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.

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 2018.

The September 2018 survey includes the views of 14 private sector economists:

1. BMO Capital Markets,
2. Caisse de dépôt et placement du Québec,
3. Canadian Federation of Independent Business,
4. CIBC World Markets,
5. The Conference Board of Canada,
6. Desjardins,
7. IHS Global Insight,
8. Industrial Alliance Insurance and Financial Services Inc.,
9. Laurentian Bank Securities,
10. National Bank Financial Markets,
11. Royal Bank of Canada,
12. Scotiabank,
13. TD Bank Financial Group, and
14. The University of Toronto (Policy and Economic Analysis Program).

Fiscal Projections

Changes to the Fiscal Outlook Since Budget 2018

Economic and Fiscal Developments Since Budget 2018

Relative to Budget 2018, budgetary revenues are projected to be higher over the forecast horizon. This increase is fairly broad-based across revenue streams and reflects an overall improvement in the economic outlook, particularly in the corporate sector, as well as strong 2018–19 year-to-date results.

Income tax revenues are expected to be higher relative to Budget 2018 due primarily to the outlook for corporate income tax, as year-to-date developments indicate stronger-than-expected corporate profits. Personal income tax revenues are also higher across the forecast horizon due to better-than-expected 2017–18 results as well as strong 2018–19 year-to-date results that are expected to carry forward.

Upward revisions to revenue from excise taxes and duties reflect both the improvement in the economic outlook and growth in taxable consumption. Of note, the upward revision to customs import duties in 2018–19 is larger than in other years due to the temporary imposition of steel and aluminum retaliatory tariffs. The description below provides further details on these revenues as well as sector support measures announced by the Government.  

Employment Insurance (EI) premium revenues are projected to improve due to growth in employment earnings, which leads to an upward revision in 2018–19 but is more than offset over the remainder of the forecast horizon by the reduction in the EI premium rate from $1.66 per $100 of insurable earnings to $1.62 in 2019.

Other revenues, such as those resulting from sales of goods and services, investments and loans, interest and penalties, and Crown corporations’ revenues, are higher in all years of the forecast horizon largely as a result of the better-than-expected financial performance of enterprise Crown corporations.

With respect to expenses, major transfers to persons have been revised downwards for 2018–19 and 2019–20 as the improved labour market outlook leads to lower projected EI benefit expenses, and lower-than-expected 2017–18 results for elderly benefit expenses are expected to carry forward. The forecast has been revised upwards for subsequent years due to a projected increase in children’s benefits, which largely reflects an increase in the projected number of children eligible for the benefit.

Major transfers to other levels of government are higher than Budget 2018 projections. The increase is primarily due to higher forecasted nominal GDP, to which the Canada Health Transfer and Equalization payments are pegged.

Compared to Budget 2018, direct program expenses are higher in 2018–19 and 2019–20. This increase primarily reflects higher pension and benefits expenses due to lower projected long-tem interest rates in those years relative to Budget 2018, which results in actuarial losses. The impact is eliminated in later years due to projected increases in interest rates that result in actuarial gains later in the forecast period. 

Public debt charges are lower across the forecast horizon, largely reflecting a reduction in long-term interest rates, which leads to lower pension interest expenses.

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.

This outlook includes new policy actions taken since Budget 2018 (Table A1.7) and new 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 4.9 per cent in 2018–19, reflecting strong economic growth and year-to-date results. Over the remainder of the forecast horizon, revenues are projected to grow at an average annual rate of 3.8 per cent, in line with projected growth in nominal GDP.

Personal income tax (PIT) revenues—the largest component of budgetary revenues—are projected to increase by $8.3 billion, or 5.4 per cent, to $161.9 billion in 2018–19. The strong growth in 2018–19 reflects an improved economic outlook, better-than-expected 2017–18 results that are expected to carry forward, and 2018–19 year-to-date developments. Over the remainder of the projection period, PIT revenues are forecast to increase faster than growth in nominal GDP, averaging 4.3 per cent annually, reflecting the progressive nature of the income tax system combined with projected real income gains.

