Department of Finance
Symbol of the Government of Canada
Table of Contents - Previous - Next
Fiscal Outlook

Highlights

  • The deterioration of the economic outlook has led to a significant reduction in projected revenues, particularly in 2009–10 and 2010–11.
  • The projections in this budget are based on the average of private sector economic forecasts. However, given the degree of uncertainty in the global economy, the Government is including an explicit adjustment for the risks to the private sector forecasts. This adjustment amounts to a reduction in the budgetary balance of $0.8 billion in 2008–09, $4.5 billion in 2009–10 and 2010–11, $3 billion in 2011–12, $1.5 billion in 2012–13 and $0.8 billion in 2013–14.
  • After this adjustment for risk and before accounting for the impact of the actions proposed in this budget, the Government is projecting a small surplus in 2008–09, followed by deficits of $15.7 billion in 2009–10, $14.3 billion in 2010–11, $8.3 billion in 2011–12, $2.3 billion in 2012–13 and a surplus of $5.5 billion in 2013–14.
  • After taking into account the cost of the measures proposed in Budget 2009 to support the economy, the Government is projecting deficits of $1.1 billion in 2008–09, $33.7 billion in 2009–10, $29.8 billion in 2010–11, $13.0 billion in 2011–12, $7.3 billion in 2012–13 and a surplus of $0.7 billion in 2013–14.
  • The Government has designed its Economic Action Plan to concentrate new spending in 2009–10 and 2010–11, when the economy is expected to be weak. Starting in 2011–12, the fiscal position of the Government is projected to improve rapidly, as time-limited stimulus measures expire and the economy recovers. By 2013–14, the budget is projected to be in a small surplus.
  • Program spending is expected to increase through 2010–11, reflecting the impact of the measures in this budget. Over the medium term, spending as a share of GDP is expected to return close to its 2007–08 level. The Government remains committed to ensuring that spending is focused and disciplined.
  • The debt-to-GDP ratio is expected to increase from 28.6 per cent in 2008–09 to 32.1 per cent by 2010–11, as a result of projected deficits. The debt-to-GDP ratio is projected to be below its 2008–09 level by 2013–14.
  • Canada’s net debt-to-GDP ratio will remain below other G7 countries over the forecast horizon.
  • The Government’s priority is to support the economy. The Government will use budget surpluses first of all to repay the deficits expected in the upcoming four years.

Approach to Budget Planning

The Government’s approach to budget planning is built upon the principles of accountability, transparency and strong expenditure management. To ensure objectivity and transparency in forecasting, the economic forecast underlying the Government’s fiscal projections is based on the average of the private sector economic forecasts. This process has been followed for over a decade. This budget maintains that approach. However, as described in Chapter 2, there is considerable uncertainty about the future course of output, employment and commodity prices. Given these extraordinary uncertainties, the Government has judged it appropriate for budget planning purposes to adjust downward the private sector forecast of nominal GDP—the broadest measure of the tax base.

Table 4.1 shows that the private sector forecast of nominal GDP has been adjusted down by $30 billion in each of 2009 and 2010. This is consistent with the views of the private sector economists that the greatest risks to the outlook are in the coming two years. With this downward adjustment, the economic assumptions underlying the fiscal projections are consistent with the more pessimistic private sector economic forecasts. Starting in 2011, when risks to the economic situation are expected to be fewer, the adjustment for risk is gradually eliminated. By 2014, the planning assumptions are consistent with the private sector forecast. The result is that budget revenue projections are about $0.8 billion lower than they would be under the private sector average in 2008–09, $4.5 billion in 2009–10 and 2010–11, $3 billion in 2011–12, $1.5 billion in 2012–13 and about $0.8 billion lower in 2013–14.

Table 4.1
Budget Planning Assumption Comparison
  2008 2009 2010 2011 2012 2013 2014
  (billions of dollars)
Nominal GDP level              
  January 2009 private
   sector forecast
1,609 1,590 1,657 1,751 1,848 1,940 2,031
  Budget 2009
   fiscal planning
1,604 1,560 1,627 1,731 1,838 1,935 2,031
  Adjustment for risk -5 -30 -30 -20 -10 -5  
  2008–2009 2009–2010 2010–2011 2011–2012 2012–2013 2013–2014  
Revenue effect of risk adjustment -0.8 -4.5 -4.5 -3.0 -1.5 -0.8  

The projections presented in this budget reflect monthly financial results through November 2008. In light of global economic uncertainty, this budget also provides an update of the five-year fiscal projections presented in the November 2008 Economic and Fiscal Statement.

