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Update Economic and Fiscal Projections – 2013: Part 3 of 4

Chapter 3
Fiscal Outlook

While the Canadian economy has recovered from the global recession better than other Group of Seven (G-7) economies, the global economic environment remains fragile and risks continue to weigh on global growth prospects. Canada is not immune to these external developments. Indeed, reflecting the slow global recovery and the associated weakness in nominal gross domestic product (GDP), the broadest single measure of the tax base, revenues are projected to be lower than forecast in Budget 2013, negatively impacting the fiscal track. However, by continuing to control growth in direct program spending, the Government remains on track to return to balanced budgets in 2015.

This chapter reviews the major fiscal developments since Budget 2013 and updates the Government’s fiscal projections for the 2013–14 to 2018–19 period.

Fiscal Planning Assumptions

To ensure objectivity and transparency, 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 nearly two decades. This Update maintains that approach.

However, as described in Chapter 2, although the September 2013 private sector survey is considered to be a reasonable basis for fiscal planning purposes, the global economic outlook remains highly uncertain. As a result, the Government has judged it appropriate to continue to include a $20-billion downward adjustment to the private sector forecast for nominal GDP. With this adjustment for risk, the revenue projections are reduced by $3.0 billion in each year from 2014–15 to 2018–19 (Table 3.1). The downward adjustment for 2013 nominal GDP is reduced to $10 billion, or $1.5 billion in revenue for 2013–14, as actual economic data are now available for two-thirds of 2013, meaning the risk for 2013 as a whole has been reduced.

Table 3.1
Planning Assumptions for the 2013 Update of Economic and Fiscal Projections
billions of dollars
2013–14 2014–15 2015–16 2016–17 2017–18 2018–19
Adjustment for risk to revenues -1.5 -3.0 -3.0 -3.0 -3.0 -3.0

Changes in the Fiscal Outlook Since the March 2013 Budget

Table 3.2 provides a summary of the changes in the fiscal projections between Budget 2013 and this Update.The $18.9-billion deficit in 2012–13 was down from a $26.3-billion deficit in 2011–12 and $6.9  billion lower than the $25.9-billion deficit forecast in Budget 2013. Revenues were $1.9 billion higher than projected in Budget 2013, reflecting higher-than-expected tax revenues and other revenues. In addition, program expenses were $5.2 billion lower than forecast. 

The table shows that the risk-adjusted budgetary balance has improved across the forecast horizon as a result of policy decisions and changes to the forecast since Budget 2013. The projected budgetary deficit continues its downward path, reaching a small deficit of $5.5 billion in 2014–15 before turning into a surplus of $3.7  billion in 2015–16. As a result, despite the weak global economic environment, the Government is on track to meet its commitment to return to balanced budgets in 2015. 

Table 3.2
Summary of Changes in the Fiscal Outlook Since Budget 2013
billions of dollars
    Projection
   
  2012–13 2013–14 2014–15 2015–16 2016–17 2017–18 2018–19
Budget 2013 budgetary balance -25.9 -18.7 -6.6 0.8 3.9 5.1 n/a
  Excluding revenue effect of adjustment for risk   3.0 3.0 3.0 3.0 3.0  
Budget 2013 budgetary balance before adjustment for risk -25.9 -15.7 -3.6 3.8 6.9 8.1
Impact of economic and fiscal developments              
  Budgetary revenues 1.9 -1.3 -2.6 -2.2 -1.8 -2.5  
  Program expenses 5.2 2.7 3.0 3.0 1.7 1.1  
    Major transfers to persons 0.1 1.0 1.5 1.5 1.4 1.1  
    Major transfers to other levels of government 0.2 -0.2 -0.1 -0.1 -0.1 -0.1  
    Direct program expenses 4.9 1.9 1.5 1.6 0.4 0.2  
  Public debt charges -0.1 0.3 0.5 0.7 0.7 0.8  
 
  Total economic and fiscal developments 6.9 1.7 0.9 1.4 0.5 -0.5  
Revised status quo budgetary balance -18.9 -14.0 -2.7 5.3 7.4 7.5 11.6
Disaster assistance              
  Alberta flood   -2.8          
  Lac-Mégantic train derailment and explosion   -0.1          
Action to support jobs and growth              
  Employment Insurance premium rates   -0.2 -0.8 -1.2 -0.5    
Action to support a return to balance in 2015              
  Operating budget freeze     0.6 1.1 1.1 1.2 1.2
Asset sales              
  Sale of General Motors shares   0.7          
  Provision for future asset sale revenues     0.5 1.5      
Reclassification of interest expense              
  Budgetary revenues 0.6 0.6 0.7 0.9 1.2 1.4 1.8
  Program expenses -0.6 -0.6 -0.7 -0.9 -1.2 -1.4 -1.8
2013 Update budgetary balance before adjustment for risk -18.9 -16.4 -2.5 6.7 8.0 8.7 12.8
  Including revenue effect of adjustment for risk   -1.5 -3.0 -3.0 -3.0 -3.0 -3.0
2013 Update budgetary balance -18.9 -17.9 -5.5 3.7 5.0 5.7 9.8
Note: Totals may not add due to rounding. 
A negative number implies a deterioration in the budgetary balance (lower revenues or higher spending). A positive number implies an improvement in the budgetary balance (higher revenues or lower spending). 

