Table of Contents - Previous

Archived - Update of Economic and Fiscal Projections – 2011:
Part 3 of 3

Archived information

Archived information is provided for reference, research or recordkeeping purposes. It is not subject to the Government of Canada Web Standards and has not been altered or updated since it was archived. Please contact us to request a format other than those available.

3. Fiscal Outlook

To ensure objectivity and transparency in forecasting, the economic forecast underlying the Government’s fiscal projections is based on an average of private sector economic forecasts. This process has been followed for over a decade. This Update maintains that approach.

However, as described in Table 2.3 of Chapter 2, although the September 2011 private sector survey is considered to be a reasonable basis for fiscal planning purposes, the near-term global economic outlook remains highly uncertain and, as a result, the Government has judged it appropriate to adjust downward the private sector forecast for nominal GDP. With this adjustment for risk, the revenue projections are reduced by $3.0 billion in 2011–12, $4.5 billion in 2012–13, $3.0 billion in 2013–14 and $1.5 billion in 2014–15, 2015–16 and 2016–17 (Table 3.1). The fiscal projections contain a larger adjustment for risk in each fiscal year through 2013–14, reflecting the higher prospect of downside risk over this period.

Table 3.1
Planning Assumptions for the Update of Economic and Fiscal Projections
  2011–12 2012–13 2013–14 2014–15 2015–16 2016–17
  (billions of dollars)
Adjustment for risk to revenues -3.0 -4.5 -3.0 -1.5 -1.5 -1.5

Changes in the Fiscal Outlook Since the 2011 Budget

Table 3.2 provides a summary of the changes in the fiscal projections between Budget 2011 and this Update of Economic and Fiscal Projections. The $33.4-billion deficit in 2010–11 was $2.8 billion lower than the $36.2-billion deficit forecast in the 2011 budget. Revenues were $1.5 billion higher than forecast, while program expenses were $1.2 billion lower than forecast. 

The table indicates that the projected budgetary balance has improved in 2011–12 due to a drop in anticipated expenses and public debt charges, but has deteriorated over the remainder of the forecast horizon, mainly reflecting the downward revision to the outlook for nominal GDP.

Table 3.2
Summary of Changes in the Fiscal Outlook Since the 2011 Budget
    Projection
   
  2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17
  (billions of dollars)
Budget 2011 budgetary balance -36.2 -32.3 -19.4 -9.4 -0.3 4.2 n/a 
Adjustment for risk   1.5 1.5 1.5 1.5 1.5  
Budget 2011 budgetary balance
 before adjustment for risk
-36.2 -30.8 -17.9 -7.9 1.2 5.7  
Economic and fiscal developments              
  Budgetary revenues 1.5 -3.9 -9.0 -10.3 -11.5 -11.7  
  Program expenses1 1.2 5.6 -0.1 -0.5 0.1 0.3  
  Public debt charges1 0.0 1.5 4.6 5.4 4.4 2.9  
 
  Subtotal 2.8 3.1 -4.4 -5.5 -7.0 -8.6  
Policy decisions since Budget 2011              
  Limiting Employment Insurance premium
   rate increase
  -0.2 -0.6 -0.6 -0.2 0.9  
  Temporary extension of enhancement
   to the Work-Sharing Program2
    -0.01        
  Other   -0.1          
 
  Subtotal   -0.3 -0.6 -0.6 -0.2 0.9  
2011 Update—budgetary balance
before adjustment for risk
-33.4 -28.0 -22.9 -14.0 -6.0 -1.9 2.0
Adjustment for risk   -3.0 -4.5 -3.0 -1.5 -1.5 -1.5
2011 Update—budgetary balance3 -33.4 -31.0 -27.4 -17.0 -7.5 -3.4 0.5
Deficit reduction action plan savings target     1.0 2.0 4.0 4.0 4.0
Budgetary balance including savings
 targeted by the deficit reduction
 action plan
-33.4 -31.0 -26.4 -15.0 -3.5 0.6 4.5
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 For greater transparency, the presentation of the measure includes an additional decimal place.
3 Does not include savings targeted by the deficit reduction action plan.

Nominal GDP is the broadest single measure of the tax base and its downward revision drives a significant decrease in tax revenues over the projection period. In addition, lower projected interest rates lead to a lower outlook for other revenues, although this impact is more than offset by lower public debt charges.