Fiscal Planning Framework

Chart 4.1 shows the budgetary balance-to-GDP ratio since 1990-91, after taking into account the actions outlined in Chapter 3, as well as the impacts of recent economic developments on revenues and expenses, as described later in this chapter.

The Government is projecting deficits of $33.7 billion in 2009–10 and $29.8 billion in 2010–11. In order to ensure that the Government’s fiscal position remains structurally sound, stimulus spending is temporary—it is projected that the overwhelming majority of new spending ends in 2011–12. As a result, it is projected that the budget balance will improve sharply starting in 2011–12, with a return to surplus in 2013–14.

The projected deficits in 2009–10 and 2010–11 represent about 2 per cent of GDP.

Chart 4.1 - Budgetary Balance-to-GDP Ratio

An important measure of fiscal sustainability is the debt burden as measured by the debt-to-GDP ratio. Reductions in the debt burden in recent years have provided Canada the flexibility to put in place measures to support the economy that are sustainable. Under the Budget projections, the debt-to-GDP ratio will be below its 2008–09 level by 2013–14, as shown in Chart 4.2.

Chart 4.3 shows Canada’s total government net debt-to-GDP ratio compared to a weighted average of other G7 nations. International comparisons rely on the standardized System of National Accounts estimates for the total government sector (i.e. the combined national and sub-national levels). The Organisation for Economic Co-operation and Development (OECD) produces a complete series of estimates based on this system. These figures facilitate international comparisons by taking into account two important factors: differences in accounting methods among countries which affect the comparability of data, and differences in financial responsibilities among orders of government within countries. Canada’s total government net debt-to-GDP ratio fell to 22.3 per cent in 2008, almost 50 percentage points below its 1995 peak, and well below the average of other G7 countries. Adjusting OECD projections for the announced value of stimulus plans, Canada’s total government net debt-to-GDP ratio will remain below 30 per cent of GDP over the next two years, while the G7 average excluding Canada is projected to reach about 60 per cent.

The Government remains firmly committed to strong fiscal management and to reducing the debt burden. The Government affirms that, as a first priority, surpluses should be dedicated to repay the deficits expected over the next four years.

Chart 4.2 - Debt-to-GDP Ratio

Chart 4.3 - Net Debt-to-GDP Ratio, Canada and G7 Average

Automatic Fiscal Stabilizers

The federal budget has a number of features that dampen cyclical swings in economic activity, by automatically raising spending and lowering tax collections when the economy slows. These are referred to as automatic fiscal stabilizers. Through these stabilizers, federal fiscal policy helps to dampen the economic slowdown. The two most important automatic fiscal stabilizers are the income tax system and the Employment Insurance system.

When the economy slows, the Government collects less revenues, both because of the lower level of activity and because of counter cyclical features of the tax system. In particular, the income tax system allows taxpayers to use certain losses to reduce taxable income in the three preceding years. In 2008 and 2009, when more taxpayers are expected to record losses, this is expected to result in an increased number of taxpayers claiming refunds of taxes paid in the previous three years. Losses that exceed the amount that an individual taxpayer can carry back may be carried forward to reduce the amount of income tax liabilities in future years. In 2009 and 2010, increased loss carry-backs and corporate income tax reductions are projected to provide about $10 billion in additional economic stimulus.

On the expense side, as the economic slowdown raises unemployment, more people will claim Employment Insurance (EI) benefits. This will support the economy and those most affected by the slowdown. Furthermore, the Government has announced in this budget that the EI premium rate will remain frozen at $1.73 per $100 of insurable earnings in 2010, when the economic recovery is expected to remain fragile, rather than rising to the level needed for the program to break even. Together with the below break-even premium rate in 2009, this will provide an additional $4.5 billion in economic stimulus in 2009 and 2010.

