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Based upon the downward revision in the economic forecast by private sector forecasters for Canada described above, the Government’s fiscal position is now expected to be weaker than that projected at the time of the 2009 budget. The deficit is projected to decline steadily over the forecast horizon, reflecting 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.
|(billions of dollars)|
|Public debt charges||31.0||30.7||33.7||37.7||41.2||42.1||42.0|
|Per cent of GDP|
|Public debt charges||1.9||2.0||2.1||2.3||2.3||2.3||2.1|
|Note: Totals may not add due to rounding.|
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.
Expressed in relation to the size of the economy, the budget deficit in 2009–10 is 3.7 per cent of GDP, well below the most recent peak achieved just after the last recession of 5.6 per cent in 1992–93. By 2013–14, the deficit measured in relation to the size of the economy is now projected to be 0.6 per cent of GDP; in 2014–15 it is 0.3 per cent.
The deficits currently projected are the result of significantly weaker prospects for the global economy over the medium term. These deficits are manageable, amounting to just 0.3 per cent of GDP in 2014–15, and their impact on our debt will be manageable. Most importantly, the Government is staying the course that it has set since 2006, with a sound plan for the economy and for bringing the budget back to balance.
The federal debt measured in relation to the size of the economy is projected to increase from 29 per cent of GDP in 2008–09—the lowest debt ratio in 27 years—to a peak of 35.5 per cent in 2010–11. The debt ratio over the next two years will be about equal to the ratio in 2005–06, when the Government recorded a $13.2 billion surplus.
Canada had by far the best fiscal position among G7 nations going into the current crisis, and is projected to maintain this strong position as it emerges from recession. The OECD projects Canada’s total government net debt-to-GDP ratio will be 32.6 per cent in 2010.
|(billions of dollars)|
|January 2009 Budgetary Balance||-1.1||-33.7||-29.8||-13.0||-7.3||0.7||n/a|
|Impact of Economic and
|Economic and other Changes||-0.4||-0.2||-0.7||-0.9||-0.7||-0.7|
|Total program expenses||-1.1||-12.8||-8.2||-5.4||-2.3||0.2|
|Public debt charges||-0.3||-1.2||-0.4||-0.5||-2.0||-2.5|
|Total Economic and Fiscal Developments||-4.7||-22.2||-15.4||-14.4||-12.1||-11.9|
|Revised Budgetary Balance||-5.8||-55.9||-45.3||-27.4||-19.4||-11.2||-5.2|
|1A 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.
The deficit in 2009–10 reflects both much weaker economic growth than anticipated in the 2009 budget and the impact of policy actions taken since the budget. In subsequent years, the changes primarily reflect the impact on revenues and the EI program of the weaker private-sector economic forecast over the medium term described above.
The corporate asset review is continuing consistent with the Budget 2009 commitment. The Government remains committed to this process. However, in light of the recent weakness in the economy and, in line with our stated commitment to ensure that fair value can be realized by taxpayers and the transaction will generate additional economic activity, gains resulting from the sale of corporate assets have not been included in the projection.
This projection includes a revision to the estimated amount of planned spending that does not proceed in any given year—the so-called lapse. In recent years, lapsed spending has been at historically high levels, reaching 9 per cent of planned spending in 2007–08. In large part this reflects the rapid expansion of a number of federal programs. Over the projection period, as programs reach maturity, this lapse amount is projected to decline sharply. By 2013–14, the lapse is projected to be close to recent historical lows. This is an important element of the spending projection that is subject to judgement. The assumption that the lapse returns to a historically low share introduces an element of prudence into the spending projection. To the extent that the lapse is higher than this, program spending would be commensurately lower, and deficits would be reduced.
Other changes to the program expense forecast reflect higher actuarial losses for public sector pension and benefit plans.
