Annex 1 – Details of Economic and Fiscal Projections

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Economic Projections

The average of private sector forecasts has been used as the basis for fiscal planning since 1994 and introduces an element of independence into the Government’s fiscal forecast. This practice has been supported by international organizations such as the International Monetary Fund.

The Department of Finance Canada regularly surveys private sector economists on their views on the outlook for the Canadian economy. The economic forecast presented in this section is based on a survey conducted in September 2017.

The September 2017 survey includes the views of 14 private sector economists:

• BMO Capital Markets,
• Caisse de dépôt et placement du Québec,
• Canadian Federation of Independent Business,
• CIBC World Markets,
• The Conference Board of Canada,
• Desjardins,
• IHS Global Insight,
• Industrial Alliance Insurance and Financial Services Inc.,
• Laurentian Bank Securities,
• National Bank Financial Markets,
• Royal Bank of Canada,
• Scotiabank,
• TD Bank Financial Group, and
• the University of Toronto (Policy and Economic Analysis Program).

Since the release of Budget 2017, the average private sector outlook has been revised up. Private sector economists now expect real gross domestic product (GDP) growth of 3.1 per cent in 2017 and 2.1 per cent in 2018, higher than the 2.0 per cent forecast in Budget 2017 for both years. Real GDP growth over the remaining years of the forecast is slightly lower than in the Budget 2017 forecast (Table A1.1).

Private sector economists assume West Texas Intermediate (WTI) crude oil prices will rise more gradually than in the Budget 2017 forecast, reaching US$59 per barrel in 2021, compared to US$64 per barrel in Budget 2017.

While the outlook for GDP inflation (the broadest measure of economy-wide price inflation) has been revised up in 2017 compared to the Budget 2017 forecast, it has been revised down somewhat in 2018 onwards reflecting a lower outlook for oil prices.

As a result of these developments, the level of nominal GDP (the broadest measure of the tax base) is higher by $30 billion on average per year over the forecast horizon.

In line with upward revisions to real GDP growth, the economists have revised down their outlook for the unemployment rate by about 0.3 percentage points on average over the forecast horizon. They now expect the unemployment rate to average 6.5 per cent in 2017 and 6.1 per cent in 2022.

The recent increases in the Bank of Canada’s target for the overnight rate have led the private sector economists to revise up the outlook for the 3-month treasury bill rate by 40 basis points per year, on average. As well, the outlook for the 10-year government bond rate is revised slightly up from 2018 onwards, by an average of about 10 basis points per year.

Fiscal Projections

The remainder of this annex reviews the major economic and fiscal developments since Budget 2017 and updates the Government’s fiscal projections for the 2017–18 to 2022–23 period. Changes in the fiscal outlook since Budget 2017 are shown in Table A1.2.

Impact of Economic and Fiscal Developments

Relative to Budget 2017, projected budgetary revenues are higher over the forecast horizon due to higher projected corporate and personal income tax revenues as well as excise taxes and duties. This improvement reflects the overall improvement in the economic outlook, particularly in the corporate sector, as well as the carry-forward of better-than-expected results in 2016–17. 

Employment Insurance (EI) premium revenues are lower over the forecast horizon due to lower projected EI benefits as a result of the stronger economy, which leads to a decrease in the projected premium rate to $1.65 per $100 of insurable earnings (from $1.68 in Budget 2017).

Other revenues, such as those resulting from loans and investments, interest and penalties, Crown corporations’ revenues and assets held in the Exchange Fund Account, are lower in all years of the forecast horizon largely as a result of a downward revision to the projected revenue from consolidated Crown corporations (particularly the Canadian Commercial Corporation), which more than offsets improvements due to higher interest rates.

With respect to expenses, major transfers to persons are projected to be lower throughout the forecast horizon compared to Budget 2017, as the improved economic outlook leads to lower projected EI benefit expenses, and a small decrease in the expected number of recipients leads to lower projected Old Age Security benefit expenses.

Major transfers to other levels of government are higher than Budget 2017 projections due to the improved outlook for nominal GDP growth, to which the Canada Health Transfer and Equalization are pegged. In addition, home care and mental health transfers announced in Budget 2017 are now classified as major transfers to other levels of government rather than direct program expenses. While the value of these transfers is unchanged from Budget 2017, the reclassification leads to an increase in major transfers to other levels of government and a corresponding decrease to direct program expenses.

