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Archived - Chapter 5

The Government’s fiscal position remains strong. The strength in the economy in 2007 means that fiscal results for 2007–08 are expected to be somewhat better than at the time of the October 2007 Economic Statement. Over the next two years, the Government is planning on continued surpluses, despite downward revisions to private sector forecasts for economic growth.

• Budget 2008 continues to focus on a two-year horizon, where uncertainties are fewer and the Government can reasonably be held to account for its fiscal plan.
• Planned debt reduction is $10.2 billion in 2007–08, $2.3 billion in 2008–09 and $1.3 billion in 2009–10.
• In light of global economic uncertainty, it is appropriate to update the five-year fiscal projections presented in the Economic Statement.
• Surpluses are expected to rise from $3.1 billion in 2010–11 to $5.3 billion in 2012–13, allowing for debt reduction of at least $3 billion per year in those years. This means that total debt reduction by the Government since coming into office will be more than $50 billion by 2012–13.
• After taking into account planned debt reduction, remaining surpluses are $0.1 billion in 2010–11, rising to $2.3 billion in 2012–13.
• The federal tax burden, measured by total revenues as a share of the economy, is projected to decline from 16.3 per cent in 2006–07 to 15.3 per cent in 2009–10—the lowest level in nearly 50 years.
• Spending as a share of gross domestic product (GDP) is below the track set out in Budget 2007.

Budget Planning and Fiscal Forecasting

The Government is committed to budget planning that is accountable and transparent.

• To incorporate objective economic assumptions, the Government’s fiscal projections are based on the average of the private sector economic forecasts.
• Budget 2008 continues to focus on a two-year horizon, where the Government can reasonably be held to account. However, in light of global economic uncertainty, Budget 2008 provides an update of the five-year fiscal projections presented in the October 2007 Economic Statement.
• Planned debt reduction totals $13.8 billion over the current and next two years. Interest savings from federal debt reduction will continue to be dedicated to personal income tax reductions through the Government’s Tax Back Guarantee.
• The fiscal projections in Budget 2008 reflect financial results through December 2007.
• Quarterly updates of the fiscal outlook for the current year are provided in the monthly Fiscal Monitor. The next update will be provided with the March fiscal results in May 2008. The final results for the 2007–08 surplus will be published in the fall.

Fiscal Outlook Before the Measures Proposed in Budget 2008

Table 5.1 provides a summary of the main changes in the fiscal projections since the October 2007 Economic Statement. The underlying budgetary surplus presented in the Economic Statement was $11.6 billion for 2007–08, $4.4 billion for 2008–09 and $4.3 billion for 2009–10.

Table 5.1
Changes in the Status Quo Fiscal Outlook
Since the October 2007 Economic Statement
(billions of dollars)

	Projection
	2007-08	2008-09	2009-10
October 2007 Economic Statement  underlying surplus	11.6	4.4	4.3
Impact of economic and fiscal developments
Budgetary revenues
Personal income tax	-1.0	-2.5	-2.3
Corporate income tax	0.9	-1.0	-1.3
Goods and services tax	0.4	0.2	0.3
Other revenues	0.3	-0.3	0.2
Total	0.6	-3.7	-3.1
Program expenses
Major transfers to persons	0.2	0.2	0.2
Major transfers to other levels of government	-0.1	-0.5	-0.4
Direct program expenses	-0.2	1.0	0.3
Total	-0.1	0.8	0.1
Public debt charges	0.8	2.2	1.7
Total economic and fiscal developments	1.4	-0.6	-1.3
Revised underlying planning surplus  (before Budget 2008 measures)	12.9	3.8	3.0
Notes: A positive number implies an improvement in the budgetary balance. A negative number implies a deterioration in the budgetary balance. Totals may not add due to rounding.

The 2007–08 underlying planning surplus is expected to be $12.9 billion, somewhat stronger than was projected at the time of the October 2007 Economic Statement. The upward revision largely reflects higher-than-expected revenues and lower-than-expected public debt charges.

Consistent with the weaker private sector economic outlook, underlying surpluses of $3.8 billion and $3.0 billion are projected for 2008–09 and 2009–10 respectively. The current projections are down from those presented in the Economic Statement by $0.6 billion in 2008–09 and $1.3 billion in 2009–10. In both years, revenues are projected to be significantly weaker than at the time of the Economic Statement, reflecting private sector forecasts of slower economic growth. However, weaker revenues are projected to be partially offset by significantly lower public debt charges resulting from lower interest rates. In the short term, lower public debt charges occur largely because of lower interest payments on debt issued at shorter maturities. In recent years, the Government has taken steps to increase the variable portion of the debt in order to achieve additional debt cost savings when interest rates fall (see Annex 2).