Strong Expenditure Management

Strategic Reviews

Underpinning the Government’s commitment to a sustainable fiscal plan is strong expenditure management. The Expenditure Management System, the core of which consists of ongoing strategic reviews of program spending, supports this objective. The strategic reviews are designed to ensure that programs are achieving their intended results, are efficiently managed and are aligned with the priorities of Canadians. Building on the initial year of review, which examined departmental spending of $13.6 billion, or 15 per cent of total direct program spending, the 2008 round of reviews involved 21 departments and agencies. Ministers examined departmental spending amounting to $25 billion, or about 27 per cent of total direct program spending. The results of this year’s strategic reviews are consistent with estimates conducted at the time of the Economic and Fiscal Statement. Detailed outcomes of the 2008 strategic reviews are provided in Annex 3.

Corporate Assets

To complement the ongoing strategic reviews of departmental spending, the Government has commenced an ongoing review of its corporate asset holdings. Corporate assets will be assessed systematically to make sure that the initial rationale for government ownership is still relevant, that their activities are still effective, and that their business plans are sustainable.

Corporate assets include enterprise Crown corporations, real property and other holdings. Enterprise Crown corporations are not dependent on appropriations and their principal activity and source of revenues is the sale of goods and services, sometimes in competition with private enterprises. The focus of the review in respect of real property will be to identify government holdings that could be developed by the private sector to stimulate local economic development. Other holdings include assets where the Government competes directly with private enterprises, earns income from a property, or performs a commercial activity.

The review of corporate assets will be led by the Minister of Finance, with the assistance of the Parliamentary Secretary to the Minister of Finance, in collaboration with ministers whose portfolios have been identified for review. In its first year, the review will focus on selected assets in the portfolios of the Minister of Finance, the Minister of Indian and Northern Affairs, the Minister of Natural Resources and the Minister of Transport, Infrastructure and Communities.

The reviews will include an assessment of the current relevance of the assets to government’s core responsibilities, and of their market value. Based on this information, reviews will assess whether value could be created through changes to the assets’ structure and ownership, and report on a wide set of options including the status quo, amendments to current mandates or governance. In some cases, it may be concluded that selling an asset to a private sector entity may generate more economic activity and deliver greater value to taxpayers. The reviews will seek to ensure that asset holdings are efficient, effective and focused on priorities, and contribute to leveraging private investments and expertise.

The Government will take a considered approach to the sale of any asset, including taking into account the condition of markets, to ensure that fair value can be realized by taxpayers and the transaction will generate additional economic activity. Assets will not be sold if such sales do not meet these tests.

Improvements to Spending Projections

In recent years, spending authorities granted to departments at the beginning of the year have not turned out to be an accurate estimate of departmental program requirements, resulting in departmental appropriations being higher than needed and departments not spending the full amounts appropriated. In 2007-08, the lapse—the amount of funding that is appropriated by Parliament but not spent by departments—reached its highest level in recent years at $7.6 billion, or about 9 per cent of appropriated funds.

As described in the Economic and Fiscal Statement, steps have been taken to better align planned and actual departmental spending so that the spending information provided to Parliament and Canadians will be more accurate.

Stronger Departmental Management

As indicated in the Economic and Fiscal Statement, the Government will take a number of actions to limit discretionary spending by departments and agencies. Specifically, departments will be asked to freeze spending on travel, conferences and hospitality at 2008–09 levels for the next two years. Where possible, departments will be encouraged to explore less costly options, such as teleconferencing, and business class travel will no longer be allowed on any flight that is less than two hours for ministers, their staff and senior public servants.

In addition, a review of Governor in Council positions will be conducted with the aim of reducing the number of positions. The President of the Treasury Board was asked to lead the review and to report back to the Prime Minister with results and recommendations.

The Government will also strengthen and improve the management of Canada’s federal agencies, boards, commissions and Crown corporations to achieve greater cost-effectiveness and accountability.

Structural Changes

Budget 2009 includes three structural changes, which were announced in the November 27, 2008 Economic and Fiscal Statement:

  • The Government will ensure the Equalization program continues to grow in a way that is sustainable and fair. Without action, Equalization would have grown to $16 billion in 2009–10 and almost $20 billion in 2010–11, which would have been unsustainable. The Government is taking action to ensure that the Equalization program grows in line with the economy. Other transfers to other levels of government will also continue to grow. Over the forecast horizon, growth in major transfers to other levels of government is expected to average 5.2 per cent a year.
  • The existing complaint-based pay equity regime is a lengthy, costly and adversarial process that does not serve employees or employers well. Legislation to modernize the pay equity regime for federal public sector employees will be introduced. The new regime reflects the Government’s commitment to pay equity. It will ensure that the employer and bargaining agents are jointly responsible and accountable for negotiating salaries that are fair and equitable to all employees.
  • The Government will also introduce legislation to ensure the predictability of federal public sector compensation during this difficult economic period, by putting in place annual wage increases for the federal public administration of 2.3 per cent in 2007–08 and 1.5 per cent for the following three years.