Impact of Economic and Fiscal Developments

Total economic and fiscal developments since Budget 2013 have largely resulted in an improvement to the fiscal outlook, as weaker projected budgetary revenues are generally more than offset by lower projected program expenses and public debt charges.

Revenues are lower over the forecast horizon as the downward revision to nominal GDP more than offsets the carry-forward of better-than-expected revenue results for 2012–13.  

The forecast for major transfers to persons has been reduced, reflecting fewer Employment Insurance beneficiaries than previously expected as well as lower forecasts for elderly and children’s benefits.

The forecast for major transfers to other levels of government has increased as a result of a reprofile of a portion of the Gas Tax Fund from 2012–13 to 2013–14 as well as increased expected transfers to the territories.

Direct program expenses are expected to be lower than projected in Budget 2013. This is largely due to a revision to the estimated lapse of departmental spending included in the fiscal projections. The lapse included in the fiscal projections reflects an estimate of planned spending that does not proceed in any given year. Lapses in departmental spending are to be expected, as they result from factors such as lower-than-expected costs for programming and revised schedules for implementation of initiatives. Lapses reflect the Government’s commitment to the responsible use of public funds—funds are only spent when necessary.

Budget 2013 included an increase in the estimated lapse to reflect recent historical trends. This Updatefurther increases the estimated lapse to reflect spending patterns observed in 2012–13. Departments effectively lapsed $8.9 billion, or 9 per cent of appropriations, in 2012–13 after taking into account frozen allotments to implement Budget 2012 reductions to departmental spending (Chart 3.1). This amount was higher than anticipated in Budget 2013 and continued the recent trend in large departmental lapses. Therefore, the forecasted lapse has been further revised upwards by $1.5  billion in 2013–14. To be prudent, gradually smaller upward revisions have been made for the 2014–15 to 2017–18 fiscal years. No upward revision is made in 2018–19 when the lapse amount is projected to be about $4.8 billion. As a proportion of appropriations, the lapse is projected to be about 5 per cent by 2018–19, which is close to post-2000 historical lows. The assumption that the lapse trends towards post-2000 historical lows introduces an element of prudence into the fiscal projections. This assumption remains consistent with the lapse adjustment included in Budget 2013.

The difference between planned and actual departmental spending is expected to return to post-2000 historical lows
Chart 3.1 Historical and Projected Lapses Chart 3.1 - Historical and Projected Lapses - See previous paragraph for details
Notes: Historical lapses are presented on a cash basis as they are presented in the Public Accounts of Canada. Projected lapses are presented on an accrual basis to be consistent with the fiscal projections. The projected lapses are divided by projected appropriations on a cash basis.
The total budgetary lapse for 2012–13, as presented in the 2013 Public Accounts of Canada, is $10.1 billion; however, $1.2 billion of this lapse corresponds to frozen allotments applied to departmental appropriations to implement Budget 2012 reductions to departmental spending. Consequently, the effective lapse in departmental spending for 2012–13 is $8.9 billion.
Sources: Public Accounts of Canada; Department of Finance.

The projection for direct program expenses also reflects changes to the profile of projected infrastructure spending, as well as lower projected costs for refundable tax credits in most years. However, these decreases are partially offset by higher projected transfers to provinces in respect of natural resource revenues in the outer years of the forecast. 

Public debt charges are expected to be lower than projected in Budget 2013 over the entire forecast horizon, reflecting lower forecasted short-term interest rates and lower net interest costs on pension liabilities. These savings are partially offset by higher forecasted long-term interest rates.

Disaster Assistance

Since Budget 2013 the Government has pledged support to communities affected by disasters. In June 2013, Alberta was struck by devastating floods, with damage in the billions of dollars. This Update includes the estimated federal liability of $2.8 billion under the Disaster Financial Assistance Arrangements (DFAA) for assistance related to the recent flooding in Alberta, based on information received from the Government of Alberta. Under the DFAA cost-sharing formula applied to eligible expenses related to large-scale natural disasters, the federal share begins at 50 per cent for costs over $1 per capita and ramps up to a federal share of 90 per cent for costs over $5 per capita.

This Update also reflects the $60 million in assistance announced for the town of Lac-Mégantic.