Program expenses are broadly in line with the Budget 2011 projections. The decrease in projected spending in 2011–12 reflects a number of factors, including a revised outlook for EI expenses, a provision for the repayment of British Columbia’s sales tax harmonization assistance payments, and the recording of enhanced veterans benefits in 2010–11, which were previously provisioned in 2011–12 in Budget 2011.

Public debt charges are considerably lower throughout the forecast horizon, reflecting lower expected interest rates. Within public debt charges, interest costs related to the Insured Mortgage Purchase Program (IMPP) are also lower as a result of lower expected interest rates (more information on the IMPP is provided in the box below).

The Insured Mortgage Purchase Program

While the Canadian financial system withstood the global financial crisis better than most, the crisis made it difficult for Canadian banks and other lenders to obtain funds from international markets at reasonable costs, which hampered their ability to provide loans to Canadian households and businesses. To soften the impact of the crisis, the Government took action through the Extraordinary Financing Framework (EFF) by making credit available to Canadian financial institutions. This helped sustain economic growth by supporting Canadian lenders’ continued capacity to extend financing to Canadian households and businesses. This support was offered on a commercial basis to protect taxpayers.

Through the Insured Mortgage Purchase Program (IMPP), the Government committed to purchase up to a total of $125 billion in insured residential mortgage pools from Canadian financial institutions to help facilitate continued lending to Canadian consumers and businesses. The program was instrumental in safeguarding Canada’s economy during a time of severe economic stress. Moreover, it had the added benefit of operating at no financial cost or additional risk to taxpayers since the mortgages were already contingent liabilities of the Government of Canada. In fact, the IMPP, which provided $69 billion in stable, long-term funding to lenders, has generated more than $1.6 billion in net revenues since its inception. By the time the program ends in 2014–2015, it will have generated an estimated $2.5 billion in net revenues that will benefit Canada’s budgetary balance.

Overall, the IMPP, together with the other measures included in the EFF, allowed Canadian households and businesses continued access to financing at a reasonable cost during the global credit crisis, which helped Canada’s economy through the crisis and emerge from it in better shape than most.

With respect to new policy decisions, to further help Canadian workers and employers overcome challenges posed by the fragility of global economic growth, the Government will reduce the maximum potential increase in EI premiums for 2012 from 10 cents to 5 cents per $100 of insurable earnings, maintaining the same maximum potential increase as in 2011. The new limit is projected to lower EI premium rates and revenues over the short to medium term, raising the overall budgetary deficit. As the current rate-setting approach is designed to balance the EI account over time, the negative impact on the budgetary balance in the short term is offset by a positive impact on the budgetary balance by the end of the projection period. Based on current economic projections, it is still expected that the EI account will return to cumulative balance by 2015.

In addition, the Government will provide an additional extension of up to 16 weeks for active, recently terminated or new work-sharing agreements until October 2012. Since Budget 2011, the Government has also provided assistance for farmers affected by flooding and excess moisture conditions in Alberta, Manitoba, Saskatchewan and Quebec.

In addition to the budgetary balance projection, Table 3.2 shows the savings targeted by the deficit reduction action plan, as well as the projected budgetary balance including these savings. The Government’s deficit reduction action plan will help ensure that the budget is balanced by 2015–16 (Chart 3.1).

The deficit reduction action plan will help ensure
that the budget is balanced by 2015–16
Chart 3.1 - Budgetary Balance With Savings Targeted by the Deficit Reduction Action Plan. For details, please refer to the preceding paragraph.

Summary Statement of Transactions

Table 3.3 summarizes the Government’s financial position, including the cost of measures announced in this Update, but excluding the savings targeted by the deficit reduction action plan.

Table 3.3
Summary Statement of Transactions
    Projection
   
  2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17
  (billions of dollars)
Budgetary revenues 237.1 243.5 251.8 268.8 285.1 298.4 310.6
Program expenses 239.6 243.0 247.4 252.5 257.6 265.3 272.4
Public debt charges 30.9 31.5 31.9 33.3 35.0 36.5 37.7
Total expenses 270.5 274.5 279.2 285.8 292.6 301.8 310.1
Budgetary balance -33.4 -31.0 -27.4 -17.0 -7.5 -3.4 0.5
Federal debt1 550.3 585.2 612.7 629.7 637.2 640.6 640.0
Per cent of GDP              
  Budgetary revenues 14.6 14.4 14.4 14.6 14.7 14.8 14.7
  Program expenses 14.7 14.4 14.1 13.7 13.3 13.1 12.9
  Public debt charges 1.9 1.9 1.8 1.8 1.8 1.8 1.8
  Budgetary balance -2.1 -1.8 -1.6 -0.9 -0.4 -0.2 0.0
  Federal debt 33.9 34.6 35.0 34.2 32.9 31.7 30.3
Note: Totals may not add due to rounding.
1 The projected level of federal debt for 2011–12 includes an estimate of other comprehensive income, as well as estimated transitional adjustments related to enterprise Crown corporations’ adoption of International Financial Reporting Standards.