Chart 4.4 - Major Federal Transfers Will Continue to Grow

Fiscal Outlook Before the Measures Proposed in Budget 2009

Table 4.2 provides a summary of the changes in the fiscal projections since the Economic and Fiscal Statement. The budgetary balance presented in the Statement was $0.8 billion for 2008–09, $0.1 billion for 2009–10, $0.1 billion for 2010–11, $1.1 billion in 2011–12, $4.2 billion in 2012–13 and $8.1 billion in 2013–14.

Table 4.2
Changes in the Status Quo Fiscal Outlook Since the November 2008 Economic and Fiscal Statement
  Projection
  2008–2009 2009–2010 2010–2011 2011–2012 2012–2013 2013–2014
  (billions of dollars)
Economic and Fiscal Statement Budgetary Balance 0.8 0.1 0.1 1.1 4.2 8.1
Impact of economic
  changes based on
  private sector average
0.2 -11.3 -9.9 -6.4 -5.0 -1.8
 
Budgetary balance based
  on private
  sector average
1.0 -11.2 -9.8 -5.3 -0.8 6.3
Adjustment for risk -0.8 -4.5 -4.5 -3.0 -1.5 -0.8
Revised status quo
  budgetary balance
0.2 -15.7 -14.3 -8.3 -2.3 5.5
Total Economic Changes
  by Component
           
Budgetary revenues            
  Personal Income Tax -0.3 -5.6 -6.4 -6.4 -3.9 -1.9
  Corporate Income Tax -2.3 -6.3 -4.2 -0.1 0.0 0.8
  Goods and Services Tax -0.5 -1.9 -1.7 -1.0 -0.6 -0.5
  Other revenues 1.7 -2.9 -1.4 -0.5 0.9 2.5
 
  Total -1.4 -16.8 -13.8 -8.0 -3.5 0.9
Program expenses            
  Major transfers
   to persons
0.0 -0.9 -1.0 -0.3 0.0 0.4
  Major transfers to other
   levels of government
0.0 -0.2 -0.2 0.0 -0.1 -0.1
  Direct program expenses -0.1 -0.3 -0.5 -0.3 -0.3 -0.4
 
  Total -0.1 -1.4 -1.6 -0.7 -0.3 -0.1
Public debt charges 0.9 2.4 1.0 -0.7 -2.7 -3.4
 
Total economic changes -0.6 -15.8 -14.4 -9.4 -6.5 -2.6
Notes: Totals may not add due to rounding.
A positive number implies an improvement in the budgetary balance.
A negative number implies a deterioration in the budgetary balance.

The underlying budgetary balance is $0.2 billion, or $0.6 billion lower than projected at the time of the Economic and Fiscal Statement, as lower revenues in 2008–09 are only partially offset by lower expected public debt charges.

Consistent with sharp downward revisions to the economic outlook for 2009 and 2010, the projected underlying budgetary balance has been revised down significantly to deficits of $15.7 billion in 2009–10, $14.3 billion in 2010–11, $8.3 billion in 2011–12, $2.3 billion in 2012–13, and a surplus of $5.5 billion in 2013–14. Program expenses are expected to be higher than projected in the Statement, particularly in 2009-10 and 2010-11, as major transfers to persons increase. Public debt charges are expected to be significantly lower from 2008–09 to 2010–11, as a result of large downward revisions to forecasted interest rates. They are expected to rise starting in 2011–12, as a result of higher debt levels.

The status quo forecast includes the impact of the Government’s initiatives to support access to financing under the Extraordinary Financing Framework, including debt charges arising from higher government borrowing, revenues from the associated assets and estimates of provisions for changes in the Government’s liabilities.

Budgetary revenues are lower by $1.4 billion in 2008–09, $16.8 billion in 2009–10, $13.8 billion in 2010–11, $8.0 billion in 2011–12, and $3.5 billion in 2012–13 than at the time of the Economic and Fiscal Statement. With the economy recovering over the medium term, revenues are expected to be slightly higher by 2013–14.