Corporate income tax (CIT) revenues are projected to increase by $1.7 billion, or 3.5 per cent, to $49.5 billion in 2018–19, reflecting growth in corporate profits and correspondingly strong recent financial results. CIT revenues are then projected to decline in 2019–20 by 7.6 per cent largely due to the proposals in this Fall Economic Statement to promote business investment, namely the two immediate expensing measures and the Accelerated Investment Incentive. Over the remainder of the projection period, CIT revenues are expected to grow at an average annual rate of 3.9 per cent.  

Non-resident income tax revenues are income taxes paid by non-residents on Canadian-sourced income, notably dividends and interest payments. For 2018–19, non-resident income tax revenues are projected to increase by $0.9 billion, or 11.0 per cent, based on strong year-to-date results and an expected increase in dividend, investment and interest income resulting from strong corporate profits growth. Over the remainder of the forecast horizon, these revenues are projected to grow at an average annual rate of 1.0 per cent.

Goods and Services Tax (GST) revenues are forecast to grow by 4.8 per cent in 2018–19 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 3.7 per cent per year, on average, based on the outlook for taxable consumption.

Customs import duties are projected to grow 11.2 per cent in 2018–19, partially due to temporary retaliatory surtaxes on steel, aluminum and other products. Over the remainder of the projection horizon, annual customs import duties are projected to decline by an average of 1.9 per cent, largely due to the phase-out of tariffs under the Comprehensive Economic and Trade Agreement and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

Other excise taxes and duties (OETD) are projected to increase by $0.8 billion, or 6.7 per cent, to $12.4 billion in 2018–19, due to additional excise duty revenues from cannabis legalization and the higher excise duty on tobacco products announced in Budget 2018. Over the remainder of the projection horizon, OETD revenues are expected to grow at an average annual rate of 1.0 per cent based on historical consumption trends.

The revenue outlook includes an estimate for direct fuel charge proceeds from the federal carbon pollution pricing system. In provinces that do not meet the Canada-wide federal standard for reducing carbon pollution—Ontario, New Brunswick, Manitoba and Saskatchewan—the majority of the proceeds will be returned through Climate Action Incentive payments to individuals and families residing in those jurisdictions. The remainder of the direct proceeds will be used to support particularly affected sectors in these jurisdictions. In Yukon and Nunavut, direct proceeds will be returned directly to those governments as they have chosen to adopt the federal carbon pollution pricing system. All direct proceeds from the federal carbon pollution pricing system will be returned to the jurisdiction of origin in which they were raised.

EI premium revenues are projected to rise by 4.1 per cent in 2018–19 based on growth in employment earnings and the increase in the EI premium rate from $1.63 per $100 of insurable earnings in 2017 to $1.66 in 2018. Growth is expected to slow to 1.8 per cent in 2019–20 due to a lower premium rate of $1.62 in 2019, as recently announced by the Canada Employment Insurance Commission. Over the remainder of the forecast horizon EI premium revenues are projected to grow at an average of 3.6 per cent annually, driven by continued growth in insurable earnings.

Other revenues are made up of three broad components: 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 decrease by 11.7 per cent in 2018–19, and grow thereafter at an average annual rate of 7.9 per cent over the remainder of the forecast horizon, reflecting outlooks presented in the corporate plans of respective enterprise Crown corporations. The projected decrease in 2018–19 largely reflects one-time positive equity adjustments (from the implementation of revised financial reporting standards) that boosted revenue growth in 2017–18.

Other program revenues are affected by consolidated Crown corporation revenues, interest rates, inflation, 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 3.8 per cent in 2018–19 and grow at an average annual rate of 3.4 per cent over the remainder of the forecast horizon, reflecting the outlook for interest rates, which affects the return the Government receives on its investments, as well as projections from 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. Between 2018–19 and 2023–24, net foreign exchange revenues are projected to grow at an average annual rate of 8.8 per cent, reflecting a projected increase in interest rates and the anticipated appreciation of the Canadian dollar by private sector forecasters.

Outlook for Program Expenses

Table A1.6 provides an overview of the projections for program expenses, on an accrual basis, by major component. A more detailed outlook for 2018–19 can be found in Tables A1.10 and A1.11, which also provide a full reconciliation between the 2018–19 Estimates and the budgetary balance presented in this Fall Economic Statement.

