of children and changes in consumer prices, to which the CCTB is indexed, offset by growth in incomes.

Major transfers to other levels of government in 2008–09 are projected to be $0.1 billion, or 0.3 per cent, higher than in 2007–08. The $2.0-billion increase in transfers in support of health and social programs and the $0.5-billion increase in fiscal arrangements in 2008–09 more than offset the one-time payments totalling $2.1 billion in 2007–08 to provinces and territories in support of community development, public transit, police officer recruitment and carbon storage. Over the next five years, major transfers to other levels of government are projected to increase from $46.3 billion in 2008–09 to $59.6 billion in 2013–14, averaging 5.2-per-cent growth per year. This growth reflects the impact of rising transfers for health, Equalization and Territorial Formula Financing. Equalization has been put on a new sustainable growth path and will grow in line with the economy, increasing to $14.2 billion in 2009–10 from $13.6 billion in 2008–09. The growth in overall entitlements for 2009–10 is based on the average annual growth of GDP in 2007, 2008 and 2009.

Direct program expenses include expenses for National Defence and Crown corporations, transfers administered by departments (for example transfers for farm income support and Aboriginal programming) and departmental operating costs. The growth in direct program expenses reflects the impact of previous measures as no increases to direct program expenses are being introduced in this Statement. Direct program expenses are projected to grow by $4.3 billion or 4.5 per cent in 2008–09 and by $3.4 billion or 3.4 per cent in 2009–10. This includes significant growth in infrastructure funding, as outlined in Chapter 2.

Debt-to-GDP Ratio on Track to 25 Per Cent by 2012–13

The federal debt-to-GDP ratio, which measures the debt in relation to the size of the economy, stood at 29.8 per cent in 2007–08, 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 below 25 per cent in 2012–13, one year later than projected in Budget 2008.

Private Sector Five-Year Fiscal Projections

To provide context for the Government’s fiscal projections, four private sector organizations developed their own fiscal projections based on existing policy: the Conference Board of Canada, the Policy and Economic Analysis Program of the University of Toronto, Global Insight and the Centre for Spatial Economics.

The four organizations prepared their fiscal projections based on their own individual economic forecasts and information publicly available as of early November. The forecasts for direct program expenses and transfers to other levels of government were provided by the Department of Finance. The private sector organizations were asked to set EI premiums at levels sufficient to cover EI program costs from 2010 onwards. In preparing its fiscal projections, the Government had access to financial results for September 2008, which were not available to the four private sector organizations when they completed their projections.

In addition, the private sector projections, shown in Chart 3.4, were subsequently raised by the net impact of actions announced in this Statement, which are $0.6 billion in 2008–09, $6.0 billion in 2009–10 and $2.4 billion by 2013–14 (Table 3.2). While these adjustments raise the projected budgetary balance levels, as shown in Chart 3.5, they do not have an impact on the variation among the private sector projections.

The range between the lowest and highest projection is $1.3 billion in 2008–09 and $11.6 billion in 2009–10. The significant range between projections in 2009–10 is primarily due to very different views of the extent of the economic slowdown in 2009. The range narrows over the planning period as all four organizations project a recovery in economic conditions.

The range in the private sector fiscal forecasts highlights the uncertainty around the economic and fiscal forecasts. Small changes in revenues and expenditures 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 in 2008–09, the impact on the Government’s budgetary balance would be $4.8 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.

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:

• A one-year, 1-percentage-point decrease in real GDP growth driven equally by lower productivity and employment growth.
• A decrease in nominal GDP growth resulting solely from a one-year, 1-percentage-point decrease in the rate of GDP inflation.
• A sustained 100-basis-point decrease in all interest rates.

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 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	Year 5
	(billions of dollars)
Federal revenues
Tax revenues
Personal income tax	-1.7	-1.8	-2.1
Corporate income tax	-0.4	-0.4	-0.4
Goods and services tax	-0.3	-0.3	-0.3
Other tax revenues	-0.2	-0.2	-0.2
Total tax revenues	-2.6	-2.7	-3.1
Employment Insurance premium revenues	-0.1	0.7	0.8
Other revenues	0.0	0.0	0.0
Total budgetary revenues	-2.7	-2.0	-2.4
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	-0.2	-0.4
Public debt charges	0.0	0.1	0.4
Total expenses	0.5	0.6	0.7
Budgetary balance	-3.2	-2.6	-3.1
Note: Numbers may not add due to rounding.