  • Personal income tax revenues are projected to be $0.3 billion lower in 2008–09, and $5.6 billion lower in 2009–10, reflecting weaker forecast growth in most sources of taxable income. In addition, growth in personal income tax revenues in 2009–10 is projected to be slower than normal relative to growth in the personal income tax base, as total personal income growth is not expected to surpass the indexation rate of the personal income tax system. Personal income tax revenues are projected to be $6.4 billion lower in 2010-11 and 2011-12, $3.9 billion lower in 2012-13, and $1.9 billion lower in 2013-14, as the economy recovers.
  • Corporate income tax revenues are revised down by $2.3 billion in 2008–09, primarily reflecting an expectation that the impact of global financial turmoil on corporate income tax liabilities in 2008 will be greater than previously expected. Corporate income tax revenues are revised down by $6.3 billion in 2009–10 and $4.2 billion in 2010–11, driven by significant downward revisions to projected net corporate profits. The sharply lower net profits in 2009 means corporate losses can be expected to rise significantly. This brings greater uncertainty to the corporate income tax projections, as the timing of the impact of weaker profits on taxes will be determined by the level of losses and the ability of individual taxpayers to carry losses backward or forward. The income tax system allows corporations to smooth their income tax liabilities over time. As such, corporations recording losses in 2009 would not only owe no taxes in respect of 2009, but could also use the losses to request refunds of taxes paid from 2006 to 2008, with an impact on the 2009–10 fiscal year. In addition, losses that could not be carried back could be carried forward, thereby having a negative impact on revenues in the following years. As these loss pools are exhausted and the economy recovers, corporate income tax revenues are projected to be $0.1 billion lower in 2011–12, unchanged in 2012–13, and $0.8 billion higher in 2013–14.
  • GST revenues are now projected to be lower by $0.5 billion in 2008–09, $1.9 billion in 2009–10, $1.7 billion in 2010–11, $1.0 billion in 2011–12, $0.6 billion in 2012–13 and $0.5 billion in 2013–14, reflecting downward revisions to projected consumer spending in 2009–10 and 2010–11.
  • Other revenues have been revised up since the Economic and Fiscal Statement by $1.7 billion in 2008–09, due in part to higher expected revenues under the Atlantic Offshore Revenue Accounts. This revenue is transferred to Newfoundland and Labrador and Nova Scotia. Consistent with the much weaker economic outlook in 2009 and 2010, other revenues are revised down by $2.9 billion in 2009–10 and $1.4 billion in 2010–11, reflecting weaker projected revenues across most revenue streams. As the economy recovers, and reflecting increased returns from the Extraordinary Financing Framework, other revenues are revised down by $0.5 billion in 2011–12, and revised up by $0.9 billion in 2012–13, and $2.5 billion in 2013–14.

Program expenses are projected to be $0.1 billion above the level estimated in the Economic and Fiscal Statement in 2008–09, while increasing by $1.4 billion in 2009–10, $1.6 billion in 2010–11, $0.7 billion in 2011–12, $0.3 billion in 2012–13 and by $0.1 billion in 2013–14.

  • Transfers to persons are expected to be higher by $0.9 billion in 2009–10, $1.0 billion in 2010–11, and $0.3 billion in 2011–12, as higher projected unemployment rates result in higher Employment Insurance benefits. Transfers to persons are expected to be $0.4 billion lower in 2013–14, once the economy has recovered.
  • Transfers to other levels of government are slightly higher than projected last fall.
  • Direct program expenses are higher by $0.3 billion in 2009–10, $0.5 billion in 2010–11 and 0.3 billion in 2011-12 and 2012-13, and $0.4 billion in 2013-14. This is partly the result of pension expenses increasing to reflect the amortization of 2008-09 losses on market investments.
  • Public debt charges are projected to be lower by $0.9 billion in 2008–09, $2.4 billion in 2009–10 and $1.0 billion in 2010–11, due to significantly lower forecasted interest rates and, to some extent, lower-than-expected inflation. Starting in 2011–12, public debt charges are expected to be higher than projected at the time of the Statement. This is partly as a result of the increase in federal liabilities incurred to support the Extraordinary Financing Framework, as described in Chapter 3. While increasing public debt charges, these initiatives are also increasing the Government’s interest revenues, which are more than offsetting the increase in debt charges. The projections also take into account the increase in debt associated with other measures announced in the Budget, as well as projected deficits.