Budgetary revenues in 2007–08 are expected to be $0.6 billion higher than at the time of the Economic Statement, largely due to stronger-than-expected corporate income tax and Goods and Services Tax (GST) collections through December 2007. In spite of the stronger starting point, revenues in 2008–09 and 2009–10 are projected to be $3.7 billion and $3.1 billion lower respectively, primarily driven by downward revisions to private sector forecasts of economic growth in 2008. When compared to the Economic Statement:

• The underlying projection for personal income tax revenues in 2007–08 is $1.0 billion lower, reflecting slightly lower than expected personal income tax collections thus far in 2007–08. Personal income tax revenues are projected to be $2.5 billion lower in 2008–09 and $2.3 billion lower in 2009–10, as a result of a downward revision to forecast growth in personal income in 2008–09.
• Corporate income tax revenues are projected to be $0.9 billion higher in 2007–08, reflecting strong growth in collections so far this year. In 2008–09 and 2009–10, corporate income tax revenues are forecast to be lower by $1.0 billion and $1.3 billion, respectively, reflecting a downward revision to the forecast for corporate profits.
• GST revenues in 2007–08 are now projected to be $0.4 billion higher, reflecting upward revisions to consumption in 2007–08 and higher collections through December. These upward revisions largely carry forward over the planning period, dampened somewhat by a downward revision to growth in the tax base in 2008–09.
• Other revenues are expected to be $0.3 billion higher in 2007–08, mainly due to higher projected receipts attributable to the Atlantic Offshore Revenue Accounts. This upward revision is offset by a corresponding upward revision of projected revenue transfers to Newfoundland and Labrador and Nova Scotia under the Atlantic Offshore Accords, such that there is no net impact on the budgetary balance.

Program expenses are also projected to be lower than estimated in the Economic Statement, by $0.8 billion in 2008–09 and $0.1 billion in 2009–10. These changes take into account economic developments, the results of the Government’s strategic reviews and recent action to reduce spending on public opinion research by $10 million per year. Compared to the Economic Statement:

• Transfers to persons are expected to be lower by $0.2 billion in each year, largely due to lower projected elderly benefit payments resulting from lower expected inflation.
• Projected transfers to other levels of government are higher than expected as a result of increases to Equalization and Territorial Formula Financing (TFF) for 2008–09 that were announced in December 2007. As the data required to calculate Equalization payments for 2009–10 are not yet available, it is assumed that Equalization will grow at the rate of growth in the private sector forecast of nominal GDP, adjusted for changes in the share of the recipient provinces’ population. Equalization and TFF entitlements for 2009–10 will be released in December 2008.
• Direct program expenses are lower than expected in 2008–09 and 2009–10, reflecting the Government’s commitment to implement programs only when they are ready and to ensure that spending is necessary and effective.
• Public debt charges in 2007–08 are projected to be $0.8 billion lower. In 2008–09 and 2009–10, public debt charges are expected to be $2.2 billion and $1.7 billion lower, due to significantly lower forecast interest rates.

Fiscal Costs of Measures
Proposed in Budget 2008

The measures proposed in Budget 2008 total $2.7 billion for 2007–08, $1.5 billion for 2008–09 and $1.7 billion for 2009–10. When combined with the actions taken in the Economic Statement, this brings total measures to $29.4 billion over these three years, of which $23.9 billion, or over 80 per cent, is dedicated to tax relief. The costs of these measures are reflected in the projections of revenues and expenses presented in the following pages.

After accounting for the cost of the measures proposed in Budget 2008, planned debt reduction in 2007–08 amounts to $10.2 billion. The Government is planning on debt reduction of $2.3 billion in 2008–09 and $1.3 billion in 2009–10.

Table 5.2
Fiscal Outlook
(Including Budget 2008 Measures)
(billions of dollars)

	Projection
	2007–08	2008–09	2009–10	Total
Revised Budget 2008  underlying surplus	12.9	3.8	3.0	19.7
Measures proposed  in Budget 2008	2.7	1.5	1.7	5.9
Planned debt reduction	10.2	2.3	1.3	13.8
Memorandum
Measures since Budget 2007:
Spending	2.7	1.3	1.4	5.4
Tax reductions	4.8	9.6	9.5	23.9
Total	7.6	10.9	10.9	29.4
Note: Totals may not add due to rounding.