A 1-percentage-point decrease in real GDP growth reduces the budgetary balance by $3.2 billion in the first year, $2.6 billion in the second year and $3.1 billion in the fifth year.

• Tax revenues from all sources fall by a total of $2.6 billion in the first year, $2.7 billion in the second year and $3.1 billion by the fifth year. Personal income tax revenues decrease as employment and wages and salaries fall. Corporate income tax revenues fall as output and profits decrease. GST revenues decrease as a result of lower consumer spending associated with the fall in employment and personal income.
• For the purpose of the simulations, it is assumed that EI premium rates are increased in the second year such that EI premiums cover EI program costs, which are higher due to the weaker economy.
• Expenses rise, mainly reflecting higher EI benefits (due to an increase in the number of unemployed) and higher public debt charges (reflecting a higher stock of debt due to the lower budgetary balance).

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	Year 5
	(billions of dollars)
Federal revenues
Tax revenues
Personal income tax	-1.7	-1.5	-1.5
Corporate income tax	-0.4	-0.4	-0.4
Goods and services tax	-0.3	-0.3	-0.3
Other tax revenues	-0.2	-0.2	-0.2
Total tax revenues	-2.6	-2.4	-2.5
Employment Insurance  premium revenues	-0.1	-0.1	-0.1
Other revenues	-0.1	-0.1	-0.1
Total budgetary revenues	-2.7	-2.6	-2.8
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	-0.6	-0.6
Other program expenses	-0.3	-0.4	-0.8
Public debt charges	-0.3	0.1	0.2
Total expenses	-1.0	-0.8	-1.2
Budgetary balance	-1.7	-1.7	-1.6
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 $1.7 billion in the first year, $1.7 billion in the second year and $1.6 billion in the fifth year.

• Lower prices result in lower nominal income and, as a result, personal income tax, corporate income tax and GST revenues all decrease, reflecting declines in the underlying nominal tax bases. For the other sources of tax revenue, the negative impacts are similar under the real and nominal GDP shocks. EI premium revenues decrease marginally in the price shock in response to lower earnings. However, unlike the real GDP shock, EI benefits do not rise since unemployment is unaffected by price changes.
• Partly offsetting lower revenues are the declines in the cost of statutory programs that are indexed to inflation, such as elderly benefit payments and the Canada Child Tax Benefit, as well as federal wage and non-wage expenses. Payments under these programs are smaller if inflation is lower. Public debt charges decline in the first year due to lower costs associated with Real Return Bonds, then rise due to the higher stock of debt.

Table 3.8
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 dollars)
Federal revenues	-0.7	-0.9	-1.3
Federal expenses	-1.5	-2.1	-2.7
Budgetary balance	0.8	1.2	1.4
Note: Numbers may not add due to rounding.

A decrease in interest rates raises the budgetary balance by $0.8 billion in the first year, $1.2 billion in the second and $1.4 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 $1.3 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:

• Personal and corporate income tax revenues are sensitive to changes in investment income and taxable capital gains income, both of which can vary significantly with changes in market conditions and are subject to taxpayers’ decisions to realize capital gains or losses. Unlike wages and salaries, where personal income tax is withheld at source, information on the impact of changes in investment and capital gains income in 2008 will only be available when returns are filed in the spring of 2009. The delay is even longer for information on corporate income taxes. To the extent that current and future market conditions have a greater impact on investment and capital gains income than projected, personal and corporate income tax revenues will be lower.
• Net corporate profits are projected to decline in 2009. This could lead to an increase in losses, which corporations could carry back 3 years or forward 20 years to reduce taxes owing in current or future years. This would have a negative impact on the average effective tax rate. To the extent that the impact of a decline in the average effective tax rate for sectors with growing losses outweighs the impact of an increase in the average effective tax rate for sectors that continue to record growth in profitability, corporate income tax revenues could be lower than projected.
• Given the uncertainty surrounding the global economic outlook, commodity prices could be weaker than projected, which would have a negative impact on tax revenues.
• On the expense side, the extent to which departments and agencies do not fully use all of the resources appropriated by Parliament varies from year to year and can materially affect the fiscal outcome. As announced in this Statement, actions will be taken to better align departmental appropriations with spending requirements on an ongoing basis. In addition, during the course of the fiscal year, departments and agencies often incur liabilities for which no payments are made. These liabilities are recognized throughout the year and are updated following the close of the fiscal year as part of the normal year-end accrual adjustments. Changes in estimates of liabilities can be significant.

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