• Previous
• Table of Contents
• Next

Archived - Annex 1
Details of Economic and Fiscal Projections

Economic Projections

The average of private sector forecasts has been used as the basis for fiscal planning since 1994. This helps ensure objectivity and transparency, 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 2020.

The September survey includes the views of 13 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. Desjardins,
6. IHS Markit,
7. Industrial Alliance Insurance and Financial Services Inc.,
8. Laurentian Bank Securities,
9. National Bank Financial Markets,
10. Royal Bank of Canada,
11. Scotiabank,
12. TD Bank Financial Group, and
13. The University of Toronto (Policy and Economic Analysis Program).

Private sector economists expect real gross domestic product (GDP) to decline by 5.8 per cent in 2020, a smaller decline than the projected drop of 6.8 per cent in the July 2020 Economic and Fiscal Snapshot (EFS 2020), reflecting slightly better-than-expected results in the second quarter and stronger momentum in the third quarter (Table A1.1 below). The Canadian economy is expected to continue to recover in 2021, rebounding by 4.8 per cent in 2021. This is revised down from 5.5 per cent in EFS 2020 due to ongoing weakness heading into 2021 as a result of ongoing challenges associated with COVID-19. Real GDP growth is expected to gradually decline over the remaining years of the forecast horizon.

Along with the contraction in economic activity, the unemployment rate is expected to rise to reach close to 10 per cent on average in 2020 and to decline to 8.1 per cent in 2021, still above its pre-COVID-19 level and broadly similar to the EFS 2020 forecast.

The outlook for GDP inflation (the broadest measure of economy-wide price inflation) in the September 2020 survey has also been revised up for 2020 compared to the EFS 2020 forecast (from -0.5 per cent to +0.3 per cent) as a result of better-than-expected results in the second quarter and upward forecast revisions in the third quarter, in part attributable to higher oil prices. Going forward, GDP inflation is expected to stand at about 2 per cent per year.

As a result of these developments, the level of nominal GDP (the broadest measure of the tax base) is projected at $2,183 billion for 2020, $39 billion higher than projected in EFS 2020 (but still $214 billion lower than projected in the Economic and Fiscal Update 2019). The nominal GDP level difference with EFS 2020 is expected to be reduced by half to $21 billion in 2021, reflecting a smaller projected rebound in nominal GDP next year.

The outlook for short- and long-term interest rates has been revised down in the September 2020 survey by about 10 basis points both this year and next year compared to the EFS 2020 forecast. Short- and long-term interest rates are expected to average low levels of 0.7 per cent and 1.5 per cent, respectively, over the forecast horizon.

Alternative Economic Scenarios

Given the uncertainty of the current environment, with a virulent resurgence of COVID-19 in Canada and around the globe since the September survey, the Department has also considered two alternative downside scenarios to the projections of the private sector survey, described in detail in section 4.3.1. These scenarios broadly illustrate the economic impacts of different health outcomes (Table A1.2).

Fiscal Projections

Changes to the Fiscal Outlook since the Economic and Fiscal Snapshot 2020 (EFS 2020)

Economic and Fiscal Developments since EFS 2020

Due to the unprecedented severity and suddenness of the economic shock, the fiscal outlook for 2020-21 and beyond is subject to a much higher degree of uncertainty than normal.

Relative to EFS 2020, budgetary revenues are projected to be higher in 2020-21 largely due to better-than-expected income tax revenue. This improvement has been driven by an upward revision to personal income tax revenues due to improved economic conditions, which have resulted in a more positive outlook for household incomes, and the distributional effect of the downturn having a greater relative impact on lower income tax brackets.

Excise taxes and import duties have been revised downward, mainly due to the carry-forward of lower-than-expected revenues for 2019-20, particularly with respect to Goods and Services Tax (GST) revenues.

Proceeds from the pollution pricing framework are projected to be marginally lower as a result of expected lower demand for greenhouse gas-intensive fuel products due to COVID-19.