 

Summary Statement of Transactions

Table 5.3 provides a summary of the Government’s financial position, including the cost of all measures proposed in Budget 2008. Budgetary revenues are expected to increase at a rate below that of overall growth in the economy on average through 2009–10, reflecting the impact of tax reduction measures implemented since Budget 2006 (see the box entitled "Recap: Major Tax Relief Measures" in Chapter 3). These include the 2-percentage-point reduction in the GST rate, increases in the basic personal amount, the reduction of the lowest personal income tax rate to 15 per cent, and the general federal corporate income tax rate reductions to 15 per cent by 2012. Over the forecast horizon, program expenses as a share of GDP are projected to remain below the track set out in Budget 2007. Public debt charges are projected to continue to decline as a percentage of GDP.

Table 5.3
Summary Statement of Transactions
(Including Budget 2008 Measures)
(billions of dollars)

	Actual	Projection
	2006–07	2007–08	2008–09	2009–10
Budgetary revenues	236.0	244.5	241.9	252.0
Program expenses	188.3	201.2	208.1	218.3
Public debt charges	33.9	33.1	31.5	32.4
Total expenses	222.2	234.3	239.6	250.7
Planned debt reduction1	14.2	10.2	2.3	1.3
Federal debt	467.3	457.1	454.8	453.5
Per cent of GDP
Budgetary revenues	16.3	16.0	15.3	15.3
Program expenses	13.0	13.2	13.1	13.2
Public debt charges	2.3	2.2	2.0	2.0
Total expenses	15.4	15.3	15.1	15.2
Federal debt	32.3	29.9	28.7	27.5
Note: Totals may not add due to rounding. 1 Actual debt reduction in 2006–07 (includes other comprehensive income of $479 million).

The federal debt-to-GDP ratio stood at 32.3 per cent in 2006–07, down significantly from its peak of 68.4 per cent in 1995–96. Taking into account the projected debt reduction, the debt ratio is expected to fall to 27.5 per cent by 2009–10, the lowest level since 1978–79.

Outlook for Budgetary Revenues

Revenues as a share of GDP are projected to fall to 15.3 per cent by 2009–10 from 16.4 per cent in 2004–05. The tax burden in 2009–10 is projected to be the lowest since 1963–64. The decline in the revenue ratio reflects tax relief measures announced in this and previous budgets.

Table 5.4
Revenue Outlook
(Including Budget 2008 Measures)
(millions of dollars)

	Actual	Projection
	2006–07	2007–08	2008–09	2009–10
Tax revenues
Income tax
Personal income tax	110,477	112,515	118,595	125,475
Corporate income tax	37,745	42,405	36,830	36,570
Other income tax	4,877	5,910	5,890	6,100
Total income tax	153,099	160,830	161,315	168,145
Excise taxes/duties
Goods and Services Tax	31,296	30,680	27,565	28,860
Customs import duties	3,704	3,975	4,190	4,405
Other excise taxes/duties	10,317	10,075	10,050	10,090
Total excise taxes/duties	45,317	44,730	41,800	43,355
Total tax revenues	198,416	205,560	203,115	211,500
Employment Insurance premium revenues	16,789	16,520	16,530	17,330
Other revenues	20,761	22,430	22,265	23,170
Total budgetary revenues	235,966	244,510	241,910	252,000
Per cent of GDP
Personal income tax	7.6	7.4	7.5	7.6
Corporate income tax	2.6	2.8	2.3	2.2
Goods and Services Tax	2.2	2.0	1.7	1.7
Other excise	1.0	0.9	0.9	0.9
Tax revenues	13.7	13.4	12.8	12.8
Employment Insurance premium revenues	1.2	1.1	1.0	1.0
Other revenues	1.4	1.5	1.4	1.4
Total	16.3	16.0	15.3	15.3
Note: Totals may not add due to rounding.

Personal income tax revenues—the largest component of budgetary revenues—are projected to increase by $2 billion, or 1.8 per cent, to $112.5 billion in 2007–08. This is below the projected growth rate in personal income, reflecting the impact of recent tax relief measures. Starting in 2008–09, personal income tax revenues increase somewhat faster than personal income, reflecting the progressive nature of the income tax system combined with real income gains.

