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Update of Economic and Fiscal Projections — 2012:
Part 1 of 3

Highlights 

• The Canadian economy has experienced one of the best performances among Group of Seven (G-7) countries over the recovery. The output that was lost over the recession has been more than fully recouped and Canada has outperformed all other G-7 economies in job creation over the recovery.
• However, the global economic environment remains highly uncertain and downside risks continue to weigh on the outlook.
• While real growth in Canada has remained resilient, Canada is not immune to developments outside our borders.
• Weak global demand has resulted in lower-than-expected commodity prices. This in turn has contributed to a lower-than-expected level of nominal gross domestic product (GDP) and government revenues.
• Nevertheless, the Government remains on track to meet its commitment to return to balanced budgets over the medium term.
• This reflects the Government’s ongoing commitment to control growth in program spending.
• Since 2006, the Government has implemented a comprehensive agenda to support jobs and growth, including making Canada a competitive low-tax jurisdiction. Economic Action Plan 2012 announced a set of measures that will further bolster long-term growth.
• The Government’s agenda is delivering results. Business investment rebounded strongly during the recovery and Canada is the only G-7 country to have more than fully recovered business investment that was lost during the recession.
• The Government is striking the right balance between returning to balanced budgets over the medium term and continuing to invest in the key drivers of economic growth and job creation.

Note: This document incorporates economic, financial and fiscal data available up to and including November 2, 2012.

Chapter 1
Keeping Canada on Course in an Uncertain World

The Canadian economy continues to outperform in a world of elevated uncertainty. Canada has more than recovered the output that was lost during the recession and has experienced the strongest employment growth in the G-7 over the recovery (Chart 1.1). Moreover, the private sector has been the primary driver of new job creation, with over 90 per cent of all new jobs in full-time positions and more than two thirds in high-wage industries. This bodes well for a sustained recovery.

Canada has outperformed all other G-7 economies
in job creation over the recovery

Chart 1.1
Improvement in Employment Over the Recovery

Note: Monthly data for Canada (July 2009 to October 2012), the United States (February 2010 to October 2012), Germany (July 2009 to September 2012), Italy (August 2010 to September 2012), and Japan (May 2012 to September 2012). Quarterly data for France (2009Q4 to 2012Q2) and the United Kingdom (2010Q1 to 2012Q2).
Sources: Haver Analytics; Department of Finance calculations.

However, the global economic environment remains highly uncertain. The sovereign debt and banking crisis in the euro area continues to weigh on consumer and business confidence and is dragging down economic activity in the region. Based on readings of business conditions, the euro area is most likely back in recession. In the United States, the recovery remains modest and there is potential for significant federal government fiscal contraction beginning next year if political agreement cannot be reached on a plan to smooth out needed expenditure reductions and scheduled tax increases (the so-called “fiscal cliff”).

Reflecting the softening of global growth, the International Monetary Fund (IMF) recently downwardly revised its outlook for real GDP growth in the advanced economies to just 1.3 per cent in 2012 and 1.5 per cent in 2013 (Chart 1.2).

The global economic outlook has been downgraded

Chart 1.2
IMF Real GDP Growth Outlook for Advanced Economies

Sources: IMF, World Economic Outlook, April and October 2012.

In the face of these adverse conditions, Canadian economic growth has remained resilient. Real GDP has continued to expand, albeit at a modest pace, in line with the projections in Budget 2012.

However, Canada is not immune to developments beyond our borders. The most important impact of the weakness of the global economy on Canada has been through lower commodity prices. Commodity prices were lower than expected during the first half of this year and are projected to remain below levels anticipated in Budget 2012 over the medium term (Chart 1.3).

Uncertainty and weaker global growth have weighed
on commodity prices since Budget 2012

Chart 1.3
Commodity Prices
(in U.S. dollars)

Note: Solid line shows historical spot prices. Dotted lines are projections of commodity prices consistent with the March 2012 and October 2012 surveys of private sector economists. Last data point is December 2016.
Sources: Commodity Research Bureau; Department of Finance March 2012 and October 2012 surveys of private sector economists; Department of Finance calculations.

As a result of weaker global commodity prices, the expected level of nominal GDP is on average $25 billion (1.3 per cent) lower than projected in Budget 2012 over the 2012 to 2016 period. Since nominal GDP is the broadest single indicator of the tax base, this downward revision has a direct and significant negative impact on expected government revenues over this period (Chart 1.4).

Downward revision to budgetary revenues resulting
from lower nominal GDP

Chart 1.4
Change in Projected Budgetary Revenues From the 2012 Budget
to the 2012 Update

Source: Department of Finance.

While the forecast for revenues is lower compared to that of Budget 2012, the fiscal projections nevertheless show that the Government remains on track to return to balanced budgets over the medium term (Chart 1.5). This projected return to budgetary balance is based on prudent planning assumptions, which include an adjustment for risk.