Action to Support Jobs and Growth

Budget 2013 projected that the Employment Insurance (EI) premium rate would increase by the maximum 5 cents per year to reach $1.98 per $100 of insurable earnings in 2015, before declining to $1.93 in 2016. However, the Government has taken action to support jobs and growth by freezing the EI premium rate for employees and employers at the 2013 level for 2014, and announcing that the rate will be set no higher than $1.88 in 2015 and 2016. In 2014 alone, this change is expected to save employers and employees $660 million, relative to a 5-cent increase to $1.93. For a worker earning $48,600—the maximum insurable earnings threshold for 2014—this represents a savings of $24. For a small business employing 10 workers, this represents a savings of up to $340.

Action to Support a Return to Balance in 2015

As announced in the Speech from the Throne, the Government will reintroduce a freeze on departmental operating budgets. This freeze will apply for two years beginning in 2014–15. 

Substantively, the freeze will mean that federal departmental budgets will not be increased to fund annual wage increases that are established through collective bargaining during the two years in which the operating freeze is in effect. Federal employee wages will continue to be determined through the collective bargaining process; however, departments will be required to reallocate from the remainder of their existing operating budgets to fund any negotiated wage increases. Departments will place increased focus on improving the efficiency of their internal operations and administration. Employee wages represent the largest portion of departmental operating expenses.

Any increases or transfers to operating budgets during this period will be approved on an exceptional basis by Treasury Board. Potential adjustments would be limited to expenditures related to measures announced in recent and upcoming budgets, cost pressures related to essential services, and payments that arise from liabilities and other contingencies. In addition, while the Department of National Defence will be subject to the overall operating budget constraint, the Defence escalator will continue to apply.  

This measure will apply to all federal organizations that receive appropriations from Parliament for wage increases, including all federal departments and certain appropriation-dependent Crown corporations. The Government expects that other federal organizations, for which expenses are not appropriated by Parliament (for example self-financing Crown corporations), will follow suit to restrain their operating budgets. The Government is also calling upon the Agents of Parliament to adhere to the spirit and intent of the operating budget freeze.  

The Government will also freeze the overall budget of Ministers’ offices and calls upon Members of both Houses of Parliament to do the same.

Recognizing the constraint that will be imposed on the operating budgets of departments, the Government will continue to work with public sector bargaining agents to ensure that the Public Service is affordable, modern and high-performing. This will include an examination of pay and benefits to ensure that the total compensation available to public servants is responsible and fair relative to other employers in the private and public sectors.

The operating budget freeze is expected to generate savings of roughly $550 million in 2014–15 and $1.1 billion in 2015–16. 

Asset Sales

The Government is also updating the fiscal framework to account for revenues resulting from the sale of government assets. Since 2009, the Government has been undertaking a systematic review of federally owned assets to improve their efficiency and effectiveness and to ensure value for taxpayers. This review seeks to ensure that government ownership of federal assets remains in the best interests of Canadians. If it is determined that divestiture of an asset would create economic value and would represent the most efficient use of taxpayer resources, the Government will proceed with a sale process. 

On September 16, the Government divested its interests in 30 million General Motors common shares, leading to a fiscal gain of roughly $0.7 billion that will be recorded in 2013–14. In addition, this Update includes potential gains from the sale of various assets in 2014–15 and 2015–16. Assets that are expected to be sold in these years include Ridley Terminals (a bulk coal terminal in British Columbia) and the Government’s remaining holdings of General Motors. In addition, the Government is considering the sale of the Dominion Coal Blocks (two parcels of Crown land in British Columbia). The potential gain included in the forecast for other revenues is $500 million in 2014–15 and $1.5  billion in 2015–16. These amounts are conservative and do not reflect the full potential gain that could be realized from the sale of these assets.

Including expected net proceeds from asset sales is consistent with practices and principles that have recently been employed by other countries, including the United Kingdom and Australia. It is also consistent with Budget 2004, when the Government included a projection of net proceeds from the sale of its remaining interest in Petro-Canada.

Reclassification of Interest Expense

Previously, interest expense paid by the Government of Canada on taxes owing was subtracted from interest revenue with the net amount recorded in other revenues. In order to be consistent with the 2013 Public Accounts of Canada, interest expense has been reclassified from other revenues to direct program expenses. As a result of the reclassification, both revenues and expenses will increase by an equivalent amount, resulting in no net impact on the budgetary balance. The fiscal outlook tables and charts in this Update reflect this reclassification. To enhance comparability, prior-year results have also been restated to reflect this reclassification. For 2012–13, this has the impact of increasing both revenues and expenses by $0.6 billion.

An Ongoing Commitment to Strong Public Finances

The emphasis placed on responsible fiscal management will help ensure that the Government is on track to return to budgetary balance in 2015 and will free up additional resources to invest in priority measures. Going forward, the Government will continue its policy of continuously examining departmental spending and examining whole-of-government initiatives to ensure that federal programs are managed efficiently and aligned with taxpayer priorities. 