Corporate income tax revenues are expected to increase by 12.3 per cent in 2007–08, to $42.4 billion, significantly higher than the projected rate of growth in National Accounts profits of 6.9 per cent. The higher projected growth largely reflects significant year-end settlement payments related to one-time factors not reflected in National Accounts profits. These gains are not projected to carry forward over the forecast period. Moreover, corporate income taxes are projected to be dampened by tax relief measures. Therefore, corporate income tax revenues are projected to decline by 13.1 per cent in 2008–09 and by 0.7 per cent in 2009–10.

Other income tax revenues—largely withholding taxes levied on payments to non-residents—are expected to increase by 21.2 per cent to $5.9 billion in 2007–08, reflecting strong growth in underlying collections through the first nine months of the fiscal year. Other income tax revenues are projected to remain relatively flat in 2008–09, reflecting the January 1, 2008 elimination of the withholding tax in respect of arm’s length interest paid to non-resident lenders, as well as the pending elimination, under the Canada-United States Tax Treaty, of withholding tax on non-arm’s length payments of interest to lenders resident in the U.S.

GST revenues are expected to decline by 2.0 per cent in 2007–08, largely reflecting the impact of the 1-percentage-point reduction in the GST rate to 5 per cent, effective January 1, 2008. GST revenues are projected to decline further, by 10.2 per cent in 2008–09, the first full fiscal year under the lower 5-per-cent rate. They are projected to grow by 4.7 per cent in 2009–10, in line with the taxable consumption base.

All other excise taxes and duties are projected to rise by 0.2 per cent in 2007–08, after a 6.7-per-cent increase in 2006–07. The increase in 2006–07 largely reflected the introduction of an export charge on softwood lumber exports to the U.S. effective October 12, 2006, consistent with the Canada-United States Softwood Lumber Agreement, as well as a one-time charge on returned duty deposits under the Agreement. Other excise taxes and duties are projected to increase by 1.4 per cent in 2008–09 and by 1.8 per cent in 2009–10.

Employment Insurance (EI) premium revenues are projected to decrease by 1.6 per cent in 2007–08, reflecting the declines in the premium rate to $1.80 per $100 of insurable earnings, effective January 1, 2007, and to $1.73 effective January 1, 2008. Consistent with the proposed new rate-setting mechanism, which will guarantee that the EI Account will break even over the business cycle, EI premium revenues are assumed to match projected EI program costs over the planning period. This results in relatively unchanged EI premium revenues in 2008–09 followed by an increase of 4.8 per cent in 2009–10, reflecting the private sector expectation of slightly weaker labour market conditions.

Other revenues include those of consolidated Crown corporations, net gains/losses from enterprise Crown corporations, foreign exchange revenues, returns on investments and proceeds from the sales of goods and services. 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/losses from enterprise Crown corporations. Other revenues are projected to rise 8.0 per cent in 2007–08, due in part to strong growth in year-to-date receipts under the Atlantic Offshore Revenue Accounts, which results in turn from strong growth in offshore production and oil prices to date in 2007–08. This revenue is transferred to Newfoundland and Labrador and Nova Scotia under the Atlantic Offshore Accords, such that there is no net impact on the budgetary balance. Other revenues are projected to decline slightly as a share of GDP in 2008–09 and then remain stable as a share of GDP in 2009–10.

Outlook for Program Expenses

As shown in Chart 5.2, program expenses as a share of GDP rose rapidly between 2000–01 and 2004–05. This trend was reversed in 2005–06, when nominal spending fell by 1 per cent, the first absolute decline in nine years. Since that time, the Government has made important investments to restore fiscal balance, provide historic long-term funding for infrastructure and strengthen Canada’s armed forces. Spending decisions in Budget 2008 continue to be focused and disciplined. As a result, spending as a share of the economy has remained well below the recent high reached in 2004–05, and is expected to remain below the track set out in Budget 2007.

Table 5.5 provides an overview of the projections for program expenses by major component, including the cost of measures proposed in Budget 2008. Program expenses are divided into three components: major transfers to persons, major transfers to other levels of government and direct program expenses—the latter includes subsidies and other transfers, expenses of Crown corporations, and departmental operating expenses.

