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Introduction

After the deepest global recession since the Second World War, there are encouraging signs Canada will return to economic growth this fall, along with many of its major trading partners. In these uncertain times, the Government will stay the course and follow through on Canada’s Economic Action Plan to ensure a sustainable recovery. This is consistent with the commitment G20 finance ministers and central bank governors made in London on September 5, 2009:

"We will continue to implement decisively our necessary financial support measures and expansionary monetary and fiscal policies, consistent with price stability and long-term fiscal sustainability, until recovery is secured."

Canada entered this downturn in an enviable condition. Our fiscal position is the healthiest in the G7, our housing markets avoided the problems seen in other countries, and our banks and financial system are the strongest in the world.

Canada’s sound fiscal position is the product of significant debt reduction efforts by the Government before the global recession began. At the onset of the crisis, Canada had the lowest debt-to-GDP ratio of all G7 countries (Charts 1 and 2).

From this position of strength, the Government responded quickly and boldly with an economic stimulus package that ranks among the largest in the world (Chart 3).

Under Canada’s Economic Action Plan, the Government took the necessary step of running short-term deficits to deliver targeted and timely stimulus in order to protect Canadians from the global recession. Our strong fiscal position made this spending affordable.

The payoff from this has been that the deterioration in Canada’s economy has been less severe than in virtually all other major industrialized economies. In particular, the loss of jobs in Canada has been considerably less pronounced than in the United States—our largest trading partner (Chart 4 and Chart 5). The unemployment rate in Canada is now one full percentage point lower than it is in the United States—the first time this has occurred in a generation.

With the recent revision to the private sector economic forecast, the deficit is now expected to be larger than anticipated at the time of the 2009 budget. The deterioration in the deficit in Canada has generally been in line with or smaller than in other countries (Chart 6). In essence, the sharp drop-off in global activity and incomes has reduced revenues and pushed up government deficits worldwide. Other governments and businesses across the globe have had to revisit forecasts as the economic situation has unfolded. Canada is no different.

Private sector forecasters expect a return to economic growth beginning in the second half of this year, with growth expected to gain momentum in 2010. There is considerable debate among private-sector economists about the strength of the emerging recovery and the medium-term prospects for the global and US economies. For Canada, this means that on average private-sector forecasters surveyed in August now expect the level of nominal GDP to be considerably lower than they forecasted at the time of the 2009 budget.

There is also a very wide range of views among private sector forecasters on how strongly the Canadian economy will grow over the medium term. Among the forecasters surveyed in August by the Department of Finance, these differences yield about a $100 billion range in the projected level of nominal GDP (the broadest measure of the tax base) by the 5th year of the budget planning horizon. This record large variation in the expected level of nominal GDP translates into a potential $15 billion variation in the level of annual budgetary revenues. There is no consensus among forecasters in the August survey about medium-term growth prospects due to the global recession.

Given the ongoing fragility of the economy, the Government’s immediate priority is to complete the effective implementation of Canada’s Economic Action Plan—to help Canadians and secure the emerging economic recovery.

As the economy improves over the medium term, the Government is committed to returning to balanced budgets. The speed at which a balanced budget is achieved, as well as any actions required, will depend on the strength of the recovery. The current uncertainty and debate over future growth prospects will take some time to resolve, as the ramifications of the largest global economic shock since the Second World War become better understood.

The Government’s approach to building a stronger economy and promoting opportunities for Canadians remains on track. The Government will continue to follow a disciplined approach to fiscal planning in order to assure a return to budgetary balance without endangering the economic recovery. The main elements of that approach are as follows.

• To ensure that the economic recovery is secured, the Government will complete the implementation of Canada’s Economic Action Plan so that growth takes hold and jobs are created and maintained. This requires the full implementation of the $29.4 billion in stimulus measures announced for the current fiscal year, as well as the $17.2 billion in measures planned for 2010–11. The Government has made significant progress in implementing the Action Plan and is seeing results.
• The Government will follow through on the "exit strategy" that is built into the plan, by ensuring that the temporary measures in the plan end as scheduled.
• The Government will not raise taxes.
• The Government will protect the growth track of major transfers to persons—including seniors, children’s and employment insurance benefits—from restraint. These important benefits for Canadians will not be affected.
• The Government will protect the growth track of major transfers to other levels of government in support of health care, social services and Equalization. These are programs that fund essential services.
• The Government will ensure that there is spending growth restraint on direct program spending—the component of total program spending over which the Government has greatest control, as required to achieve balanced budgets. This will require sustained discipline. The extent to which spending is restrained will depend on economic performance.
• The Government will provide Canadians with an update to its economic and fiscal projections in the 2010 budget.

Primarily based upon the downward revision in the economic forecast for Canada from private-sector forecasters surveyed in August by the Department of Finance, the Government’s fiscal position is now expected to be weaker than projected at the time of the 2009 budget. The deficit is projected to decline steadily over the forecast horizon, reflecting the end of the Economic Action Plan, the positive impact of economic growth on revenues and an expected moderation in growth of program spending as employment insurance benefits decline with the improving labour market.

The Government will maintain a steady course. The Economic Action Plan will be implemented as planned. The budget will be returned to balance over the medium term. Tax cuts will be protected. Major transfers to persons and other levels of government will be protected. The growth in direct program spending will be restrained as necessary based on the economic situation.

The deficits currently projected are the result of significantly weaker prospects for the global economy over the medium term (Chart 7). These deficits are manageable, amounting to just 0.3 per cent of GDP in 2014–15, and their impact on our debt is manageable. Most importantly, the Government has a responsible plan for the economy and for bringing the budget back to balance.

The global recession has had a major effect on Canadians and their families. The Government’s first priority is to complete the implementation of Canada’s Economic Action Plan to protect those affected and to emerge with a stronger economy. Canada’s economic, financial and fiscal position is the envy of the world. The Government cannot control shocks to the global economy. However, it can ensure that we respond to global challenges in a way that protects Canadian families, while bolstering competition and economic opportunity.