Outlook for Budgetary Revenues
|(billions of dollars)|
|Personal income tax||116.0||108.7||117.1||124.5||133.3||141.7||150.6|
|Corporate income tax||29.5||23.8||26.1||29.2||29.9||32.1||33.9|
|Other income tax||6.3||4.6||5.4||5.8||6.3||6.8||7.0|
|Total income tax||151.8||137.1||148.7||159.4||169.6||180.6||191.4|
|Goods and service tax||25.7||25.8||27.1||28.5||30.4||32.0||33.8|
|Customs import duties||4.0||3.4||3.5||3.6||3.8||4.0||4.1|
|Other excise taxes/duties||10.0||10.0||9.8||9.9||9.9||10.0||10.0|
|Total excise taxes/duties||39.8||39.2||40.3||42.0||44.1||46.0||47.9|
|Total tax revenues||191.6||176.3||189.0||201.4||213.7||226.5||239.3|
|Total budgetary revenues||233.1||216.6||233.1||250.9||268.7||284.7||298.2|
|Per cent of GDP|
|Personal income tax||7.3||7.1||7.4||7.4||7.5||7.6||7.7|
|Corporate income tax||1.8||1.6||1.6||1.7||1.7||1.7||1.7|
|Goods and service tax||1.6||1.7||1.7||1.7||1.7||1.7||1.7|
|Total tax revenues||12.0||11.5||11.9||12.0||12.1||12.2||12.2|
|Note: Totals may not add due to rounding.|
Table 5 sets out the Government’s projection for budgetary revenues. Budgetary revenues are expected to decline 7.1 per cent in 2009–10, reflecting the impact of the recession on all main revenue streams, particularly personal and corporate income tax revenues. Revenue growth is projected to recover beginning in 2010–11, primarily reflecting the economic recovery, the impact on returns on investments of rising interest rates, and rising EI premiums.
Personal income tax revenues—the largest component of budgetary revenues—are projected to decline $7.3 billion, or 6.3 per cent, in 2009–10. This decline reflects income tax relief such as the Home Renovation Tax Credit, combined with very weak growth in personal income. 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 dropped by 27.4 per cent in 2008–09, are projected to decline by a further 19.2 per cent in 2009–10. This is consistent with a forecast decline in profits, lower projected capital income, and an additional 0.5-percentage-point reduction in the general corporate income tax rate effective January 1, 2009. A portion of current losses is expected to be carried forward by corporations and applied against future tax liabilities, reducing the growth of corporate income tax revenues in future years. In 2010–11, after a further 1.0–percentage-point decline in the general corporate income tax rate effective January 1, 2010, corporate income tax revenues are projected to rise 9.9 per cent, reflecting a strong projected recovery in profits, dampened by loss carry-forwards. After the full implementation of general corporate income tax rate reductions in 2012, corporate income tax revenues are projected to grow at an average of 6.5 per cent per year, roughly in line with growth in profits.
Other income tax revenues—largely withholding taxes levied on non-residents—are generally projected to follow the trend in profits. The phase-out of the withholding tax on non-arm’s length interest payments to the US under the Fifth Protocol to the Canada-US Tax Treaty is projected to dampen the growth in this component of revenues.
GST revenues are expected to rise only slightly in 2009–10, consistent with weak projected growth in taxable consumption. GST revenues are projected to grow by just over 5 per cent on average over the remainder of the planning period, in line with taxable consumption.
Customs import duties are projected to decline 15.3 per cent in 2009–10, consistent with a projected decline in imports and the implementation of tariff relief for machinery and equipment introduced in Budget 2009. Growth in both imports and customs import duties is projected to recover, with growth averaging just under 4 per cent, over the remainder of the planning period.
Other excise taxes and duties are projected to remain virtually flat over the planning period.
Employment Insurance (EI) premium revenues are projected to decline by 2.8 per cent in 2009–10 and to recover in 2010–11. Under the Economic Action Plan, the Government froze the EI premium rate constant at the 2008 level of $1.73 per $100 of insurable earnings in both 2009 and 2010. As well, an estimated $2.9 billion will be credited to the EI Account on August 1, 2010 to maintain the Government’s Budget 2009 commitment that benefit enhancements announced in Budget 2009 will not be recovered in future years. As planned, premium rate increases will be subject to decisions of the Canada Employment Insurance Financing Board (CEIFB) and will be limited to the cap set out in Budget 2008.
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. Other revenues are projected to rise steadily over the medium term, as higher interest rates boost returns on investments.