Table 5.5
Program Expense Outlook
(Including Budget 2008 Measures)
(millions of dollars)

	Actual	Projection
	2006–07	2007–08	2008–09	2009–10
Major transfers to persons
Elderly benefits	30,284	31,845	33,265	34,760
Employment Insurance benefits1	14,084	14,445	15,295	15,875
Children’s benefits2	11,214	11,910	11,905	11,980
Total	55,582	58,200	60,465	62,615
Major transfers to other   levels of government
Federal transfers in support of     health and other programs	28,640	31,345	33,185	35,105
Fiscal arrangements3	13,066	14,530	15,250	15,800
Alternative Payments     for Standing Programs4	-3,177	-3,050	-3,255	-3,435
Canada's cities and communities	590	800	1,000	2,000
Community Development Trust		1,000
Public transit		500
Police Officers Recruitment Fund		400
Early learning and child care	650
Clean Air and Climate     Change Trust	1,519
Patient Wait Times     Guarantee Trust	612
Transition Trust	614
Total	42,514	45,525	46,180	49,470
Direct program expenses	90,173	97,445	101,450	106,205
Total program expenses	188,269	201,165	208,095	218,290
Per cent of GDP
Major transfers to persons	3.8	3.8	3.8	3.8
Major transfers to other levels of     government	2.9	3.0	2.9	3.0
Direct program expenses	6.2	6.4	6.4	6.4
Total program expenses	13.0	13.2	13.1	13.2
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 (amounting to $1.6 billion in 2006–07) relate to administration costs. 2 Consists of the Canada Child Tax Benefit and the Universal Child Care Benefit. 3 Fiscal arrangements include Equalization, Territorial Formula Financing, the Youth Allowances Recovery and statutory subsidies. 4 Alternative Payments for Standing Programs are a recovery from Quebec to offset additional tax point transfers.

Major transfers to persons consist of elderly, EI and children’s benefits, including the Universal Child Care Benefit.

• Elderly benefits are projected to grow in line with the growth in the elderly population and changes in consumer prices, to which benefits are fully indexed.
• EI benefits are projected to increase by $0.4 billion in 2007–08 due to the increase in average EI benefits in 2007, reflecting the indexation of maximum insurable earnings under the EI program to the growth in the average industrial wage. In 2008–09 and 2009–10, higher projected EI benefits are attributable to a projected moderate increase in the number of beneficiaries as well as higher average EI benefits.
• Children’s benefits, consisting the Canada Child Tax Benefit and the Universal Child Care Benefit, increase slightly over the budget forecast horizon, largely reflecting growth in the population of children.

Major transfers and targeted support to other levels of government are projected to increase from $42.5 billion in 2006–07 to $49.5 billion in 2009–10, averaging 5.2 per cent growth per year. This reflects actions taken to restore fiscal balance by placing transfers on a predictable and principled footing and to significantly increase funding for those transfers. This includes increased funding for Equalization, Territorial Formula Financing and the Canada Social Transfer (CST). It also includes a one-time adjustment to increase CST protection levels against declines relative to CST and related child care payments in 2007–08.

Direct program expenses include subsidies and other transfers, expenses of Crown corporations, and departmental operating expenses. The growth in direct program expenses reflects the impact of previous measures, such as the Canada First Defence Strategy and the Building Canada Plan, as well as initiatives announced in Budget 2008, including investments to increase grants for post-secondary education and improve health and safety. Growth also incorporates increases in the cost of ongoing operations, including wage increases.

Subsidies and other transfers are also expected to increase over the budget horizon, reflecting a number of items including the higher transfers to Newfoundland and Labrador and Nova Scotia under the Offshore Accords discussed earlier and transfers to the agriculture sector. The Government will ensure, where appropriate, that royalties to be remitted to the provinces pursuant to federal-provincial agreements proceed in a timely manner under a statutory payment process.

Five-Year Fiscal Projections

Budget 2008 focuses on a two-year horizon, where the Government can reasonably be held to account. However, in light of global economic uncertainty, it is appropriate to update the five-year fiscal projections presented in the Economic Statement.

Table 5.6 shows the average of private sector economic projections of nominal GDP growth and interest rates through 2012, along with changes since the Economic Statement.

Table 5.6
Private Sector Economic Forecasts, 2007–2012
(per cent)

	Projection
	2007	2008	2009	2010–2012 Average
Nominal GDP growth	5.7	3.5	4.3	4.4
Change since Economic Statement	-0.2	-1.3	-0.3	0.0
3-month treasury bill rate	4.2	3.2	3.8	4.5
Change since Economic Statement	0.0	-1.2	-0.9	-0.1
10-year Government of Canada bond rate	4.3	3.6	4.2	4.9
Change since Economic Statement	-0.1	-1.1	-0.8	-0.1
Source: December 2007 Department of Finance survey of private sector forecasters, updated in January 2008.