Compared to Budget 2017, direct program expenses are lower, reflecting the carry-forward of 2016–17 results (notably lower bad debt expenses on tax receivables) and lower projected expenses for consolidated Crown corporations (particularly the Canadian Commercial Corporation). In addition, expenses related to pensions and employee future benefits are down, reflecting the actuarial gain on plan liabilities as a result of higher interest rates and the recent performance of plan assets.

Public debt charges are expected to be lower in 2017–18 as lower projected inflation results in lower expected Real Return Bond adjustments. Public debt charges are higher in 2018–19 and 2019–20 due to higher projected interest rates, but from 2020–21 onwards, the expected improvement in the federal debt stemming from significantly smaller deficits more than offsets the impact of projected rate increases.

Policy Actions Taken Since Budget 2017

Investing in Critical Services for Canadians

Since Budget 2017, the Government has made significant investments in order to ensure an adequate level of mission-critical services to Canadians, and address critical health and safety needs. New investments total approximately $5.2 billion over six years, on a net basis, starting in 2017–18—and include:

Funding to Maintain Core Fisheries and Oceans Canada and Canadian Coast Guard Services

Fisheries and Oceans Canada and the Canadian Coast Guard deliver services that support the health, safety and security of our aquatic ecosystems, while providing for sustainable economic growth in the marine and fisheries sectors.

To maintain these mission-critical services to Canadians, funding of $1,240 million over six years, starting in 2017–18, and $353 million per year on an ongoing basis, has been provided to Fisheries and Oceans Canada and the Canadian Coast Guard. This funding will support fisheries management activities, and the maintenance of the fleet and other critical infrastructure, which are essential to fostering economic prosperity and providing for the continued safety and security of Canadian waters.

Increasing Capacity for Status of Women Canada

Status of Women Canada is a federal government agency that promotes equality between women and men in all aspects of Canadian life. The agency works to promote and advance equality for women and girls with a focus on: improving women’s and girls’ economic security and prosperity; ending violence against women and girls; and supporting the advancement and increased representation of women and girls in leadership and decision making roles.

Funding of $41 million over six years, starting in 2017–18, and $8 million per year ongoing, is being provided to Status of Women Canada to help advance the Government’s gender equality objectives.

Protecting Canada’s Missions and People Abroad

Our cadre of federal workers abroad serve as Canada’s face and voice around the world, and their work is critical to the success of Canada’s international goals—providing services for Canadians abroad, forging new export and business opportunities for Canadian firms, engaging with the international community, and helping those in need. Yet working abroad carries risks, especially in an increasingly dangerous and volatile global security environment.

To ensure the Government is fulfilling its duty of care obligations, funding of $760 million over six years, starting in 2017–18, and $127 million per year ongoing, is provided to Global Affairs Canada to ensure that our network of people and missions abroad can do their work in safety and security.

Supporting RCMP Front-Line Operations

The RCMP works to prevent and investigate crime; maintain peace and order; enforce laws; and contribute to the safety of Canadians and Canada. In this context, funding of $100 million over three years, starting in 2017–18, was provided to support existing policing operations, including in the areas of national security, serious and organized crime, and financial crime. This funding includes support for the RCMP’s Force Generation, which will help the organization meet demand for new front-line officers, ensuring that they are trained and equipped to maintain public safety. Funding also includes support for the RCMP External Review Committee.

Other Investments in Critical Services for Canadians

Services in other areas, including health care, local governance for First Nations, air transport security and seniors’ benefits, were enhanced as a result of investments since Budget 2017. These investments are highlighted in Table A1.3 below.

Altogether, investments in critical services for Canadians as well as all other investments made since Budget 2017 total approximately $11.4 billion over six years, on a net basis, starting in 2017–18.

Summary Statement of Transactions

Table A1.4 summarizes the Government’s projected financial position over the forecast horizon. These projections are based on the average private sector forecast for the economy discussed above.

The budgetary balance is expected to show deficits of $19.9 billion in 2017–18 and $18.6 billion in 2018–19. Over the remainder of the forecast horizon, deficits are expected to decline significantly from $17.3 billion in 2019–20 to $12.5 billion in 2022–23. The federal debt-to-GDP ratio is projected to decline gradually over the forecast horizon, reaching 28.5 per cent in 2022–23. This outlook includes new policy actions taken since Budget 2017 and the new tax measures announced in this Fall Economic Statement.