Fiscal Cost of Measures
Proposed in Budget 2009

The measures proposed in Budget 2009 total $1.3 billion for 2008–09, $18.0 billion for 2009–10, and $15.5 billion for 2010–11. The cost of these measures is reflected in the projections of revenues and expenses presented in the following pages.

Table 4.3
Fiscal Outlook
  Projection
  2008–2009 2009–2010 2010–2011 2011–2012 2012–2013 2013–2014
  (billions of dollars)
Risk-adjusted status quo budgetary balance 0.2 -15.7 -14.3 -8.3 -2.3 5.5
Measures proposed
 in the Budget
           
  Improving Access
   to Financing and
   Strengthening Canada’s
   Financial System
  0.2 0.0 0.0 0.0 0.0
  Action to Help Canadians and
   Stimulate Spending
0.7 5.9 6.9 3.5 3.6 3.7
  Action to Stimulate Housing
   Construction
0.5 3.9 1.4 0.2 0.2 0.2
  Immediate Action to Build
   Infrastructure
  5.7 5.1 0.1 0.1 0.1
  Action to Support Businesses
   and Communities
0.0 2.4 2.1 0.9 1.0 0.7
  Additional tax measures
   (Annex 5)
0.0       0.1 0.1
 
  Total 1.3 18.0 15.5 4.7 5.0 4.9
Budgetary balance -1.1 -33.7 -29.8 -13.0 -7.3 0.7
Note: Totals may not add due to rounding.

After taking into account the cost of the measures proposed in this budget, deficits of $1.1 billion in 2008–09, $33.7 billion in 2009–10, $29.8 billion in 2010–11, $13.0 billion in 2011–12, and $7.3 billion in 2012–13 are projected, as well as a surplus of $0.7 billion in 2013–14.

While a short-term deterioration in budgetary balances is projected, the Government is committed to maintain Canada’s strong structural fiscal position, and to ensure that the budgetary balance returns to surplus over the medium term.

Summary Statement of Transactions

Table 4.4 provides a summary of the Government’s financial position, including the cost of measures proposed in Budget 2009.

Table 4.4
Summary Statement of Transactions
  Actual
Projection
  2007–2008 2008–2009 2009–2010 2010–2011 2011–2012 2012–2013 2013–2014
  (billions of dollars)
Budgetary revenues 242.4 236.4 224.9 239.9 259.4 276.4 294.3
Program
 expenses
199.5 206.8 229.1 236.5 235.1 244.5 254.1
Public debt
 charges
33.3 30.7 29.5 33.3 37.2 39.2 39.6
Total expenses 232.8 237.4 258.6 269.7 272.3 283.7 293.7
Budgetary Balance 9.6 -1.1 -33.7 -29.8 -13.0 -7.3 0.7
Federal debt 457.6 458.7 492.4 522.2 535.2 542.4 541.8
Per cent of GDP              
  Budgetary
   revenues
15.8 14.7 14.4 14.7 15.0 15.0 15.2
  Program
   expenses
13.0 12.9 14.7 14.5 13.6 13.3 13.1
  Public debt
   charges
2.2 1.9 1.9 2.0 2.1 2.1 2.0
  Total expenses 15.2 14.8 16.6 16.6 15.7 15.4 15.2
  Federal debt 29.8 28.6 31.6 32.1 30.9 29.5 28.0
Note: Totals may not add due to rounding.

Budgetary revenues are expected to decline in 2008–09 and 2009–10, reflecting the impact of the weaker economic outlook and tax reductions. Program expenses as a share of GDP are projected to increase to 14.7 per cent in 2009–10, before gradually declining to 13.1 per cent in 2013–14. This reflects the impact of weaker economic growth, as well as of the temporary stimulus measures proposed in this budget. Public debt charges are projected to decline somewhat as a percentage of GDP in 2008–09, before increasing as a result of higher public debt and higher interest rates toward the end of the projection period.

The federal debt-to-GDP ratio (accumulated deficit) stood at 29.8 per cent in 2007–08, down significantly from its peak of 68.4 per cent in 1995–96. The debt ratio is expected to fall to 28.6 per cent in 2008–09, before increasing to 31.6 per cent in 2009–10 and 32.1 per cent in 2010–11. The debt burden is projected to be below its 2008–09 level in 2013–14.

The Government’s Plan to Return to Surplus

The planning approach set out in this budget will enable the federal budget to return to a surplus position.