Private sector forecasters have revised projected nominal GDP down in every year going forward, resulting in lower projected revenues. As well, the overall average effective tax rate is expected to be weaker over the medium term. Program expenses are expected to be somewhat higher in the outer years relative to the Economic Statement, largely due to the introduction of new measures included in Budget 2008. Projected interest rates are down sharply in the early years of the projection, but are virtually back in line with levels projected at the time of the Economic Statement by the latter years of the projection. As a result, projected debt charges are significantly lower in the early years of the projection, but little changed in the outer years, compared to the Economic Statement.

In 2010–11, the surplus is projected to be $3.1 billion. It is projected to steadily rise to $5.3 billion by 2012–13 (Table 5.7).

Table 5.7
Summary Statement of Transactions (Including Budget 2008 Measures)
(billions of dollars)

	Projection
	2007–08	2008–09	2009–10	2010–11	2011–12	2012–13
Budgetary revenues	244.5	241.9	252.0	263.5	273.9	283.2
Program expenses	201.2	208.1	218.3	226.8	235.4	244.8
Public debt charges	33.1	31.5	32.4	33.7	33.8	33.2
Total expenses	234.3	239.6	250.7	260.5	269.2	277.9
Budgetary surplus	10.2	2.3	1.3	3.1	4.7	5.3
Planned debt reduction	10.2	2.3	1.3	3.0	3.0	3.0
Remaining surplus	0.0	0.0	0.0	0.1	1.7	2.3
Federal debt	457.1	454.8	453.5	450.5	447.5	444.5
Per cent of GDP
Budgetary revenues	16.0	15.3	15.3	15.2	15.1	15.1
Program expenses	13.2	13.1	13.2	13.1	13.0	13.0
Public debt charges	2.2	2.0	2.0	1.9	1.9	1.8
Total expenses	15.3	15.1	15.2	15.1	14.9	14.8
Federal debt	29.9	28.7	27.5	26.0	24.7	23.6
Note: Totals may not add due to rounding.

Planned debt reduction over the budget horizon—2007–08 to 2009–10—is $13.8 billion. Together with planned debt reduction of $3 billion per year for 2010–11 to 2012–13, total debt reduction by the Government since coming into office will be more than $50 billion.

After taking into account planned debt reduction, remaining surpluses are $0.1 billion in 2010–11, rising to $2.3 billion in 2012–13.

The federal debt-to-GDP ratio (accumulated deficit) stood at 32.3 per cent in 2006–07, down significantly from its peak of over 68.4 per cent in 1995–96. Taking into account planned debt reduction, along with projected growth in the economy, the debt-to-GDP ratio is expected to fall to 27.5 per cent by 2009–10. The Government is on track to meet the medium-term objective of reducing the ratio to 25 per cent by 2011–12.

As outlined in Advantage Canada, the Government proposes that Canada should aim to eliminate total government net debt by 2021. With the federal fiscal plan set out in Budget 2008 and with a continued solid provincial fiscal outlook, Canada remains on track to meet this objective.

Financial Source/Requirement

The budgetary balance is presented on a full accrual basis of accounting, recording government liabilities and assets when they are incurred or acquired, regardless of when the cash is paid or received.

Table 5.8
Budgetary Balance, Non-Budgetary Transactions
and Financial Source/Requirement
(billions of dollars)

	Actual	Projection
	2006–07	2007–08	2008–09	2009–10
Budgetary balance	13.8	10.2	2.3	1.3
Non-budgetary transactions
Pensions and other accounts	5.1	4.5	3.9	3.4
Non-financial assets	-1.2	-2.5	-1.4	-1.1
Loans, investments and advances	-2.7	-6.2	-17.3	-8.5
Other transactions	-6.5	11.0	-2.9	2.8
Total	-5.3	6.8	-17.7	-3.4
Financial source/requirement	8.5	17.0	-15.4	-2.1
Note: Totals may not add due to rounding.

In contrast, the financial source/requirement measures the difference between cash coming in to the Government and cash going out. This measure is affected not only by the budgetary balance but also by the Government’s non-budgetary transactions. These include changes in federal employee pension accounts; changes in non-financial assets; investing activities through loans, investments and advances; changes in other financial assets and liabilities; and foreign exchange activities. Non-budgetary transactions also include adjustments made to convert the Government’s financial statements from full accrual to cash accounting.