The Government’s record on fiscal management has made Canada a recognized leader on the international economic stage. Canada’s total government net debt level, which includes the federal, provincial/territorial and local governments as well as the net assets of the Canada Pension Plan and Québec Pension Plan, is the lowest of any G-7 country, standing at less than half the G-7 average in 2012, at 34.7 per cent of GDP. Canada is now one of only a handful of countries that continues to receive a triple A credit rating, with a stable outlook, from all the major credit rating agencies.

At the G-20 Leaders’ Summit in St. Petersburg, Russia, on September 5, 2013, Prime Minister Stephen Harper announced Canada’s commitment to achieve a federal debt-to-GDP ratio of 25 per cent by 2021. Lower debt levels will result in lower taxes for Canadians and a strong investment climate that supports job creation and economic growth.   

Summary Statement of Transactions

Table 3.3 summarizes the Government’s financial position over the forecast horizon. These projections are based on the average private sector forecast for the economy, with the adjustment for risk discussed above.

Table 3.3
Summary Statement of Transactions
billions of dollars
  Projection
 
  2012–13 2013–14 2014–15 2015–16 2016–17 2017–18 2018–19
Budgetary revenues 256.6 265.2 277.4 293.9 307.0 317.9 332.7
Program expenses 246.4 253.6 253.1 259.4 268.8 277.2 286.8
Public debt charges 29.2 29.5 29.7 30.8 33.2 35.0 36.1
 
Total expenses 275.6 283.1 282.8 290.2 301.9 312.2 322.9
Budgetary balance -18.9 -17.9 -5.5 3.7 5.0 5.7 9.8
Federal debt1 602.4 617.9 623.3 619.6 614.6 608.9 599.1
Per cent of GDP              
  Budgetary revenues 14.1 14.2 14.3 14.5 14.5 14.4 14.4
  Program expenses 13.5 13.6 13.1 12.8 12.7 12.5 12.4
  Public debt charges 1.6 1.6 1.5 1.5 1.6 1.6 1.6
  Budgetary balance -1.0 -1.0 -0.3 0.2 0.2 0.3 0.4
  Federal debt 33.1 33.1 32.2 30.6 29.1 27.6 26.0
Note: Totals may not add due to rounding.
1 The projected level of federal debt for 2013–14 includes an estimate of other comprehensive income.

As a result of the Government’s responsible management of public finances, the budgetary balance is projected to continue to improve from a deficit of $18.9 billion in 2012–13 to a surplus of $9.8 billion in 2018–19 (Chart 3.2). As a percentage of GDP, the budgetary balance is projected to improve over the forecast period from a deficit of 1.0 per cent in 2012–13 to a surplus of 0.4 per cent in 2018–19, including the adjustment for risk.

The Government is on track to return to balanced budgets in 2015
Chart 3.2 Budgetary Balance After Measures Chart 3.2 - Budgetary Balance After Measures - See previous paragraph for details
Source: Department of Finance.

The federal debt-to-GDP ratio (accumulated deficit) stood at 33.1 per cent in 2012–13, down from 33.2 per cent in 2011–12. The federal debt ratio is projected to reach low, pre-recession levels by 2017–18, putting the Government well on its way to meeting its commitment to reduce the federal 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) continues to decline from its already low level. Indeed, the International Monetary Fund estimates that Canada’s total government net debt-to-GDP ratio is the lowest, by far, of any G-7 country (Chart 3.3).

Canada has by far the lowest net debt-to-GDP ratio in the G-7
Chart 3.3 Total Government1 Net Debt-to-GDP Ratio, 2013  Chart 3.3 - Total Government Net Debt-to-GDP Ratio, 2013 - For details, refer to preceding paragraphs.

1 The total government sector is comprised of federal, state and local governments and includes social security plans. In Canada, total government net debt includes those of the federal, provincial/territorial and local governments, as well as the net assets held in the Canada Pension Plan and the Québec Pension Plan.
Source: International Monetary Fund, Fiscal Monitor, October 2013.

Outlook for Budgetary Revenues

Table 3.4
Revenue Outlook
billions of dollars
    Projection
   
  2012–13 2013–14 2014–15 2015–16 2016–17 2017–18 2018–19
Income taxes              
  Personal income tax 125.7 131.3 139.1 146.8 153.8 161.0 168.2
  Corporate income tax 35.0 35.0 36.3 38.6 41.8 44.5 47.1
  Non-resident income tax 5.1 5.5 5.8 6.3 6.8 7.2 7.6
 
  Total income tax 165.8 171.8 181.2 191.6 202.4 212.7 222.9
Excise taxes/duties              
  Goods and Services Tax 28.8 29.7 31.1 33.0 34.8 36.5 38.1
  Customs import duties 4.0 4.0 4.2 4.7 4.4 4.6 4.8
  Other excise taxes/duties 10.8 10.8 10.8 10.8 10.7 10.8 10.8
 