First, the Government will continue to carefully manage spending. This includes the structural changes to spending outlined earlier in this chapter—to put Equalization on a growth path that is in line with growth in the economy and the federal compensation regime. It also includes continuing with reviews of departmental spending and corporate assets. As a result of these actions, program spending in 2013–14, measured in relation to the size of the economy, will be on par with current levels.

Second, the stimulus measures in this budget are concentrated in the next two years, when they are needed. Consistent with the focus on stimulus, in cases where time-limited spending does not evolve as set out in this budget, amounts will not be rolled forward beyond 2010–11. The Government will apply a strong "use it or lose it" theme to the stimulus measures proposed in this budget.

The Government will use budget surpluses first of all to repay the deficits expected in the upcoming four years.

Outlook for Budgetary Revenues

Table 4.5
Revenue Outlook
(Including Budget 2009 measures)
  Actual
Projection
  2007–2008 2008–2009 2009–2010 2010–2011 2011–2012 2012–2013 2013–2014
  (millions of dollars)
Tax revenues              
  Personal income
   tax
113,063 117,085 110,275 117,865 125,840 136,075 145,950
  Corporate income
   tax
40,628 31,750 26,385 30,770 35,385 36,245 39,475
  Other income
   tax
5,693 5,975 4,875 5,805 6,255 6,560 7,045
 
  Total income tax 159,384 154,810 141,540 154,440 167,480 178,880 192,470
Excise
  taxes/duties
             
  Goods and
   Service Tax
29,920 26,360 25,785 27,315 29,465 31,310 33,005
  Customs import
   duties
3,903 4,185 4,150 4,365 4,505 4,670 4,970
  Other excise
   taxes/duties
10,384 10,340 10,175 9,655 9,710 9,775 9,865
 
  Total excise
   taxes/duties
44,207 40,880 40,115 41,340 43,680 45,755 47,835
Total tax revenues 203,591 195,690 181,650 195,780 211,160 224,635 240,305
Employment
 Insurance
 premium
 revenues
16,558 16,620 16,795 17,325 18,350 19,695 20,370
Other revenues 22,271 24,040 26,460 26,820 29,875 32,095 33,630
Total budgetary revenues 242,420 236,350 224,905 239,925 259,385 276,430 294,310
Per cent of GDP              
 Personal income
  tax
7.4 7.3 7.1 7.2 7.3 7.4 7.5
 Corporate income
  tax
2.6 2.0 1.7 1.9 2.0 2.0 2.0
 Goods and
  Services tax
1.9 1.6 1.7 1.7 1.7 1.7 1.7
 Other tax
  revenues
1.3 1.3 1.2 1.2 1.2 1.1 1.1
 
 Total tax revenues 13.3 12.2 11.6 12.0 12.2 12.2 12.4
 Employment
  Insurance
  premium
  revenues
1.1 1.0 1.1 1.1 1.1 1.1 1.1
 Other revenues 1.5 1.5 1.7 1.6 1.7 1.7 1.7
Total 15.8 14.7 14.4 14.7 15.0 15.0 15.2
Note: Totals may not add due to rounding.

Personal income tax revenues—the largest component of budgetary revenues—are projected to increase by $4.0 billion, or 3.6 per cent, to $117.1 billion in 2008–09. Relatively slow growth in 2008-09 reflects weak growth in taxable income, notably capital gains income and the impact of new and previously announced tax relief measures. Personal income tax revenue growth is further dampened in 2009–10, as total growth in personal income is projected to be lower than the indexation rate of the personal income tax system. Starting in 2010–11, personal income tax revenues are projected to 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 decline by 21.8 per cent in 2008–09, and a further 16.9 per cent in 2009–10. This projected drop in corporate tax revenues over the two years is due to increased losses resulting from global financial turmoil, and an expected decline of over 20 per cent in net corporate profits in 2009. It also includes the effects of previously announced tax reductions, which came into effect on January 1, 2008. There is, however, significant uncertainty surrounding the magnitude of corporate losses and the timing of their impact on corporate income tax revenues. Given that corporate income tax revenues have been quite strong in the last three years, the projections are based on the assumption that a high portion of losses will be carried back, and that higher-than-normal losses recorded in 2009 and 2010 will generally have been used to reduce income tax liabilities before the end of the projection period. Corporate income tax revenues are projected to increase by 16.6 per cent in 2010–11 and 15.0 per cent in 2011–12, lifted by strong growth in profits, partially offset by the carry-forward of previous losses and ongoing tax relief. Growth is projected to decline to 2.4 per cent in 2012–13, largely due to the decline in the general corporate income tax rate to 15 per cent in 2012 and other tax relief measures. Growth is then projected to rise to 8.9 per cent in 2013–14, reflecting the unwinding of the impact of loss carry-forwards.