With a projected budgetary surplus of $10.2 billion and a source of $6.8 billion from non-budgetary transactions, a financial source of $17.0 billion is projected for 2007–08. In 2008–09, a financial requirement of $15.4 billion is projected, due in part to budget measures that are expensed in 2007–08 and for which cash payments will be made in 2008–09. It also reflects loans to three major Crown corporations as a consequence of the Budget 2007 decision to consolidate borrowing of certain Crown corporations (see Annex 2). A financial requirement of $2.1 billion is expected in 2009–10.

Pensions and other accounts include the activities of the Government of Canada’s employee superannuation plans, as well as those of federally appointed judges and members of Parliament. Since April 2000, the net amount of contributions less benefit payments related to post-March 2000 service has been invested in capital markets. Contributions and payments pertaining to pre-April 2000 service are recorded in the pension accounts. The Government is committed to efficient and cost-effective administration of the public service pension plans.

The Government also sponsors a variety of future benefit plans, such as health care and dental plans and disability and other benefits for war veterans and others. The financial source associated with pension and other accounts is expected to be $4.5 billion in 2007–08.

Non-financial assets include the cash outlay for the acquisition of new tangible capital assets, proceeds from the sale of tangible capital assets, the amortization of existing tangible assets, losses on the disposal of tangible capital assets, the change in inventories, and prepaid expenses. In the calculation of the budgetary balance, the acquisition of new capital assets is not included; only the amortization of existing tangible assets is included. In the calculation of the financial source/requirement, this is reversed. A net cash requirement of $2.5 billion for non-financial assets is estimated for 2007–08.

Loans, investments and advances include the Government’s investments in enterprise Crown corporations, such as Canada Mortgage and Housing Corporation (CMHC), Canada Post Corporation, Export Development Canada and the Business Development Bank of Canada (BDC). They also include loans, investments and advances to national and provincial governments and international organizations, and for government programs. As announced in Budget 2007, the Government plans to meet all of the borrowing needs of BDC, CMHC and Farm Credit Canada through direct lending to these Crown corporations in order to reduce overall borrowing costs and improve the liquidity of the government securities market. Loans to these Crown corporations are included in this component of the financial source/requirement. Net financial requirements in this component are also attributable to the share of annual profits retained by enterprise Crown corporations and loans made under the Canada Student Loans Program.

Other transactions primarily include the conversion of other accrual adjustments included in the budgetary balance into cash, as well as foreign exchange activities.

Risks to the Fiscal Projections

Risks associated with the fiscal projections primarily relate to risks to the Canadian economic outlook and volatility in the relationship between fiscal variables and the underlying economic activity to which they relate.

As discussed in Chapter 2, there are considerable uncertainties to the economic outlook, with the risks tilted to the downside.

• The U.S. economy could slow more than expected.
• Turbulence in financial markets could persist longer than expected.
• Together, these two risks increase uncertainties for global growth and commodity prices.

Tables illustrating the sensitivity of the budget balance to a number of economic shocks are provided later in this chapter. These tables are generalized rules of thumb that provide a guide to the impact of changes in economic assumptions on the fiscal projections.

Even if the economic outlook were known with certainty, there would still be risks associated with the fiscal projections because of the uncertainty in the translation of economic developments into spending and tax revenues. The following are the key sources of uncertainty:

• The sensitivity of personal income tax revenues to changes in personal income is summarized by a measure called personal income tax elasticity, which is the ratio of growth in personal income tax revenues to growth in personal income. Consistent with the benchmark forecasting assumption adopted in Budget 2007, underlying personal income tax elasticity—excluding the impact of policy changes—is projected to remain at about 1.3 over the planning period. In other words, growth in underlying personal income tax revenues is projected to be about 30 per cent faster than growth in personal incomes. While this is in line with the average observed over the last decade, underlying personal income tax elasticity can be very volatile on a year-to-year basis, and is often lower than average in periods of weak economic growth and higher than average in periods of strong economic growth.
• Projected corporate income tax revenues in 2007–08 have been revised up since the Economic Statement, reflecting growth in corporate income tax revenues to date, which has been well in excess of growth in profits. However, collections over the final three months of the fiscal year, which generally account for over 30 per cent of annual receipts, will have a significant bearing on the outcome for the year as a whole. Over the planning period, underlying corporate income tax revenues are expected to grow in line with corporate profits, leaving underlying average effective tax rates close to their current levels. In 2006–07, the average effective tax rate increased in part as a result of a decline in corporate loss pools. In 2007–08, corporate income tax revenues could come in higher than projected if loss pools continue to decline. Over the medium term, however, there is some risk that average effective tax rates could return to their lower, pre-2006 levels.
• On the expense side, the extent to which departments and agencies do not fully use all of the resources appropriated by Parliament varies from year to year and can materially affect the fiscal outcome. In addition, during the course of the fiscal year, departments and agencies often incur liabilities for which no payments are made. These liabilities are recognized throughout the year and are updated following the close of the fiscal year as part of the normal year-end accrual adjustments. Changes in estimates of liabilities can be significant.