  Total excise taxes/duties 43.6 44.5 46.2 48.5 50.0 51.8 53.6
Total tax revenues 209.3 216.3 227.4 240.1 252.4 264.5 276.5
Employment Insurance premium revenues 20.4 21.5 22.7 23.6 23.0 19.5 20.2
Other revenues 26.9 27.4 27.3 30.2 31.6 33.8 35.9
 
Total budgetary revenues 256.6 265.2 277.4 293.9 307.0 317.9 332.7
Per cent of GDP              
  Personal income tax 6.9 7.0 7.2 7.3 7.3 7.3 7.3
  Corporate income tax 1.9 1.9 1.9 1.9 2.0 2.0 2.0
  Goods and Services Tax 1.6 1.6 1.6 1.6 1.6 1.7 1.7
Total tax revenues 11.5 11.6 11.8 11.9 11.9 12.0 12.0
Employment Insurance premium revenues 1.1 1.2 1.2 1.2 1.1 0.9 0.9
Other revenues 1.5 1.5 1.4 1.5 1.5 1.5 1.6
Total 14.1 14.2 14.3 14.5 14.5 14.4 14.4
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 3.3 per cent in 2013–14. Over the remainder of the forecast horizon, revenues are projected to grow at an average annual rate of 4.6 per cent.

Personal income tax revenues—the largest component of budgetary revenues—are projected to increase by $5.6 billion, or 4.5 per cent, to $131.3 billion in 2013–14. Over the remainder of the projection period, personal income tax revenues increase somewhat faster than growth in nominal GDP, averaging 5.1 per cent annual growth, reflecting the progressive nature of the income tax system combined with projected real income gains.

Despite reductions in the corporate income tax rate, corporate income tax revenues increased by $1.3 billion, or 4.0 per cent, in 2012–13, reflecting growth in corporate taxable income. Over the projection period, corporate income tax revenues are forecast to grow at an annual rate of 5.1 per cent, largely in line with projected profit growth, previously announced actions to close tax loopholes and improve the fairness and integrity of the tax system, and changes to the Canada Revenue Agency’s compliance programs.

Non-resident income tax revenues are income taxes paid by non-residents of Canada on Canadian-sourced income, notably dividends and interest payments. They are projected to increase by $0.4  billion, or 7.6 per cent, to $5.5 billion in 2013–14. Over the remainder of the projection period, they are projected to increase at an average annual rate of 6.8 per cent.

Goods and Services Tax (GST) revenues are projected to grow by 2.9 per cent in 2013–14 based on projected growth in taxable consumption and year-to-date results. Over the remainder of the projection period, GST revenues are projected to grow by 5.1 per cent per year on average, based on projected growth in taxable consumption and in the GST credit.

Customs import duties are projected to increase by 1.1 per cent in 2013–14, 5.6 per cent in 2014–15 and 10.9 per cent in 2015–16, reflecting year-to-date results, projected growth in imports and measures introduced in Budget 2013. They are projected to decline by 6.8 per cent in 2016–17, reflecting the expected introduction of the Canada-European Union Comprehensive Economic and Trade Agreement. Over the remainder of the projection period, annual growth in customs import duties is projected to average 4.1 per cent, based on projected growth in imports.

Other excise taxes and duties are projected at $10.8 billion in 2013–14, reflecting year-to-date results and recent trends, and are expected to remain stable over the remainder of the projection period.

Employment Insurance (EI) premium revenues are projected to grow by 5.4 per cent in 2013–14, in line with the growth in insurable earnings and the EI premium rate of $1.88 per $100 of insurable earnings in both 2013 and 2014. For 2015 and 2016, the Government has announced that the EI premium rate will be set no higher than $1.88. For purposes of fiscal planning, a rate of $1.88 has been assumed. As a result, from 2013–14 to 2015–16, EI premium revenues are projected to grow by 4.8 per cent per year on average. Reflecting the introduction of the seven-year break-even rate mechanism in 2017, EI premium rates are expected to decrease to $1.47, bringing expected declines in EI premium revenues of 2.4 per cent in 2016-17 and 15.4 per cent in 2017–18. EI premium revenues are expected to resume their upward trend in 2018–19.

Employment Insurance Operating Account
Employment Insurance Operating Account Projections
billions of dollars
2013–
2014  
2014–
2015  
2015–
2016  
2016–
2017  
2017–
2018  
2018–
2019  
EI premium revenues 21.5 22.7 23.6 23.0 19.5 20.2
EI benefits1 17.3 17.9 18.5 19.0 19.5 20.3
2013 2014 2015 2016 2017 2018

EI Operating Account annual balance2 2.9 3.1 3.7 4.1 -1.5 -1.4
EI Operating Account cumulative balance2 -5.3 -2.1 1.5 5.6 4.1 2.7

Reference:
Projected premium rate
(per $100 of insurable earnings)
1.88 1.88 1.88 1.88 1.47 1.47
Premium rate projected in Budget 2013 (per $100 of insurable earnings) 1.88 1.93 1.98 1.93 1.53
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. The remaining EI costs relate mainly to administration and are included in direct program spending.
2
The EI Operating Account annual and cumulative balances are on a calendar-year basis since the EI premium rate is set on a calendar-year basis.