Major transfers to persons are projected to increase from $97.5 billion in 2018–19 to $121.5 billion in 2023–24. 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 $53.4 billion in 2018–19 to $70.6 billion in 2023–24, or approximately 5.7 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 be $20.1 billion in 2018–19. Over the remainder of the projection period, EI benefits are projected to grow at an average of 4.3 per cent annually, reflecting growth in both the number of beneficiaries and average weekly benefits.

Children’s benefits are projected to rise from $23.9 billion in 2018–19 to $26.1 billion in 2023–24, or approximately 1.8 per cent annually, reflecting an increase in the projected number of children eligible for the Canada Child Benefit as well as the full indexation of the benefit to consumer price inflation.

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 $73.8 billion in 2018–19 to $88.1 billion in 2023–24.

The CHT is projected to grow from $38.6 billion in 2018–19 to $46.8 billion in 2023–24. 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. Home care and mental health transfers are projected to grow from $0.9 billion in 2018–19 to $1.2 billion in 2023–24.

Direct program expenses are projected to rise to $149.0 billion in 2018–19 and further to $161.1 billion in 2023–24. Direct program expenses include other transfer payments administered by departments and operating expenses.

The projected increase in direct program expenses is driven, in large part, by the introduction of carbon pollution pricing and the associated return of direct fuel charge proceeds, which are expected to increase from $0.6 billion in 2018–19 to $5.7 billion in 2023–24. There is also a projected increase in other transfer payments administered by departments over the forecast horizon, including transfers to provincial, municipal and Indigenous governments and post-secondary institutions for investment in infrastructure. Other transfer payments are projected to increase from $48.0 billion in 2018–19 to $54.1 billion in 2023–24.

Operating expenses reflect the cost of doing business for more than 100 government departments, agencies and Crown corporations, and are projected to reach $100.3 billion in 2018–19. Operating expenses are projected to decrease to $95.0 billion in 2020–21, and then grow to $101.4 billion in 2023–24. The growth in operating expenses is composed of growth in departmental expenses, which is largely offset by falling expenses related to pensions and employee future benefits, reflecting the projected rise in long-term interest rates.

Impact of Alternative Economic Scenarios

The fiscal projections presented in this Fall Economic Statement are based on an average of the September 2018 private sector economic outlook survey. However, economists surveyed offered a wide range of views regarding future economic growth and, therefore, the path of nominal GDP (the broadest measure of the tax base). Changes in economic growth assumptions can also have large impacts on the budgetary balance and debt-to-GDP profile over an extended projection horizon.

For example, if economic growth was stronger than expected, equalling the average of the top four individual forecasts for nominal GDP growth—which is equivalent to nominal GDP growth being 0.4 percentage points per year higher, on average, than in the full September survey—the budgetary balance would improve by $5.0 billion per year on average and potentially reach balance by 2023–24 (Chart A1.1). Further, this would result in a federal debt-to-GDP ratio of 26.1 per cent, which would be its lowest level since 1978.

Continued economic strength would accelerate deficit reduction

Chart A1.1

Federal Budgetary Balance

Federal Debt-to-GDP Ratio

Conversely, basing fiscal projections on the average of the bottom four individual forecasts for nominal GDP growth—which is equivalent to nominal GDP growth being 0.4 percentage points per year lower, on average, than in the full September survey—the budgetary balance would worsen by $5.3 billion per year on average, and the federal debt-to-GDP ratio would still decline, but would be 29.7 per cent in 2023–24.

Policy Actions Taken Since Budget 2018

Policy Actions and Fall Economic Statement Investments by Department (Cash Basis)

Reconciliation of 2018 Fall Economic Statement Expenses with 2018–19 Main Estimates

Under this reconciliation, the accrual expense forecast is decomposed into nine building blocks beginning with the Main Estimates authorities, Budget Implementation Vote (BIV) allocations-to-date, Policy Actions since Budget 2018 as well as 2018Fall Economic Statement measures that could be included in Supplementary Estimates, additional Estimates authorities for which Parliamentary approval may be sought later in the fiscal year, amounts forecasted to remain unspent or carried forward from total authorities, further spending financed by departmental revenues, spending-like programs delivered through the tax system, and remaining accrual and consolidation adjustments required to put the forecast on the same accounting basis as the Public Accounts of Canada, Volume I. These building blocks are consistent with concepts and definitions used in the Public Accounts of Canada, Volume II.