Outlook for Budgetary Revenues

Table A1.5 sets out the Government’s projection for budgetary revenues. Overall, budgetary revenues are expected to increase by 5.9 per cent in 2017–18, reflecting strong economic growth. Over the remainder of the forecast horizon, revenues are projected to grow at an average annual rate of 3.6 per cent, roughly in line with projected growth in nominal GDP.

Personal income tax revenues—the largest component of budgetary revenues—are projected to increase by $9.0 billion, or 6.3 per cent, to $152.7 billion in 2017–18. The relatively strong growth in 2017–18 reflects an improved economic outlook and the unwinding of the impact of tax planning that held down revenues in 2016–17, whereby high-income individuals recognized additional income in the 2015 tax year and lower income in the 2016 tax year when the new 33 per cent tax rate came into effect. Over the remainder of the projection period, personal income tax revenues are forecast to increase faster than growth in nominal GDP, averaging 4.4 per cent annually, reflecting the progressive nature of the income tax system combined with projected real income gains.

Corporate income tax revenues are projected to increase by $4.9 billion, or 11.7 per cent, to $47.1 billion in 2017–18, largely as a result of higher corporate profits and the associated strength in recent financial results. Over the remainder of the projection period, corporate income tax revenues are projected to grow at an average annual rate of 2.0 per cent, less than the rate of growth in nominal GDP, reflecting the projected outlook for profit growth, anticipated use of loss carry-forwards as well as the reduction of the small business tax rate to 9 per cent.

Non-resident income tax revenues are income taxes paid by non-residents on Canadian-sourced income, notably dividends and interest payments. For 2017–18, non-resident income tax revenues are projected to increase by $0.7 billion, or 9.9 per cent, owing to the expected increase in dividend, investment and interest income of non-residents, given stronger corporate profitability. Over the remainder of the forecast horizon, they are projected to grow at an average annual rate of 2.5 per cent, in line with projected growth in dividends, interest payments and profits.

Goods and Services Tax (GST) revenues are forecast to grow by 6.9 per cent in 2017–18 based on recent financial results and strong projected growth in taxable consumption over the rest of the year. Over the remainder of the projection period, GST revenues are forecast to grow by 3.0 per cent per year on average, based on projected growth in taxable consumption.

Customs import duties are projected to decline by $0.3 billion, or 6.3 per cent, in 2017–18, partly reflecting the introduction of the Canada-European Union Comprehensive Economic and Trade Agreement. Over the remainder of the projection horizon, annual growth in customs import duties is projected to average 2.2 per cent based on the projected growth in imports.

Other excise taxes and duties are projected to increase by $0.2 billion, or 1.9 per cent, to $11.7 billion in 2017–18. Over the remainder of the projection horizon, other excise taxes and duties are expected to grow at an average annual rate of 1.2 per cent based on historical consumption trends.

EI premium revenues are projected to decline by 4.9 per cent in 2017–18 due to a reduction in the EI premium rate to $1.63 per $100 of insurable earnings as a result of the introduction of the seven-year break-even mechanism in 2017. EI premium revenues are then expected to rebound in 2018–19 as the EI premium rate increases to $1.66 per $100 of insurable earnings for 2018 (as recently announced by the Canada Employment Insurance Commission). Over the remainder of the forecast horizon, EI premium revenues are expected to continue on their upward trend based on projected growth in insurable earnings and a projected EI premium rate for 2019 of $1.65 per $100 of insurable earnings resulting from a stronger economic outlook.

Other revenues are made up of three broad components: revenues from consolidated Crown corporations; net income from enterprise Crown corporations; other program revenues from returns on investments, proceeds from the sales of goods and services, and other miscellaneous revenues; and revenues in the Exchange Fund Account.

Enterprise Crown corporation revenues are projected to increase by 5.9 per cent in 2017–18, and grow at an average annual rate of 6.7 per cent over the remainder of the forecast horizon, reflecting the outlooks presented in respective enterprise Crown corporation corporate plans.

