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Archived - Update of Economic and Fiscal Projections — 2013: Part 1 of 4

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Highlights

  • The federal deficit has been reduced by almost two-thirds, from $55.6 billion in 2009–10 to $18.9 billion in 2012–13. Direct program spending has fallen for the third consecutive year, from $122.8 billion in 2009–10 to $117.7 billion in 2012–13.
  • The projected budgetary balance has improved across the forecast horizon as a result of policy decisions and changes to the forecast since Budget 2013. The Government projects a deficit of $17.9 billion in 2013–14, down from the $18.9-billion deficit recorded in 2012–13. This projection takes into account the estimated federal liability of $2.8 billion for disaster assistance related to the recent flooding in Alberta and the $60 million in assistance announced for the town of Lac-Mégantic. The deficit is projected to decline to $5.5 billion in 2014–15. A surplus of $3.7 billion is projected for 2015–16, even after taking into account a $3.0-billion adjustment for risk.
  • The Government remains on track to return to a balanced budget in 2015. Eliminating the deficit will ensure that the federal debt-to-GDP (gross domestic product) ratio will fall to low, pre-recession levels by 2017–18 and that Canada’s total government net debt-to-GDP ratio remains the lowest in the Group of Seven (G-7).
  • The Government is also on track to achieve the target, announced this September at the G-20 Leaders’ Summit in St. Petersburg, Russia, of reducing the federal debt-to-GDP ratio to 25 per cent by 2021.
  • The Canadian economy has experienced the best performance among G-7 countries over the recovery in terms of both output and job creation.
  • However, the global economic environment remains highly uncertain and downside risks continue to weigh on the outlook. While economic growth in Canada has remained resilient, Canada is not immune to developments outside its borders. Global economic weakness has weighed on our exports, which has restrained Canada’s real GDP growth. More recently, the weak external environment has dampened the prices of our export commodities which, combined with low domestic inflation, has resulted in weaker nominal GDP growth than was expected in Budget 2013.
  • To support jobs and growth, in September 2013 the Government announced that it will freeze the Employment Insurance premium rate at the 2013 level of $1.88 per $100 of insurable earnings for 2014, and additionally that the rate will be set no higher than $1.88 for 2015 and 2016.
  • As announced in the Speech from the Throne, the Government is reintroducing a freeze on departmental operating spending, which will incent departments to use their existing resources more efficiently. The freeze will apply to the 2014–15 and 2015–16 fiscal years and will help ensure a return to balanced budgets in 2015.
  • The Government is undertaking a systematic review of its corporate assets as a normal part of good governance, with a view to improving their efficiency and effectiveness and ensuring value for taxpayers. When it is in the best interest of Canadians, assets will be sold. As a first step, on September 16, the Government divested its interests in 30 million common shares in General Motors. The Government is also updating its spending projections in light of lower-than-expected departmental spending in 2012–13, which reflects the Government’s commitment to the responsible use of public funds—funds are only spent when necessary.

Note: This document incorporates economic, financial and fiscal data available up to and including November 8, 2013, unless otherwise indicated.

Chapter 1
Staying on Track in an Uncertain World

The Canadian economy has remained resilient in the face of global economic uncertainty. Over the recovery, Canada has outperformed all other
G-7 economies in job creation, with economic growth driven by strong domestic demand (Chart 1.1). Over 1 million more Canadians are working today than at the time of the trough in employment in July 2009. These new jobs are overwhelmingly full-time positions in the private sector, with the majority in high-wage industries.

Canada has outperformed all other G-7 economies in job creation over the recovery
Chart 1.1 Improvement in Employment Over the Recovery Chart 1.1 - Improvement in Employment Over the Recovery - For details, see the previous paragraph
Note: Monthly data for Canada (July 2009 to October 2013), the United States (February 2010 to October 2013), Germany (July 2009 to September 2013), Japan (December 2012 to September 2013) and Italy (at its lowest as of September 2013). Quarterly data for France (2009Q3 to 2013Q2) and the United Kingdom (2010Q1 to 2013Q2).
Sources: Haver Analytics; Department of Finance calculations.

However, Canada is not immune to external developments. Global economic growth has weakened over the course of this year, reflecting slower growth in emerging economies and continued slow growth in advanced economies. In the U.S., elevated uncertainty regarding fiscal policy, along with fiscal measures to reduce the deficit, continue to weigh on growth prospects. While overall growth in the euro area has returned to positive territory, striking disparities remain within the region and it continues to face record-high unemployment and tight financial market conditions. Taken together, these factors have led the International Monetary Fund (IMF) to revise down its global growth outlook for both this year and next (Chart 1.2).