As a result of the Government’s prudent fiscal management, and excluding the savings targeted by the deficit reduction action plan, the deficit is projected to decline by 90 per cent from 2010–11 to 2015–16 (from $33.4 billion in 2010–11 to $3.4 billion in 2015–16). As a percentage of GDP, the budgetary deficit is projected to decline from 2.1 per cent in 2010–11 to 0.2 per cent in 2015–16. The savings targeted by the deficit reduction action plan, which aims to produce at least $4 billion in ongoing annual budgetary savings by 2014–15, will allow the Government to return to budgetary balance by 2015–16.

The federal debt-to-GDP ratio (accumulated deficit) stood at 33.9 per cent in 2010–11, less than half of its peak of 68.4 per cent in 1995–96. The debt ratio is projected to fall to 30.3 per cent in 2016–17, close to its recent low of 29.0 per cent in 2008–09. This will help to ensure that Canada meets its G-20 targets to halve deficits by 2013 and stabilize or reduce total government debt-to-GDP ratios by 2016, agreed to by G-20 leaders at their summit in Toronto in June 2010, well ahead of schedule.

Outlook for Budgetary Revenues

Table 3.4
The Revenue Outlook
    Projection
   
  2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17
  (billions of dollars)
Income taxes              
  Personal income tax 113.5 119.5 124.4 133.1 142.1 149.2 156.3
  Corporate income tax 30.0 30.5 30.4 33.0 35.0 36.1 37.9
  Non-resident income tax 5.1 5.4 5.7 6.3 6.7 7.1 7.4
 
  Total income tax 148.6 155.5 160.5 172.4 183.7 192.4 201.7
Excise taxes/duties              
  Goods and Services Tax 28.4 29.0 30.3 32.0 33.9 35.5 37.3
  Customs import duties 3.5 3.8 4.0 4.2 4.5 4.8 5.1
  Other excise taxes/duties 11.0 10.8 10.7 10.6 10.5 10.5 10.7
 
  Total excise taxes/duties 42.9 43.6 44.9 46.8 48.9 50.9 53.1
Total tax revenues 191.5 199.1 205.5 219.2 232.6 243.3 254.7
Employment Insurance premium revenues 17.5 18.7 20.2 22.0 23.7 24.5 24.0
Other revenues 28.1 25.7 26.2 27.6 28.8 30.5 31.9
Total budgetary revenues 237.1 243.5 251.8 268.8 285.1 298.4 310.6
Per cent of GDP              
  Personal income tax 7.0 7.1 7.1 7.2 7.3 7.4 7.4
  Corporate income tax 1.8 1.8 1.7 1.8 1.8 1.8 1.8
  Goods and Services Tax 1.7 1.7 1.7 1.7 1.7 1.8 1.8
 
Total tax revenues 11.8 11.8 11.7 11.9 12.0 12.0 12.1
Employment Insurance premium revenues 1.1 1.1 1.2 1.2 1.2 1.2 1.1
Other revenues 1.7 1.5 1.5 1.5 1.5 1.5 1.5
 
Total budgetary revenues 14.6 14.4 14.4 14.6 14.7 14.8 14.7
Note: Totals may not add due to rounding

Table 3.4 sets out the Government’s projection for budgetary revenues after the adjustment for risk, which for planning purposes is applied to tax revenues and other revenues. Revenues are expected to increase by 2.7 per cent in 2011–12. Over the remainder of the forecast horizon, revenues are projected to grow at an average annual rate of 5.0 per cent.

Personal income tax revenues—the largest component of budgetary revenues—are projected to increase by $6.1 billion, or 5.4 per cent, to $119.5 billion in 2011–12. Over the remainder of the projection period, personal income tax revenues increase somewhat faster than growth in GDP, averaging 5.5 per cent annual growth, reflecting the progressive nature of the income tax system combined with real income gains.

Corporate income tax revenues are projected to increase by 1.9 per cent to $30.5 billion in 2011–12. Over the remainder of the projection period, corporate income tax revenues are projected to grow by 24 per cent, largely in line with projected profit growth. 