Employment Insurance (EI) premium revenues have been revised up due to better-than-expected labour force participation and an improved outlook for wages.

Other revenues, such as those resulting from sales of goods and services, investments and loans, interest and penalties, and Crown corporations’ net profits, are projected to be much lower in 2020-21, particularly reflecting lower-than-expected Bank of Canada profits as a result of the secondary market purchases of Government of Canada securities to support liquidity in financial markets. The decrease in Bank of Canada profits reflects the expensing of premiums paid on these bond purchases, which more than offsets interest earnings on the securities in 2020-21.

Relative to EFS 2020, budgetary expenses are projected to be somewhat lower in 2020-21, largely due to the better-than-expected rebound in the labour market and lower projected non-COVID-related discretionary spending.

Major transfers to persons, before measures, have been revised down in 2020-21 relative to EFS 2020, primarily driven by lower-than-expected EI beneficiaries reflecting a stronger rebound in the labour market.

Major transfers to other levels of government are lower in 2020-21, relative to the EFS 2020 forecast, as higher-than-expected personal income tax revenues translate into higher amounts to be recovered through the Quebec Abatement.

Direct program expenses – which include pollution pricing proceeds returned, other transfer payments administered by departments, and operating expenses – have been revised down in 2020-21, due in part to a higher expected lapse of underlying departmental spending resulting from reduced discretionary spending on activities such as travel and training due to the COVID crisis. In addition, the improved outlook for household incomes has resulted in somewhat lower projected refundable tax credits expenses.

Net actuarial losses – which represent changes in the measurement of the government’s obligations for pensions and other employee future benefits accrued in previous fiscal years – are expected to increase relative to EFS 2020, reflecting higher-than-expected actuarial losses at the end of 2019-20.

Public debt charges are up slightly in 2020-21 relative to EFS 2020, reflecting higher interest costs on public sector pension and other future benefit plans due to the upward revision of the associated obligation in 2019-20.

Summary Statement of Transactions

Table A1.5 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 the COVID-19 Economic Response Plan and policy actions taken since EFS 2020.

Outlook for Budgetary Revenues

Table A1.6 sets out the government’s projection for budgetary revenues.

Personal income tax (PIT) revenues – the largest component of budgetary revenues – are projected to decrease to $162.1 billion in 2020-21, or 3.3 per cent. This decline reflects the impact of the COVID-19 crisis on household incomes, partially offset by the expansion of government transfers. Over the remainder of the forecast horizon, PIT revenue growth is expected to return to an average of 4.9 per cent, in line with projected nominal GDP growth. 

Corporate income tax (CIT) revenues are projected to decrease by $10.9 billion, or 21.8 per cent, to $39.2 billion in 2020-21. Lower corporate profitability and general economic weakness due to the COVID-19 primarily explain this decline. In 2021-22, CIT is expected to rebound to $44.3 billion, or up 13.2 per cent. Over the remainder of the forecast horizon, CIT is forecast to grow at an average annual rate of 8.2 per cent reflecting improved economic conditions and stronger corporate profitability. It will, however, take several years for corporate tax revenues to return to pre-pandemic levels.

Non-resident income tax revenues are income taxes paid by non-residents on Canadian-sourced income, notably dividends and interest payments. These revenues are projected to increase to $9.9 billion in 2020-21, or 4.5 per cent, as non-resident taxpayers are expected to repatriate previously earned income to their home jurisdictions during the crisis.

GST revenues are forecast to fall to $29.4 billion in 2020-21, or 21.5 per cent, reflecting the temporary shutdown of large portions of the retail sector and the introduction of the one-time enhanced GST credit payment, before increasing to $38.9 billion in 2021-22, or 32.6 per cent. Over the remainder of the projection period, GST revenues are forecast to grow by 6.3 per cent per year, on average, reflecting the outlook for taxable consumption.