1. Main Estimates

The Estimates reflect authorities approved in previous budgets and confirmed by Treasury Board for all organizations that receive a voted appropriation from Parliament. The Estimates also include, for information, forecasts of spending under most statutory authorities previously provided by Parliament.

The Estimates are presented on a modified cash basis of accounting. Figures are net of certain revenues collected by departments, which departments can re-spend to reduce the level of appropriations sought from Parliament.

The Estimates are designed primarily to support Parliament’s scrutiny of the portion of government spending that requires annual approval through the appropriation acts. As such, they exclude several programs where authorities and reporting to Parliament are established under separate regimes, most notably the Employment Insurance Operating Account and programs delivered through the tax system.

Estimates include both budgetary authorities (for expenditures which impact the income statement) and non-budgetary authorities (for balance sheet transactions). As the objective in this reconciliation table is to identify transactions and adjustments that affect accrual expenses, the Main Estimates column includes only budgetary authorities.

2. Budget Implementation Vote allocations-to-date

The Budget Implementation Vote (BIV) was introduced in the Main Estimates 2018–19. The BIV was included in the Main Estimates of the Treasury Board of Canada Secretariat (TBS), and is being allocated to departments throughout the fiscal year as measures included in the vote are confirmed by Treasury Board.

This column shows amounts which have been allocated to departments by Treasury Board as of the latest available monthly update published by TBS on October 31, 2018, which reflects Treasury Board approvals through the end of October 2018.

BIV amounts which are remaining to be allocated later in 2018–19 are included within the column Other anticipated authorities.

3. Measures

This column is based on policy actions taken since Budget 2018 by department in Table A1.8, as well as investments announced in this Fall Economic Statement by department in Table A1.9, adjusted to follow the same modified cash basis of accounting and presentational conventions as the Estimates (for example, amounts related to the Employment Insurance Operating Account do not flow through the Estimates). In order to focus on measures where voted appropriations are expected to be sought from parliament and which are expected to have a fiscal impact, measures which are statutory or non-budgetary are omitted from this column.

Measures affecting departments other than the 23 identified in the table are grouped in the “Other direct program expenses” row. Measures which are solely statutory (and budgetary) are included in the column Other anticipated authorities.

4. Other anticipated authorities

This category captures a range of forecasted authorities for measures and mechanisms that have been approved previously, or that have already been authorized under existing legislation, and that are expected to appear in a Supplementary Estimates or the Public Accounts.

For example, a revolving fund or a department with multi-year appropriations may have authority to carry forward unspent authorities from 2017–18 into 2018–19, but that amount cannot be confirmed until the audited financial results for 2017–18 become available, which means that the amounts are not included in the Main Estimates.

Similarly, the Treasury Board manages several central votes for carry-forwards, certain eligible personnel expenditures and other contingencies that are initially presented under Treasury Board of Canada Secretariat and subsequently allocated to departments throughout the year as departments meet eligibility requirements. This includes amounts remaining to be allocated from the Budget Implementation Vote for Budget 2018 measures.

Another common reason authorities are not sought until a Supplementary Estimates is that a previous budget or off-cycle measure has not yet received the supporting policy or program approval.

There are also certain statutory authorities, often small, which may not be included for information in the Estimates but which are reported in the Public Accounts.

Note that the sum of the values in the first four columns represent a forecast of total budgetary authorities available by department, consistent with the concepts and definitions applied in the Public Accounts of Canada, Volume II, Section 1, Table 5.

5. Unspent/carried forward

This column is the forecasted difference between the forecast of potential spending authorities for 2018–19 (authorities from the first four columns) and anticipated spending over that period (net expenditures in the sixth column).

Specifically, the Estimates show the maximum amount of appropriated funding that can be spent at a point in time, while the Fall Economic Statement projects the amount of spending that will likely be spent over the entire course of the fiscal year.