Outlook for Program Expenses
|(billions of dollars)|
|Major transfers to persons|
|Employment insurance benefits1||16.3||22.1||22.0||19.2||18.4||17.6||17.9|
|Major transfers to other levels of government|
| Federal transfers in support of health
and social programs
|Alternative Payments for Standing Programs||-3.0||-2.8||-3.0||-3.2||-3.4||-3.6||-3.8|
|Canada’s cities and communities||1.0||2.0||2.0||2.0||2.0||2.0||2.0|
|Sales tax harmonization (ON, BC)||0.8||3.4||1.8|
|Direct program expenses|
|Other operating expenses||61.5||64.8||68.4||72.0||75.4||78.0||80.4|
|Economic Action Plan||0.0||18.7||10.3||1.1||1.0||1.0||0.6|
|Total program expenses||207.9||241.9||244.7||240.6||246.8||253.9||261.4|
|Per cent of GDP|
|Major transfers to persons||3.8||4.6||4.5||4.2||4.1||4.0||3.9|
|Major transfers to other levels of government||2.9||3.4||3.5||3.4||3.2||3.2||3.2|
|Direct program expenses||6.2||7.9||7.4||6.8||6.6||6.4||6.3|
|Total program expenses||13.0||15.8||15.4||14.4||14.0||13.6||13.4|
|Note: Totals may not add due to rounding.
1EI 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.
2Fiscal arrangements include Equalization, Territorial Formula Financing, the Youth Allowances Recovery and Statutory Subsidies.
Table 6 sets out the main components of program expenses. These are: major transfers to persons, major transfers to other levels of government and direct program spending.
Major transfers to persons consist of elderly, employment insurance and children’s benefits, including the Universal Child Care Benefit.
- Growth in benefits for seniors is expected to average about 5 per cent annually over the planning period due to increases in the seniors population and consumer price inflation, to which benefits are indexed.
- Employment Insurance benefits are projected to increase by $5.8 billion this year to reach $22.1 billion. Starting in 2011–12, benefits are projected to decline, reflecting the forecast improvement in the labour market at that time, as well as the end of temporary measures to increase Employment Insurance benefits in Canada’s Economic Action Plan.
- Children’s benefits increase moderately over the forecast period, reflecting the increases in the National Child Benefit and the Canada Child Tax Benefit announced in the 2009 budget.
Major transfers to other levels of government include transfers in support of health care and social programs, as well as Equalization. Transfers will continue to grow at current legislated rates for the entire projection period. Also included in major transfers are amounts for transitional assistance for the provinces of Ontario and British Columbia, which have each announced they will move to the Harmonized Sales Tax framework.
About one-half of program spending consists of direct program expenses. Direct program spending broadly consists of transfers administered by departments, wages and benefits of federal public servants, capital expenses, other operating expenses and amounts appropriated to Crown Corporations. Given the magnitude of the measures related to Canada’s Economic Action Plan included in direct program spending, these are shown separately to facilitate annual comparisons of the main components of spending. Over the 2011-12 to 2014-15 period, direct program spending increases an average of 3.3 per cent per year excluding the impact of Economic Action Plan measures.
Transfer payments administered by departments are set in nominal dollars and, therefore, do not change from year to year, unless the Government makes an express policy decision to do so.
Expenses related to Crown Corporations are fixed in nominal terms. The net income of Crown Corporations is included in the projection for budgetary revenues, under other revenues.
Operating expenses include public service wages and benefits and non-wage operating expenses. Operating expenses also include an estimate of capital amortization expenses, professional services and other costs incurred by departments. They also include amounts for potential future legal and environmental liabilities, estimates of future cost increases related to inflation, and amounts for estimated future increases in resources in areas where the government has little discretion, for example public safety and security.
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.
Program expenses as a share of GDP are up sharply in 2009–10 and 2010–11 reflecting the stimulus measures under the Economic Action Plan. As a share of GDP, spending declines to 13.4 per cent in 2014–15.
Risks to the Fiscal Projections
Risks associated with the fiscal projections primarily relate to risks around the strength of the economic recovery and volatility in the relationship between fiscal variables and the underlying economic activity to which they relate.
Even if the economic outlook were known with certainty, there would still be risks associated with the fiscal projections because of the uncertainty in the translation of economic developments into spending and tax revenues. The following are the key sources of uncertainty:
- The corporate income tax projections assume a sharp rise in corporate losses in 2009, based on the broad decline in net corporate profits. The income tax system allows corporations to use certain losses to reduce taxable income in the three preceding years or the 20 following years. There is, however, considerable uncertainty as to the magnitude and timing of these losses, and their implications for corporate income tax revenues.
- There is considerable uncertainty around the timing of the recovery in markets following the sharp decline in the TSX composite index over the latter months of 2008. Market-related income is inherently difficult to forecast. This is all the more true in times of financial turmoil, introducing a greater level of uncertainty to the personal and corporate income tax revenue projections.
- 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. 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.