The global recession led to an increase in EI benefit expenditures over a relatively short period of time. As a result, the EI Operating Account, which records all amounts received or paid out under the Employment Insurance Act, reached a cumulative deficit of $9.2 billion in 2011. The EI Operating Account is now on track to return to cumulative balance without requiring premium rate increases above the current level of $1.88. As a result, in September 2013 the Government froze the EI premium rate for 2014 at the 2013 level of $1.88 per $100 of insurable earnings and announced that the rate will be set no higher than $1.88 for 2015 and 2016.

For fiscal planning purposes, an EI premium rate of $1.88 is assumed for 2015 and 2016, which leads to the projection of a cumulative surplus in the EI Operating Account. Any accumulated surplus will be wound down after the introduction of the seven-year break-even rate mechanism in 2017. This new rate-setting mechanism will ensure that EI premiums are no higher than needed to pay for the EI program over time. This is expected to result in a significant reduction in the premium rate in 2017. After the move to the seven-year break-even rate in that year, annual adjustments to the rate will be limited to 5 cents.

Other revenues include revenues from consolidated Crown corporations, net income from enterprise Crown corporations, returns on investments, foreign exchange revenues and proceeds from the sales of goods and services. These revenues are generally volatile, owing principally to the impact of interest rates on returns on investments and the assets in the Exchange Fund Account, and the net gains or losses from enterprise Crown corporations. These revenues are also affected by the impact of exchange rate movements on the Canadian-dollar value of foreign-denominated assets as well as flow-through items that give rise to an offsetting expense and therefore do not impact the budgetary balance.

For 2013–14, other revenues are projected to increase by 2.0 per cent to $27.4 billion due to the higher revenues from Crown corporations and the sale of some of the Government’s shares in General Motors. Growth in other revenues is expected to average 5.5 per cent over the remainder of the forecast horizon, based on the projected profiles of interest rates and nominal GDP and the provision for future asset sales.

Chart 3.4 demonstrates that the revenue-to-GDP ratio declined substantially following 2006–07, and is at its lowest level in more than 50 years. This decline is due primarily to tax reduction measures. Since 2008–09, the revenue ratio has averaged just over 14 per cent. Over the forecast horizon, the revenue-to-GDP ratio is projected to remain relatively stable at around 14.4 per cent. 

Revenue-to-GDP ratio has fallen since 2006–07 and is expected to remain relatively stable
Chart 3.4 Budgetary Revenues-to-GDP Ratio Budgetary Revenues-to-GDP Ratio - For details, refer to preceding paragraphs.
Source: Department of Finance.

Outlook for Program Expenses

Table 3.5
Program Expenses Outlook
billions of dollars
    Projection
   
  2012–13 2013–14 2014–15 2015–16 2016–17 2017–18 2018–19
Major transfers to persons              
  Elderly benefits 40.3 42.0 44.1 46.4 49.0 51.7 54.4
  Employment Insurance benefits1 17.1 17.3 17.9 18.5 19.0 19.5 20.3
  Children’s benefits 13.0 13.1 13.2 13.4 13.6 13.7 13.9
 
  Total 70.3 72.4 75.2 78.3 81.5 84.9 88.6
Major transfers to other levels of government              
  Canada Health Transfer 28.6 30.3 32.1 34.0 36.1 37.7 39.3
  Canada Social ransfer 11.9 12.2 12.6 13.0 13.3 13.7 14.2
  Fiscal arrangements2 17.8 18.7 19.3 20.0 20.8 21.7 22.5
  Gas Tax Fund 2.0 2.1 2.0 2.0 2.1 2.1 2.2
  Other major transfers3 1.5 0.6 0.3 0.2 0.1 0.1 0.0
  Alternative Payments for tanding Programs4 -3.4 -3.5 -3.7 -3.9 -4.1 -4.4 -4.6
 
  Total 58.4 60.5 62.6 65.2 68.3 70.9 73.7
Direct program expenses              
  Operating expenses 78.0 77.0 73.9 74.5 75.4 77.2 79.3
  Transfer payments 34.9 38.2 35.6 35.2 37.0 37.4 38.3
  Capital amortization 4.9 5.5 5.8 6.2 6.5 6.7 6.9
 
  Total 117.7 120.7 115.4 115.9 119.0 121.4 124.5
Total program expenses 246.4 253.6 253.1 259.4 268.8 277.2 286.8
Per cent of GDP              
Major transfers to persons 3.9 3.9 3.9 3.9 3.9 3.8 3.8
Major transfers to other levels of government 3.2 3.2 3.2 3.2 3.2 3.2 3.2
Direct program expenses 6.5 6.5 6.0 5.7 5.6 5.5 5.4
Total program expenses 13.5 13.6 13.1 12.8 12.7 12.5 12.4
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. The remaining EI costs relate mainly to administration and are part of operating expenses.
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 2012–13 and 2013–14; payments under the 2005 Offshore Accords; assistance regarding sales tax harmonization; the Wait Times Reduction Transfer; and other health-related transfers.
4 Alternative Payments for Standing Programs represent a recovery from Quebec of an additional tax point transfer above and beyond the tax point transfer under the Canada Health Transfer and the Canada Social Transfer.