Sensitivity of the Budget 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 resulting solely from a one-year, 1-percentage-point decrease in the GDP inflation.
• A sustained 100-basis-point decrease 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. EI premium rates are assumed to be fixed during the first calendar year in which the shock occurs, and to adjust for subsequent years, such that EI revenues exactly offset program expenses, consistent with existing legislation governing EI rate setting. Equal and opposite impacts would result from an increase of equal magnitude in real or nominal GDP growth and interest rates.

Table 5.9
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
Federal revenues
Tax revenues
Personal income tax	-1.7	-1.8
Corporate income tax	-0.4	-0.4
Goods and Services Tax	-0.3	-0.3
Other tax revenues	-0.2	-0.2
Total tax revenues	-2.7	-2.8
Employment Insurance premium revenues	-0.1	0.7
Other revenues	0.0	0.0
Total budgetary revenues	-2.8	-2.1
Federal expenses
Major transfers to persons
Elderly benefits	0.0	0.0
Employment Insurance benefits	0.6	0.6
Children’s benefits	0.0	0.0
Total	0.6	0.6
Other program expenses	-0.1	-0.1
Public debt charges	0.1	0.2
Total expenses	0.5	0.7
Budgetary balance	-3.3	-2.8
Note: Numbers may not add due to rounding.

A 1-percentage-point decrease in real GDP growth reduces the budgetary balance by $3.3 billion in the first year and $2.8 billion in the second year.

• Tax revenues from all sources fall by a total of $2.7 billion in the first year and $2.8 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.
• For the purpose of the simulations, it is assumed that EI premium rates are increased in the second year as a result of the weaker economy.
• 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 5.10
Estimated Impact of a One-Year, 1-Percentage-Point Decrease in GDP Inflation on Federal Revenues,
Expenses and Budgetary Balance
(billions of dollars)

	Year 1	Year 2
Federal revenues
Tax revenues
Personal income tax	-1.7	-1.8
Corporate income tax	-0.4	-0.4
Goods and Services Tax	-0.3	-0.3
Other tax revenues	-0.2	-0.2
Total tax revenues	-2.7	-2.8
Employment Insurance premium revenues	-0.1	-0.1
Other revenues	-0.1	-0.1
Total budgetary revenues	-2.8	-3.0
Federal expenses
Major transfers to persons
Elderly benefits	-0.2	-0.4
Employment Insurance benefits	-0.1	-0.1
Children’s benefits	-0.1	-0.1
Total	-0.4	-0.5
Other program expenses	-0.3	-0.3
Public debt charges	-0.3	0.1
Total expenses	-1.0	-0.8
Budgetary balance	-1.8	-2.2
Note: Numbers may not add due to rounding.

A 1-percentage-point decrease in 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 and by $2.2 billion in the second.

• Lower prices result in lower nominal income and, as a result, personal income tax, corporate income tax, GST and other tax revenues all decrease, reflecting declines in the underlying nominal tax bases.
• EI premium revenues decrease marginally in the price shock in response to lower earnings. However, 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 5.11
Estimated Impact of a Sustained 100-Basis-Point
Decrease in All Interest Rates on Federal Revenues,
Expenses and Budgetary Balance
(billions of dollars)

	Year 1	Year 2
Federal revenues	-0.6	-0.8
Federal expenses	-1.3	-1.9
Budgetary balance	0.7	1.1

A decrease in interest rates raises the budgetary balance by $0.7 billion in the first year and $1.1 billion in the second. The improvement stems entirely from decreased expenses associated with public debt charges. The impact on debt charges rises through time as longer-term debt matures and is refinanced at lower rates. Moderating the overall impact is a fall in revenues associated with the decrease in the rate of return on the Government’s interest-bearing assets, which are recorded as part of non-tax revenues.

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