Non-resident income tax revenues are projected to grow at an average rate of 6.4 per cent over the forecast horizon, broadly reflecting growth in corporate profits.

Goods and Services Tax (GST) revenues are projected to grow by 2.3 per cent in 2011–12 based on projected growth in taxable consumption and year-to-date results. Annual growth in GST revenues is projected to average 5.2 per cent over the remainder of the projection period, in line with growth in taxable consumption.

Customs import duties are projected to increase by $0.3 billion, or 8.7 per cent, in 2011–12, reflecting year-to-date results and the duty remission framework for certain imported ships announced on October 1, 2010 that lowered 2010–11 revenues. Over the remainder of the projection period, annual growth in customs import duties is projected to average 5.9 per cent, in line with projected growth in imports. Based on year-to-date results, other excise taxes and duties are projected to be $10.8 billion in 2011–12 and remain close to that level over the remainder of the projection period.

EI premium revenues are projected to grow by 6.9 per cent in 2011–12. This forecast reflects growth in insurable earnings and the announcement in this Update to limit the maximum potential increase in EI premium rates to 5 cents per $100 of insurable earnings in 2012.

Other revenues include those of consolidated Crown corporations, net income 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 or losses from enterprise Crown corporations. Other revenues grew $6.5 billion, or 29.8 per cent, in 2010–11 due largely to one-time factors, including lower provisions for credit losses, unrealized gains on derivatives held under the Insured Mortgage Purchase Program administered by Canada Mortgage and Housing Corporation, gains realized on the Government’s sale of common shares in General Motors, and foreign exchange gains. Given these one-time events in 2010–11, other revenues are expected to fall by $2.4 billion, or 8.5 per cent, to $25.7 billion in 2011–12. Growth in other revenues is expected to average 4.4 per cent over the remainder of the projection period, as lower interest rates and slower growth in the near term are expected to affect returns on investments and the income of Crown corporations.

Chart 3.2 shows that, after reaching a trough of 14.3 per cent in 2009–10 due to the impact of the recession, revenues as a share of GDP rose to 14.6 per cent in 2010–11. The revenue ratio is projected to fall to 14.4 per cent in 2011–12 and 2012–13, largely due to the impacts on other revenues of one-time events which boosted 2010–11 results and lower expected interest rates. Revenues as a share of GDP are projected to increase in the outer years of the projection period as the economy strengthens, rising to 14.7 per cent in 2016–17, but remain well below the 2007–08 level of 15.8 per cent.

Revenue-to-GDP ratio steady over the projection period
Chart 3.2 - Revenue-to-GDP Ratio. For details, please refer to the preceding paragraph.

Outlook for Program Expenses

Table 3.5
The Program Expenses Outlook
    Projection
   
  2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17
  (billions of dollars)
Major transfers to persons              
  Elderly benefits 35.6 37.8 40.2 42.4 44.8 47.2 49.9
  Employment Insurance benefits1 19.9 18.1 18.5 18.6 18.8 19.1 19.4
  Children’s benefits 12.7 12.9 13.2 13.5 13.8 13.8 14.0
 
  Total 68.1 68.8 71.9 74.6 77.3 80.1 83.2
Major transfers to other levels
 of government
             
  Support for health and other
   social programs
37.2 38.7 40.7 42.7 44.7 47.0 49.4
  Fiscal arrangements2 16.4 16.9 17.8 18.7 19.4 20.2 21.1
  Canada’s cities
   and communities
1.8 2.3 2.0 2.0 2.0 2.0 2.0
  Other transfers3 0.7 2.2 0.3 0.2 0.2 0.2 0.1
  Alternative Payments for
   Standing Programs
-3.1 -3.2 -3.3 -3.5 -3.7 -3.9 -4.1
 
  Total 53.0 56.9 57.5 60.2 62.7 65.5 68.5
Direct program expenses              
  Transfer payments 36.8 35.7 34.9 32.7 30.6 30.5 30.5
  Capital amortization 4.4 4.6 4.9 5.1 5.3 5.5 5.6
  Other operating expenses 22.5 23.0 24.2 25.0 25.4 26.1 26.2
  Operating expenses subject
   to freeze
54.7 54.0 54.0 55.0 56.2 57.5 58.4
 
  Total 118.5 117.4 118.0 117.8 117.6 119.6 120.7
Total program expenses 239.6 243.0 247.4 252.5 257.6 265.3 272.4
Per cent of GDP              
Major transfers to persons 4.2 4.1 4.1 4.1 4.0 4.0 3.9
Major transfers to other levels
 of government
3.3 3.4 3.3 3.3 3.2 3.2 3.2
Direct program expenses 7.3 6.9 6.7 6.4 6.1 5.9 5.7
 