Customs import duties are projected to fall from $4.9 billion in 2019-20 to $3.7 billion in 2020-21, or 24.0 per cent, due to lower imports and a waiver of customs duties on medical goods for combatting the spread of COVID-19, before rebounding to $4.4 billion in 2021-22, or 18.3 per cent. Over the remainder of the horizon, customs import duties are projected to grow at an average annual rate of 6.3 per cent due to expected growth in imports.

Other excise taxes and duties (OETD) are projected to decline to $10.8 billion in 2020-21, or 7.4 per cent, reflecting decreased demand since the onset of the pandemic. OETD revenues are expected to increase to $11.9 billion in 2021-22, or 10.3 per cent, as demand recovers, and over the remainder of the projection period, are expected to grow at an average annual rate of 1.2 per cent, reflecting expected underlying consumption growth.

In 2020-21, EI premium revenues are projected to decrease by 3.4 per cent to $21.5 billion, due to a premium rate decrease from $1.62 per $100 of insurable earnings in 2019 to $1.58 in 2020. Over the remainder of the horizon, premium revenues are anticipated to grow at an average annual rate of 7 per cent due to anticipated increases in employment income and the improving labour market.

Other revenues consist 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 $25.3 billion in 2020-21 and increase by $25.6 billion in 2021-22, before growing thereafter at an average annual rate of 18.4 per cent starting 2022-23, reflecting outlooks presented in corporate plans of respective enterprise Crown corporations. In particular, the decrease in projected revenues in 2020-21 reflects the expensing of premiums paid on Bank of Canada purchases of Government of Canada securities on the secondary market to support liquidity in financial markets, as well as the provisioning for loan losses stemming from COVID-19 relief measures.

Other program revenues are affected by consolidated Crown corporation revenues, interest rates, inflation and exchange rate movements (which affect the Canadian-dollar value of foreign-denominated assets). These revenues are projected to decline by 34.6 per cent or $7.2 billion in 2020-21, primarily due to a decline in interest and penalty revenue of $4.0 billion and return on investments of $1 billion as a result of lower interest rates and  interest and penalty waivers provided as part of the government’s COVID-19 response, along with a $1.3 billion projected decline in revenue from sales of goods and services. Over the remainder of the forecast horizon, these revenues are projected to grow at an average annual rate of 11.4 per cent as a result of growth in revenue from sales of goods and services and interest and penalty revenue.

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 projected to decrease in 2020-21 due mainly to lower projected interest rates.

Outlook for Program Expenses

Table A1.7 provides an overview of the projection for program expenses by major component. Program expenses consist of three main categories: major transfers to persons, major transfers to other levels of government, and direct program expenses.

Major transfers to persons—which consist of elderly, EI and children’s benefits, as well as the Canada Emergency Response Benefit and Recovery Benefits—are projected to increase to $209.3 billion in 2020-21.

Elderly benefits are projected to reach $59.5 billion in 2020-21, up 5.7 per cent, due to an increase in the population of seniors. Over the remainder of the horizon, elderly benefits are forecast to grow 5.4 per cent per year, on average. The expected increase in elderly benefits is due to a projected increase in the population of seniors and projected consumer price inflation, to which the benefits are fully indexed.

EI benefits are projected to increase to $67.2 billion in 2020-21, largely reflecting the cost of Economic Response Benefits ($37.9 billion) and higher unemployment resulting from the crisis. EI benefits are expected to fall to $23.4 billion by 2023-24 as a result of the projected improvement in the labour market. In the outer years of the projection period, EI benefits are forecast to grow at an average of 2.0 per cent annually, as the unemployment rate is projected to stabilize at around 6.0 per cent after 2023.

The Canada Emergency Response Benefit (CERB) was introduced as part of Canada’s COVID-19 Economic Response Plan to provide immediate assistance to Canadians not eligible for EI benefits. As the economy reopens, the government is committed to continuing to support all Canadians and has introduced the Canada Recovery Benefit (CRB), which provides $1,000 per two-week period to eligible individuals not entitled to regular EI Benefits, for up to 26 weeks. In addition, the Canada Recovery Sickness Benefit (CRSB) and the Canada Recovery Caregiving Benefit (CRCB) are available to eligible individuals, providing $500 per week of eligibility. The CERB and the Canada Recovery Benefits (CRB, CRSB and CRCB) are forecasted to cost $54.8 billion in 2020-21, decreasing to $10.3 billion in 2021-22 as the economy recovers and temporary programs end.