The Government is on track to return to balanced budgets
over the medium term

Chart 1.5
Budgetary Balance

Source: Department of Finance.

The return to balanced budgets is the result of the Government’s ongoing commitment to controlling growth in program spending. This control will ensure that average growth of program spending is about half the rate of growth in revenues over the forecast horizon. Program expenses as a share of GDP will steadily decline, returning to pre-recession levels by the end of the forecast horizon (Chart 1.6). In controlling growth in program spending, the Government will not reduce transfers to persons, including for seniors, children and the unemployed, or transfers to other levels of government in support of health care and social services.

Program expenses-to-GDP ratio to return to its pre-recession level

Chart 1.6
Program Expenses-to-GDP Ratio

Note: The chart reflects the adoption of the new accounting standard for tax revenues.
Source: Department of Finance.

Eliminating the deficit will ensure that the federal debt, measured in relation to the size of the economy, resumes its downward track (Chart 1.7). Canada’s federal debt in relation to the economy is expected to decline to 28.1 per cent of GDP by 2017–18. As a result, Canada’s total net debt will remain the lowest in the G-7 by far. Lowering federal debt will also help to ensure that Canada meets its G-20 targets, as agreed to by G-20 leaders at their summit in Toronto in June 2010, to halve deficits by 2013 and to stabilize or reduce total government debt-to-GDP ratios by 2016.

The federal debt-to-GDP ratio is projected to resume
its downward track

Chart 1.7
Federal Debt-to-GDP Ratio

Sources: Department of Finance; Statistics Canada.

Supporting Jobs and Growth

Lowering the debt reduces the burden placed on future generations of Canadians and improves the environment for investment by keeping taxes and interest rates low. The commitment to manage public finances in a responsible manner is a key element of the Government’s comprehensive long-term agenda, launched in 2006, to foster strong, sustainable, long-term economic growth, building on Canada’s key advantages.

The Government followed through on this agenda by reducing taxes on Canadians, paying down debt, and investing in skills and infrastructure. These actions put the Canadian economy on a solid foundation for sustainable, long-term economic growth. They also placed Canada in a stronger position than most other countries and allowed the Government to respond quickly and effectively in response to the global recession in order to support the economy and protect Canadian jobs.

Budget 2012, entitled “Economic Action Plan 2012”, advanced the agenda to bolster long-term growth potential in Canada by investing in areas that promote jobs, economic growth and prosperity and by reinforcing Canada’s fundamental economic, financial and fiscal strengths. Economic Action Plan 2012 announced a set of measures to improve conditions for business investment, encourage responsible resource development, promote innovation through investments in knowledge and support for research and development, and facilitate greater participation in the labour force by underrepresented groups.

The actions taken by the Government since 2006 have been reflected in a strong economic performance over the past six years, with almost 1.4 million new jobs created since the beginning of 2006 and the strongest employment and income growth in the G-7 (Chart 1.8).

Employment and incomes have grown faster in Canada
than in any other G-7 country since 2006

Chart 1.8
Growth in Employment
From 2006 to 2011

Note: Base year for calculations is 2005.
Sources: Haver Analytics; IMF; Department of Finance calculations.

 

Growth in Real per Capita Disposable Income From 2006 to 2011

Notes: This chart shows gross personal per capita disposable income deflated by the Consumer Price Index. Base year for calculations is 2005.
Sources: Haver Analytics; IMF; Department of Finance calculations.

The Government’s actions to improve the environment for business investment have been reflected more recently in the resilience of the economic recovery, in particular the strength of business investment growth. Indeed, Canada is the only G-7 country to have more than fully recovered business investment that was lost during the recession (Chart 1.9). Business investment today creates the engines of growth for the future.

Canada is the only G-7 country to have more than fully recovered business investment lost during the recession

Chart 1.9
Change in Real Business Investment Since Pre-Recession Peak

Notes: The pre-recession peak in real GDP was 2007Q3 for Italy; 2007Q4 for the United States; 2008Q1 for the United Kingdom, France, Germany and Japan; and 2008Q3 for Canada. The latest data point is 2012Q2 for all countries except the United States, for which it is 2012Q3. Data for Italy include public non-residential investment.
Sources: Haver Analytics; Department of Finance calculations.

The Government is striking the right balance between returning to balanced budgets over the medium term and continuing to invest in the key drivers of economic growth and job creation. The commitment to return to budgetary balance over the medium term results from the Government’s fundamental belief that the private sector is the engine of growth and wealth creation. The role of government is to provide the framework policies, programs and services for a prosperous economy and society at levels of taxation that are competitive and sustainable for the long term.

To build a stronger Canada, the Government will continue to take the necessary steps to reinforce the fundamental strength and promise of the Canadian economy in order to sustain economic growth, create the high-quality, value-added jobs of tomorrow, preserve social programs and sound public finances, and deliver continued prosperity for generations to come.

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