Total program expenses 14.7 14.4 14.1 13.7 13.3 13.1 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. Remaining EI costs relate mainly to administration.
2 Fiscal arrangements include equalization, Territorial Formula Financing, the Youth Allowances Recovery and statutory subsidies.
3 Other major transfers to other levels of government include transitional payments, transfer protection payments in 2010–11 and 2011–12, payments under the 2005 Offshore Accords, a provision in 2011–12 in support of the Memorandum of Agreement between the Government of Canada and the Government of Quebec regarding sales tax harmonization, and a provision in 2011–12 for the receipt of $1.6 billion to account for the repayment by British Columbia of the transitional assistance it received from the Government of Canada for sales tax harmonization.

Table 3.5 sets out the main components of program expenses: 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.

  • Growth in benefits for seniors, which include Old Age Security and the Guaranteed Income Supplement, is expected to average almost 6 per cent annually over the planning period due to an increase in the population of seniors, the changing demographic profile of seniors and consumer price inflation, to which benefits are fully indexed.
  • EI benefits are projected to decrease by 9.0 per cent to $18.1 billion in 2011–12 based on year-to-date results and the labour market outlook for the rest of the year. EI benefits are projected to increase by 2.4 per cent in 2012–13, largely reflecting higher average weekly benefits. Over the remainder of the projection period, EI benefits are projected to grow slowly, averaging 1.3 per cent annually, despite the falling unemployment rate, due to projected increases in the average benefits paid to EI recipients.
  • Children’s benefits, including the Canada Child Tax Benefit and the Universal Child Care Benefit, are projected to grow moderately in the medium term due to youth population growth and the indexation of the Canada Child Tax Benefit.

The Government has committed to not cut transfers to persons, other levels of government, equalization, and the gas tax transfer to municipalities. The Government has also committed to maintain growth in health transfers at 6 per cent through 2015–16. Projected transfer growth rates beyond these commitments are for planning purposes only and will be finalized in the context of transfer renewal.

Other major transfers to other levels of government include a $2.2-billion provision in 2011–12 in support of the Memorandum of Agreement between the Government of Canada and the Government of Quebec, signed on September 30, 2011, regarding sales tax harmonization; transfer protection payments; and transitional payments to Newfoundland and Labrador under the 2005 Offshore Accord.

Additionally, in light of the Government of British Columbia’s decision to reintroduce its former provincial sales tax, given the provincial referendum results of August 26, 2011, a provision for the receipt of $1.6 billion in 2011–12 has been made to account for the repayment by British Columbia of the transitional assistance it received from the Government of Canada.

Close to half of program spending consists of direct program expenses. Direct program expenses include expenses of National Defence and other departments, expenses of Crown corporations, transfers administered by departments for, among other purposes, farm income support, natural resource royalties paid to provinces, and student financial assistance. The projection for direct program expenses reflects initiatives taken since Budget 2011, but does not include the impact of the deficit reduction action plan, which will be recorded in Budget 2012.

Within direct program expenses, transfers administered by departments are projected to decline steadily over the projection period. This reflects the wind-down of the Economic Action Plan, the termination of transfers to provinces following the expiry of the Canada-U.S. Softwood Lumber Agreement in 2013–14, and a reduction of activity under the Building Canada Fund.

Amounts for capital expenses are presented on an accrual basis. The amount of capital amortization is expected to increase modestly over the next five years as a result of new investments and upgrades to existing capital.

Other operating expenses include costs for employee pensions and other benefits, non-wage expenses of National Defence and accrual amounts for items such as the allowance for bad debt.

Expenses subject to the operating freeze include the wages and salaries of federal employees, professional services contracts, telecommunications, leases, utilities (heat and electricity), materials and supplies. The projection for these expenses does not reflect the deficit reduction action plan, which will place a particular emphasis on generating savings from operating expenses. The decline in these operating expenses between 2010–11 and 2011–12 is related in part to the expiry of measures under Canada’s Economic Action Plan. The growth in spending in the outer years of the forecast horizon reflects expected cost pressures related to essential services.