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 increase steadily over the forecast horizon, with spending expected to increase from $72.4 billion in 2013–14 to $88.6 billion in 2018–19.

Major transfers to persons consist of elderly, EI and children’s benefits.

Elderly benefits are comprised of Old Age Security, Guaranteed Income Supplement and Allowance payments to qualifying seniors. Elderly benefits are projected to grow from $42.0 billion in 2013–14 to $54.4 billion in 2018–19, or approximately 5.3 per cent per year—faster than nominal GDP, which is projected to grow on average by 4.4 per cent per year. This increase is due to consumer price inflation, to which benefits are fully indexed, and a projected increase in the seniors’ population from 5.4 million in 2013–14 to 6.4 million in 2018–19, an average increase of 3.5 per cent per year.

EI benefits are projected to increase by 1.0 per cent to $17.3 billion in 2013–14 based on year-to-date results and projected growth in average benefits. Over the remainder of the projection period, EI benefits are projected to grow moderately, averaging 3.2 per cent annually, as projected increases in the average benefits paid to EI recipients more than offset the impacts of the reduction in the number of unemployed.

Children’s benefits, including the Canada Child Tax Benefit and the Universal Child Care Benefit, are projected to increase moderately over the forecast horizon, reflecting growth in the eligible population and adjustments for inflation.

Major transfers to other levels of government are expected to increase over the forecast horizon, from $60.5 billion in 2013–14 to $73.7 billion in 2018–19.

Major transfers to other levels of government include transfers in support of health and social programs, Equalization and Territorial Formula Financing, among others. The Canada Health Transfer (CHT) is projected to grow from $30.3 billion in 2013–14 to $39.3  billion in 2018–19. Starting in 2017–18, the CHT will grow in line with a three-year moving average of nominal GDP growth, with funding guaranteed to increase by at least 3 per cent per year. The Canada Social Transfer will continue to grow at 3 per cent per year. Other major transfers to other levels of government include transfer protection payments to provinces in 2012–13 and 2013–14.

Reflecting the Government’s commitment to control the spending of federal departments, direct program expenses are broadly stable over the forecast horizon, with spending falling from $120.7  billion in 2013–14 to $115.4 billion in 2014–15. As a share of GDP, direct program expenses decline over the projection period from 6.5 per cent in 2013–14 to 5.4 per cent in 2018–19.

Direct program expenses include operating expenses, transfers administered by departments and capital amortization. 

Operating expenses reflect the cost of doing business for more than 100 government departments and agencies, including National Defence. The current projection reflects savings from the operating budget freeze described earlier in this chapter. Operating expenses are broadly stable over the forecast horizon, decreasing from $77.0 billion in 2013–14 to $73.9 billion in 2014–15 then rising to $79.3 billion in 2018–19. The decrease in the early years of the forecast is largely attributable to departmental spending reductions implemented in earlier budgets and this Update. The subsequent increase is a result of growth in National Defence funding as well as cost pressures related to funding for essential services such as public safety and non-discretionary payments (e.g. utilities, leases).

Transfer payments administered by departments are expected to decrease between 2013–14 and 2014–15, largely the result of one-time costs in 2013–14 associated with federal disaster assistance for the flooding in Alberta and for the Lac-Mégantic train derailment. Transfer payments are then projected to increase in 2016–17 and onwards.

Amounts for capital expenses are presented on an accrual basis. The amount of capital amortization is expected to increase modestly from $5.5 billion in 2013–14 to $6.9 billion in 2018–19 as a result of new investments and upgrades to existing capital.

As a share of GDP, program expenses are projected to decline from 13.5 per cent in 2012–13 to 12.4 per cent in 2018–19, which is below its pre-recession level (Chart 3.5).

Program expenses-to-GDP ratio to fall below its pre-recession level
Chart 3.5 Program Expenses-to-GDP Ratio Chart 3.5 - Program Expenses-to-GDP Ratio - See previous paragraph for details.
Source: Department of Finance.

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 (assuming that the Consumer Price Index (CPI) moves in line with 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, and are meant to provide a broad illustration of the impact of economic shocks on the outlook for the budgetary balance. Actual economic shocks may have different fiscal impacts. For example, they may be concentrated in specific sectors of the economy or cause different responses in key economic variables (e.g. GDP inflation and CPI inflation may have different responses to a given shock).