The Fall Economic Statement forecast recognizes that some amount of authorities included in the Estimates will remain unspent at the end of the fiscal year. These unspent amounts are either carried forward automatically into subsequent years or they “lapse”. Amounts that technically lapse in one year are often spent in a subsequent year as they are reprofiled and included in a future Estimates.

Lapses are influenced by many factors, such as contract and project delays, uncommitted authorities in Treasury Board managed central votes, as well as departmental funds management practices to ensure that spending does not exceed the authorities approved by Parliament.

In terms of the Public Accounts of Canada, Volume II, Section 1, Table 5, this column aligns with the sum of “Available for use in subsequent years” and “Lapsed”.

6. Net expenditures

Expenditures are largely funded through voted appropriations and statutory authorities, and to a limited extent through departmental revenues. In the Estimates, authorities and expenditures are presented on a “net” basis, i.e. excluding expenditures expected to be funded by departmental revenues, in order to reflect the expected impact on the Consolidated Revenue Fund.

Figures in this column are presented on the same modified cash basis of accounting as the Estimates, and represent a forecast of the corresponding amount in the Public Accounts of Canada, Volume II, Section 1, Table 5.

7. Netted revenues

Certain expenditures are funded through departmental revenues. Accrual expenses in the Fall Economic Statement and the Public Accounts are on a “gross” basis, so revenues that are netted against expenditures in the Estimates are added back in order to arrive at forecasted accrual expenses. Summing the figures in the Net expenditures column with the Netted revenues column would yield “Total gross expenditures” on a modified cash basis of accounting. Net expenditures, Netted revenues and Total gross expenditures are reported by department in the Public Accounts of Canada, Volume II, Section 1, Table 3.

8. Tax credits & repayments

This column captures expenditures forecasted to be delivered through the tax system, but not shown in the Estimates. Costs related to the Canada Child Benefit are the largest component in this column (shown in the Major transfers row). Tax credits and repayments that are considered direct program expenses are shown in the Canada Revenue Agency row, and include incentives for research and development, the Canada Workers Benefit as well as refundable tax credits.

Parliament does not authorize annual spending for such tax expenditures and refundable tax credits, which are instead legislated through the Income Tax Act. These expenditures are reported in the Public Accounts of Canada, Volume II, Section 1, Table 3a. In addition, the Department of Finance Canada’s annual Report on Federal Tax Expenditures includes both historical and forecasted values by program.

9. Accrual & consolidation adjustments

This column captures other differences in accounting basis and scope between the Estimates and the Fall Economic Statement/Public Accounts of Canada.

The budget and the Fall Economic Statement are presented on an accrual basis whereas the Estimates are presented on a modified cash basis. As a result, certain items such as acquisitions of tangible capital assets will be reported differently. Under accrual accounting, the cost to acquire an asset is amortized over the expected life of the asset, whereas under modified cash accounting, the cost is recognized as disbursements are made. For example, if a building is acquired that has a useful life of 30 years, then accrual accounting will see the cost amortized over the 30-year life of the asset, while cash accounting will portray the cost only in the first few years when the payments are made.

Other examples of accrual adjustments include bad debt expenses, operating expenses and public debt charges related to pensions and benefits for which cash disbursements are expected to be made in subsequent years but for which expenses are accrued in the current year.

All costs related to consolidated specified purpose accounts, and certain costs related to consolidated Crown corporations, are also included here, including some amounts announced in the 2018 Fall Economic Statement. The most important is Employment Insurance (EI) benefits. Most EI costs are paid directly out of the Employment Insurance Operating Account, rather than a departmental appropriation, and are therefore not specifically included in Estimates, although they are included in the Fall Economic Statement. Similarly, expenses of consolidated Crown corporations that are funded from their own revenues are also captured here.

A final consolidation adjustment included is the reversal of expenses that are internal to government, such as when one department pays another to provide it with a service.

This column represents a forecast consistent with a group of adjustments reported in the Public Accounts of Canada, Volume II, Section 1, Table 3a.

10. Fall Economic Statement expense forecast

This column represents final external expenses on an accrual basis, inclusive of all Fall Economic Statement and off-cycle measures outlined in the Fall Economic Statement.

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