Other program revenues are affected by consolidated Crown corporation revenues, interest and exchange rate movements (which affect the Canadian-dollar value of foreign-denominated assets), and flow-through items that give rise to an offsetting expense and therefore do not impact the budgetary balance. These revenues are projected to increase by 6.8 per cent in 2017–18. Over the remainder of the projection period, other program revenues are projected to increase at an average annual rate of only 2.7 per cent, reflecting a reduction in spectrum auction revenues after 2018–19 and the outlooks presented in consolidated Crown corporation corporate plans.

Net foreign exchange revenues, which consist mainly of returns on investments held in the Exchange Fund Account, are volatile and sensitive to fluctuations in foreign exchange rates and foreign interest rates. These revenues are expected to decrease in 2017–18 by 11.4 per cent, due in large part to significant one-time gains on the sale of investments in the Exchange Fund Account in 2016–17, which are not expected to reoccur. Over the remainder of the projection period, net foreign exchange revenues are projected to grow at an average annual rate of 11.3 per cent, reflecting a projected increase in interest rates and the anticipated appreciation in the Canadian dollar by private sector forecasters.

Outlook for Program Expenses

Table A1.6 provides an overview of the projections for program expenses by major component. Program expenses consist of major transfers to persons, major transfers to other levels of government and direct program expenses.

Major transfers to persons are projected to increase from $95.4 billion in 2017–18 to $116.0 billion in 2022–23. Major transfers to persons consist of elderly, EI and children’s benefits.

Elderly benefits, which are comprised of Old Age Security, Guaranteed Income Supplement and Allowance payments to qualifying seniors, are projected to grow from $50.9 billion in 2017–18 to $66.9 billion in 2022–23, or approximately 5.6 per cent per year. The expected increase in elderly benefits is due to projected consumer price inflation, to which benefits are fully indexed, and a projected increase in the population of seniors.

EI benefits are projected to increase by 2.5 per cent to $21.2 billion in 2017–18. This growth is in line with year-to-date results and the growth in average weekly benefits. Over the remainder of the projection period, EI benefits are projected to grow moderately, averaging 2.4 per cent annually as gains in average weekly benefits are largely offset by the expected improvement in the labour market.

Children’s benefits are projected to rise from $23.2 billion in 2017–18 to $25.2 billion in 2022–23, or approximately 1.6 per cent annually, largely reflecting the indexation of benefits beginning in 2018–19.

Major transfers to other levels of government, which include the Canada Health Transfer (CHT), the Canada Social Transfer (CST), Equalization, Territorial Formula Financing and the Gas Tax Fund, among others, are expected to increase over the forecast horizon, from $70.4 billion in 2017–18 to $84.5 billion in 2022–23.

The CHT is projected to grow from $37.1 billion in 2017–18 to $44.9 billion in 2022–23. The CHT grows in line with a three-year moving average of nominal GDP growth, with funding guaranteed to increase by at least 3.0 per cent per year. The CST is legislated to grow at 3.0 per cent per year. Gas Tax Fund payments are indexed at 2.0 per cent per year, with increases applied in $100 million increments. Announced in Budget 2017, home care and mental health transfers in support of provincial and territorial home care and mental health initiatives will grow from $0.3 billion in 2017–18 to $1.2 billion in 2022–23.

Direct program expenses are projected to rise to $139.1 billion in 2017–18 and further to $147.3 billion in 2022–23. Direct program expenses include operating expenses, transfer payments administered by departments and capital amortization.

The projected increase in direct program expenses is driven by an increase in transfer payments administered by departments over the forecast horizon, including transfers to provincial, municipal and Aboriginal governments and post-secondary institutions for investment in infrastructure. The increase in transfer payments also reflects enhancements to the Working Income Tax Benefit. Overall, transfer payments are projected to increase from $47.8 billion in 2017–18 to $50.6 billion in 2022–23.

Operating expenses reflect the cost of doing business for more than 100 government departments and agencies. Operating expenses are projected to increase from $85.7 billion in 2017–18 to $89.3 billion in 2022–23 due in part to measures announced in, and since, Budget 2017 and ordinary growth in operating expenses, mitigated by falling expenses related to pensions and employee future benefits due to the projected rise in long-term interest rates.

Capital amortization is expected to increase from $5.7 billion in 2017–18 to $7.4 billion in 2022–23 as a result of recent and planned investments and upgrades to existing federal capital.

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