The global economic outlook has been downgraded since the time of Budget 2013
Chart 1.2 IMF Real GDP Global Growth Outlook Chart 1.2 - IMF Real GDP Global Growth Outlook - For details, see the previous paragraph
Sources: IMF, January 2013 World Economic Outlook Update and October 2013 World Economic Outlook.

These global developments have weighed on the Canadian outlook. While our domestic economy has remained resilient, weak external demand has dampened our exports, restraining Canada’s overall real GDP growth since 2012. Moreover, the ongoing period of heightened global uncertainty has negatively affected the prices of our export commodities since Budget 2013. Along with low domestic inflation, this has resulted in weaker nominal GDP growth over the first half of 2013 than was expected in the budget.

Looking ahead, private sector economists are calling for continued modest real GDP growth, an outlook that is virtually unchanged from Budget 2013. However, the recent weakness in inflation, both domestically and in the prices of our export commodities, has led forecasters to revise down the average outlook for nominal GDP growth for both this year and next (Chart 1.3).

Economists now expect slower nominal GDP growth than at the time of Budget 2013
Chart 1.3
Real GDP Growth Outlook Chart 1.3a - Real GDP Growth Outlook - For details, see the previous paragraph
Nominal GDP Growth Outlook Chart 1.3b - Nominal GDP Growth Outlook - For details, see the previous paragraph

Supporting Jobs and Growth

Creating jobs and securing economic growth are and will remain the Government’s top priorities.

Economic Action Plan 2013 built on the strong foundation that the Government has created since 2006 with affordable measures to bolster the fundamental strengths and resilience of the Canadian economy. It included measures to:

  • Connect Canadians With Available Jobs by equipping them with the skills and training they require to obtain high-quality, well-paying jobs.
  • Help Manufacturers and Businesses Succeed in the Global Economy by enhancing the conditions for creating and growing businesses, including measures to support a globally competitive manufacturing sector, build on Canada’s financial sector advantage, increase and diversify our exports, and develop our natural resources in a safe, responsible and secure way.
  • Create a New Building Canada Plan that adds to the unprecedented investments in public infrastructure since 2006 with a new infrastructure plan focused on projects that create jobs and economic growth and provide a high quality of life for Canadian families.
  • Invest in World-Class Research and Innovation and foster a vibrant entrepreneurial culture where new ideas are translated from laboratories into the marketplace.
  • Support Families and Communities by expanding opportunities for Canadians to succeed and enjoy a high quality of life.

On September 9, 2013, the Government announced that it will freeze the Employment Insurance premium rate at the 2013 level of $1.88 per $100 of insurable earnings for 2014, and additionally that the rate will be set no higher than $1.88 for 2015 and 2016. This will leave $660 million in the pockets of job creators and Canadian workers in 2014 alone, which will help provide the certainty and flexibility employers, especially small businesses, need to keep growing.

The Government is acting to better position Canada as a strong competitor in the global economy

In mid-October, Canada and the European Union (EU) reached an agreement in principle on a comprehensive trade agreement that will significantly boost trade and investment ties, creating jobs and opportunities for Canadians. The elimination of approximately 98 per cent of all EU tariff lines on the first day that the Agreement comes into force will translate into increased profits and market opportunities for Canadian businesses of all sizes, in every part of the country, as well as reduced prices for Canadian consumers.

The Agreement will provide Canada with preferential market access to the EU. As a result, Canada will be one of only a few developed economies to have preferential access to the world’s two largest markets: the EU and the United States, which together represent more than 800 million relatively affluent consumers and almost half of global GDP.

The actions taken by the Government since 2006 have helped the Canadian economy to enjoy the strongest economic performance in the G-7, with almost 1.6 million new jobs created since the beginning of 2006. In addition, Canadians have enjoyed the strongest income growth in the G-7 by far (Chart 1.4).

Employment and incomes have grown faster in Canada than in any other G-7 country since 2006
Chart 1.4
Growth in Employment
From 2006 to 2012
Chart 1.4a - Growth in Employment From 2006 to 2012 - For details, see the previous paragraph
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 2012
Chart 1.4b - Growth in Real per Capita Disposable Income From 2006 to 2012 - For details, see the previous paragraph
Notes: This chart shows gross personal per capita disposable income deflated by the Consumer Price Index. The last data point is 2012 for all countries except Japan, for which it is 2011. Base year for calculations is 2005.
Sources: Haver Analytics; IMF; Department of Finance calculations.