Canada Child Benefit (CCB) payments are projected to increase 14.4 per cent to $27.9 billion in 2020-21, largely reflecting the one-time top up provided in May 2020. These benefits will stay close to this level for 2021-22, largely due to the temporary support for families with young children proposed in this Statement. In the outer years of the horizon, CCB payments are forecast to grow at an average annual rate of 1.9 per cent, reflecting forecasted consumer price inflation, to which the benefits are indexed.

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 by 25.9 per cent to $99.7 billion in 2020-21. The increase in 2020-21 is driven by previously announced COVID-19 response measures, including $12.9 billion for the Safe Restart Agreement, $2.0 billion for the Safe Return to Class Fund, and $3.0 billion to support essential workers through a wage top-up.

The CHT is projected to grow from $41.9 billion in 2020-21 to $51.1 billion in 2025-26. 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 be $1.3 billion in 2020–21, stabilizing at $1.2 billion starting in 2022-23.

Direct program expenses – which include proceeds from the pollution pricing framework returned, the Canada Emergency Wage Subsidy, other transfer payments administered by departments, and operating expenses – are expected to increase 105.3 per cent to $312.5 billion in 2020-21. The projected increase in direct program expenses is largely driven by COVID-19 response measures, including the wage subsidy, with an estimated cost of $83.5 billion in 2020-21, and $7.5 billion in support of medical research and vaccine development in 2020-21.

Other transfer payments administered by departments are projected to increase to $110.0 billion in 2020-21, reflecting investments made to help Canadian families and businesses through the crisis. This includes the cost of the loan repayment incentive for the Canada Emergency Business Account, and $3.0 billion for the Canada Emergency Student Benefit. Also contributing to the increased costs are supports for seniors through a one-time payment ($2.5 billion), and to small businesses through the Canada Emergency Commercial Rent Assistance ($1.7 billion), and through the Canada Emergency Rent Subsidy ($4.4 billion). Over the remainder of the forecast horizon, other transfer payments are projected to decrease to $59.1 billion by 2022-23, as the economy recovers and support measures are lifted, after which they are projected to rise by 1.8 per cent per year on average.

Operating expenses reflect the cost of doing business, including current pension service costs, for more than 100 government departments, agencies and Crown corporations. Operating expenses are projected to increase to $113.7 billion in 2020-21. This includes measures to protect the health and safety of Canadians, including $7.9 billion to procure medical and personal protective equipment in response to the crisis. Operating expenses are projected to decrease to $106.9 billion by 2022-23, after which they are projected to grow at an average of 0.9 per cent, annually.

Financial Source/Requirement

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

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 liabilities; changes in non-financial assets; investing activities through loans, investments and advances; and changes in other financial assets and liabilities, including foreign exchange activities.

As shown in Table A1.8, a financial requirement is projected in each year over the forecast horizon, largely reflecting financial requirements associated with the projected budgetary balance. The projected financial requirement in 2020-21 reflects in large part financing of the budgetary balance as well as increases in the government’s loans, investments and advances. This latter category includes funding to enterprise Crown corporations to support financing programs for businesses – including to the Business Development Bank of Canada and Export Development Canada under the government’s Business Credit Availability Program, Farm Credit Canada and the Canada Development Investment Corporation. Other financing arrangements include loans issued by the government under the Canada Emergency Business Account.

Policy Actions Taken since the 2020 Economic and Fiscal Snapshot

Since 2016, the government has provided a transparent overview of all off-cycle spending. The investments (Table A1.9) ensure that Canadians are continually well served by the programs they rely on and that government operations carry on as usual.

• Previous
• Table of Contents
• Next