Table 3.6
Estimated Impact of a One-Year, 1-Percentage-Point Decrease in Real GDP Growth on Federal Revenues, Expenses and Budgetary Balance
billions of dollars
Year 1 Year 2 Year 5
Federal revenues      
  Tax revenues      
    Personal income tax -2.5 -2.6 -3.0
    Corporate income tax -0.3 -0.3 -0.4
    Goods and Services Tax -0.3 -0.4 -0.4
    Other -0.1 -0.1 -0.2
 
    Total tax revenues -3.2 -3.4 -4.1
  Employment Insurance premiums -0.1 -0.2 -0.2
  Other revenues -0.1 -0.1 -0.1
 
Total budgetary revenues -3.4 -3.7 -4.4
Federal expenses      
  Major transfers to persons      
    Elderly benefits 0.0 0.0 0.0
    Employment Insurance benefits 0.7 0.8 0.9
    Children’s benefits 0.0 0.0 0.1
 
    Total 0.7 0.8 0.9
  Other program expenses -0.2 -0.2 -0.2
  Public debt charges 0.0 0.2 0.8
 
Total expenses 0.6 0.8 1.6
Budgetary balance -4.0 -4.4 -6.0
Note: Totals may not add due to rounding.

A 1-percentage-point decrease in real GDP growth proportional across income and expenditure components reduces the budgetary balance by $4.0 billion in the first year, $4.4 billion in the second year and $6.0 billion in the fifth year (Table 3.6).

  • Tax revenues from all sources fall by a total of $3.2 billion in the first year and by $3.4 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 as employment and wages and salaries fall. In order to isolate the direct impact of the economic shock and provide a general overview of the fiscal impacts, the EI premium revenue impacts do not include changes in the premium rate.  
  • 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). This rise is partially offset by lower other program expenses (as certain programs are tied directly to growth in nominal GDP).
Table 3.7 Estimated Impact of a One-Year, 1-Percentage-Point Decrease in GDP Inflation on Federal Revenues, Expenses and Budgetary Balance billions of dollar
  Year 1 Year 2 Year 5
Federal revenues      
  Tax revenues      
    Personal income tax -2.3 -1.8 -1.6
    Corporate income tax -0.3 -0.4 -0.5
    Goods and Services Tax -0.3 -0.4 -0.4
    Other -0.1 -0.2 -0.2
    Total tax revenues -3.1 -2.7 -2.7
  Employment Insurance premiums -0.1 -0.2 -0.2
  Other revenues -0.1 -0.1 -0.2
Total budgetary revenues -3.3 -3.0 -3.1
Federal expenses      
  Major transfers to persons      
    Elderly benefits -0.3 -0.5 -0.6
    Employment Insurance benefits -0.1 -0.1 -0.1
    Children’s benefits 0.0 0.0 0.0
    Total -0.4 -0.6 -0.7
  Other program expenses -0.4 -0.4 -0.8
  Public debt charges -0.4 0.1 0.3
Total expenses -1.2 -1.0 -1.2
Budgetary balance -2.1 -2.0 -1.8
Note: Totals may not add due to rounding.

A 1-percentage-point decrease in nominal GDP growth proportional across income and expenditure components resulting solely from lower GDP inflation (assuming that the Consumer Price Index moves in line with GDP inflation) lowers the budgetary balance by $2.1 billion in the first year, $2.0 billion in the second year and $1.8 billion in the fifth year (Table 3.7).

  • Lower prices result in lower nominal income and, as a result, personal income tax revenues decrease, reflecting declines in the underlying nominal tax base. As the parameters of the personal income tax system are indexed to inflation and automatically adjust in response to the shock, the fiscal impact is smaller than under the real shock. For the other sources of tax revenue, the negative impacts are similar under the real and nominal GDP shocks.
  • EI premium revenues, absent any change in the premium rate, decrease in response to lower earnings. In order to isolate the direct impact of the economic shock and provide a general overview of the fiscal impacts, the EI premium revenue impacts do not include changes in the premium rate.
  • Other revenues decline slightly as lower prices lead to lower revenues from the sales of goods and services.
  • 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, and downward pressure on federal program expenses. Payments under these programs are smaller if inflation is lower. Other program expenses are also lower as certain programs are tied directly to growth in nominal GDP.
  • 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 billions of dollars
Year 1 Year 2 Year 5
Federal revenues 1.3 1.7 2.4
Federal expenses 1.7 2.8 3.8
Budgetary balance -0.4 -1.1 -1.4

An increase in interest rates decreases the budgetary balance by $0.4 billion in the first year, $1.1 billion in the second year and $1.4 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. The impacts of changes in interest rates on public sector pension and benefit expenses are excluded from the sensitivity analysis.

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