This strong economic performance has translated into income gains for all Canadians. In 2011, families in all major income quintiles had a higher income (after taxes, transfers and inflation) than prior to the recession. Moreover, gains in income between 2008 and 2011 were more pronounced for lower-income families. Further, the share of Canadians living in low-income families has fallen to 8.8 per cent in 2011, its lowest level on record. The shares of children and seniors living in low-income families were also both at or near historic lows (Chart 1.5).

The share of Canadians living in low-income families has reached an historic low
Chart 1.5 Share of the Total Population, Children and Seniors Living in Low-Income Families Chart 1.5 - Share of the Total Population, Children and Seniors Living in Low-Income Families - For details, see the previous paragraph
Note: The share of Canadians living in low-income families is based on the low-income cut-off (LICO). The LICO represents the after-tax threshold below which a family would devote 20 percentage points more of its income to necessities (food, shelter and clothing) than an average family.
Source: Statistics Canada's Survey of Labour and Income Dynamics.

An Ongoing Commitment to Sound Public Finances

Ultimately, the resilience of the Canadian economy, and its ability to thrive in the 21st century global economy, must be underpinned by a strong fiscal position. 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 economic plan launched in 2006 to foster strong, sustainable, long-term economic growth, building on Canada’s key advantages.

The commitment to return to balanced budgets 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 ensure that Canada is well positioned to withstand future economic shocks and address the priorities of Canadians, the Government has taken a number of actions since Budget 2010 to eliminate the deficit and return to balanced budgets in 2015. These actions include controlling the direct program spending of federal departments, ensuring reasonable and affordable federal employee compensation, and closing tax loopholes. The success of these measures will allow the Government to return to balanced budgets without raising taxes or cutting important transfers in support of health care and social services, Equalization and the Gas Tax transfer to municipalities.

The Government is taking further action to ensure a return to balanced budgets in 2015. Specifically, as announced in the Speech from the Throne, it is reintroducing a freeze on operating spending. The freeze will be in effect for the 2014–15 and 2015–16 fiscal years. Under the freeze, departments and agencies will be required to absorb any collectively bargained wage increases for those two years. This will incent departments to become more efficient with their existing resources.

The Government is also updating its spending projections to reflect lower-than-expected departmental spending in 2012–13, which reflects the Government’s commitment to the responsible use of public funds—funds are only spent when necessary.

In addition, the Government is undertaking a systematic review of its corporate assets as a normal part of good governance, with a view to improving their efficiency and effectiveness and ensuring value for taxpayers. When it is in the best interest of Canadians, assets will be sold. As a first step, on September 16, the Government divested its interests in 30 million common shares in General Motors. The fiscal projections in this Update include conservative estimates of the potential net proceeds from already-announced upcoming asset sales.

With these actions and changes, the Government projects a deficit of $17.9 billion in 2013–14, down from the $18.9-billion deficit recorded in 2012–13. The deficit is projected to decline to $5.5 billion in 2014–15. A surplus of $3.7 billion is projected for 2015–16, even after taking into account a $3.0-billion adjustment for risk (Chart 1.6). Relative to Budget 2013, the projected budgetary balance has improved in every year of the forecast horizon.

The Government is on track to achieve a surplus of almost $4 billion in 2015
Chart 1.6 Budgetary Balance After Measures Chart 1.6 - Budgetary Balance After Measures - For details, see the previous paragraph
Source: Department of Finance.

Eliminating the deficit and maintaining balanced budgets 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 is expected to decline to a low, pre-recession level of 27.6 per cent of GDP by 2017–18, putting the Government well on its way to meeting its commitment to reduce the debt to 25 per cent of GDP by 2021. This will help to ensure that Canada’s total government net debt (which includes that of the federal, provincial, territorial and local governments as well as the net assets of the Canada Pension Plan and Québec Pension Plan) will remain the lowest, by far, of any G-7 country and among the lowest in the advanced G-20 countries.

Public debt charges represented approximately 11 cents of every revenue dollar in 2012–13, which is well below the peak of 38 cents of every revenue dollar in 1990–91. This means that fewer hard-earned tax dollars are being diverted from important government services and programs to service debt.

This Update also provides an update of Canada’s long-term economic and fiscal projections, which confirms that the federal government’s financial situation is on a sustainable path.

The federal debt-to-GDP ratio is projected to resume its downward track
Chart 1.7 Federal Debt-to-GDP Ratio Chart 1.7 - Federal Debt-to-GDP Ratio - For details, see the three previous paragraphs
Sources: Department of Finance; Statistics Canada.

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