Program expenses as a share of GDP decline in all years of the forecast horizon, reflecting the wind‑down of the Economic Action Plan and the targeted savings measures announced in Budget 2010 and Budget 2011. As a share of GDP, program expenses are projected to decline from 14.7 per cent in 2010–11 to 12.9 per cent in 2016–17, which would be in line with spending ratios in the 2006–07 to 2008–09 period (Chart 3.3).

Program expenses-to-GDP ratio to return to pre-crisis level
Chart 3.3 - Program Expenses-to-GDP Ratio. For details, please refer to the preceding paragraph.

Risks to the Fiscal Projections

Risks to the economic outlook are the greatest source of uncertainty to the fiscal projections. To help quantify these risks, tables illustrating the sensitivity of the budgetary balance to a number of economic shocks are provided below.

Beyond the economic outlook, there remain upside and downside risks associated with the fiscal projections, as several key drivers of the fiscal outlook are not directly linked to economic variables (such as the relationship between personal income taxes and personal income or the extent to which departments and agencies do not fully use all of the resources appropriated by Parliament).

Sensitivity of the Budgetary 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 increase 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.

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 -1.9 -2.0 -2.2
    Corporate income tax -0.3 -0.4 -0.4
    Goods and Services Tax -0.3 -0.3 -0.4
    Other -0.2 -0.2 -0.3
 
    Total tax revenues -2.8 -2.9 -3.3
  Employment Insurance premiums -0.1 -0.1 1.1
  Other revenues 0.0 0.0 0.0
 
Total budgetary revenues -2.9 -3.1 -2.2
Federal expenses      
  Major transfers to persons      
    Elderly benefits 0.0 0.0 0.0
    Employment Insurance benefits 0.8 0.8 0.9
    Children’s benefits 0.0 0.0 0.0
 
    Total 0.8 0.8 0.9
  Other program expenses 0.0 0.0 -0.2
  Public debt charges 0.0 0.1 0.4
 
Total expenses 0.8 0.9 1.1
Budgetary balance -3.7 -3.9 -3.3
Note: Totals may not add due to rounding.

A 1-percentage-point decrease in real GDP growth reduces the budgetary balance by $3.7 billion in the first year, $3.9 billion in the second year and $3.3 billion in the fifth year (Table 3.6).

  • Tax revenues from all sources fall by a total of $2.8 billion in the first year and by $2.9 billion in the second 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.
  • EI premium revenues decrease in the early years as employment and wages and salaries fall before increasing at the end of the period, when the premium rate is raised to recoup the cost of higher benefit payments and return the EI operating account to balance.
  • 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 -1.9 -1.5 -1.5
    Corporate income tax -0.3 -0.4 -0.4
    Goods and Services Tax -0.3 -0.3 -0.4
    Other -0.2 -0.2 -0.3
 
    Total tax revenues -2.8 -2.5 -2.6
  Employment Insurance premiums -0.1 -0.2 0.1
  Other revenues -0.1 -0.1 -0.1
 
Total budgetary revenues -3.0 -2.7 -2.6
Federal expenses      
  Major transfers to persons      
    Elderly benefits -0.2 -0.4 -0.5
    Employment Insurance benefits -0.1 -0.1 -0.1
    Children’s benefits -0.1 -0.1 -0.1
 
    Total -0.4 -0.6 -0.7
  Other program expenses -0.4 -0.4 -0.8
  Public debt charges -0.4 0.0 0.2
 
Total expenses -1.2 -1.0 -1.4
Budgetary balance -1.8 -1.8 -1.2
Note: Totals 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 $1.8 billion in the first year, $1.8 billion in the second year and $1.2 billion in the fifth year (Table 3.7).

  • 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 early years in response to lower earnings, but are higher at the end of the period as, consistent with the principle of breaking even over time, the EI premium rate adjusts to return the EI operating account to balance. 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 Increase in All Interest Rates
on Federal Revenues, Expenses and Budgetary Balance
  Year 1 Year 2 Year 5
  (billions of dollars)
Federal revenues 1.1 1.5 2.0
Federal expenses 1.9 3.0 4.2
Budgetary balance -0.8 -1.5 -2.3
Note: Totals may not add due to rounding.

An increase in interest rates decreases the budgetary balance by $0.8 billion in the first year, $1.5 billion in the second year and $2.3 billion in the fifth year (Table 3.8). The decline stems entirely from increased expenses associated with public debt charges. The impact on debt charges rises through time as longer-term debt matures and is refinanced at higher rates. Moderating the overall impact is an increase in revenues associated with the increase in the rate of return on the Government’s interest-bearing assets, which are recorded as part of other revenues.

Table of Contents - Previous