Other income tax revenues—largely withholding taxes levied on payments to non-residents—are expected to increase by 5.0 per cent to $6.0 billion in 2008–09, reflecting solid growth in collections through the first eight months of the fiscal year. Other income tax revenues are projected to decline by 18.4 per cent in 2009–10, reflecting the projected drop in profits together with the impact of the phase-out of the withholding tax on non-arm’s length payments of interest to the U.S. under the Fifth Protocol to the Canada-U.S. tax treaty, and the elimination as of 2008 of the withholding tax on arm’s length interest payments to all non-residents. Other income tax revenues are projected to rise by 19.1 per cent in 2010–11 as the economy, and particularly corporate profits, recover, and then to grow at an average rate of 6.7 per cent over the remainder of the forecast period.

GST revenues are projected to decline by 11.9 per cent in 2008–09, largely reflecting the impact of the one-percentage-point reduction in the GST rate to 5 per cent, effective January 1, 2008. GST revenues are projected to decline further, by 2.2 per cent in 2009–09, consistent with a projected decline in taxable consumption. As taxable consumption is projected to partially recover in 2010–11, GST revenues are projected to rise by 5.9 per cent. Growth in GST revenues is projected to average 6.5 per cent over the remainder of the projection period.

Customs import duties are projected to increase by 7.2 per cent to $4.2 billion in 2008–09, in line with projected growth in imports. Customs import duties are projected to decline by 0.8 per cent in 2009–10, reflecting nearly flat growth in projected imports combined with tariff relief for machinery and equipment announced in this budget. Growth in customs import duties is projected to recover to 5.2 per cent in 2010–11, and to average over 4 per cent through 2013–14.

Other excise taxes and duties are projected to decline by 0.4 per cent in 2008–09, 1.6 per cent in 2009–10 and 5.1 per cent in 2010–11, due in part to projected declines in tobacco consumption. Other excise taxes and duties are then projected to grow at an average rate of 0.7 per cent through 2013–14.

Employment Insurance (EI) premium revenues are expected to increase by 0.4 per cent in 2008–09, as the projected increase in insurable earnings is only partially offset by the decline in the premium rate from $1.80 per $100 of insurable earnings in 2007 to $1.73, effective January 1, 2008. EI premium revenues are projected to increase by 1.1 per cent in 2009–10 and 3.1 per cent in 2010–11, reflecting growth in insurable earnings combined with the commitment in this Budget to freeze the EI premium rate at $1.73 in 2010. Starting in 2011, the premium rate is assumed to rise gradually, consistent with the principle of breaking even over time.

Other revenues include those of consolidated Crown corporations, net gains/losses from enterprise Crown corporations, foreign exchange revenues, returns on investments and revenues 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 by 7.9 per cent in 2008–09, due in part to strong projected growth in revenues under the Atlantic Offshore Revenue Accounts, which results in turn from strong growth in offshore production and oil prices relative to 2007–08. This increase is offset by a corresponding rise in 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. Other revenues are projected to rise slightly as a share of GDP in 2009–10 and to remain stable around that level for the remainder of the projection period. The increase as a share of GDP is largely due to an anticipated increase in revenues derived from the ongoing implementation of the Extraordinary Financing Framework.

Revenues as a share of GDP are projected to fall to 14.7 per cent in 2008–09. The projected decline in the revenue ratio in 2008–09 and 2009–10 reflects tax relief measures announced in this and previous budgets, as well as a decline in taxable economic activity resulting from the deterioration in the economic outlook. The ratio is expected to increase to about 15.0 per cent by 2013-14, but remain below the 2007-08 level, as the economy recovers.

Chart 4.5 -  Revenue-to-GDP

Outlook for Program Expenses

Table 4.6
Program Expense Outlook (Including Budget 2009 Measures)
  Actual
Projection
  2007–2008 2008–2009 2009–2010 2010–2011 2011–2012 2012–2013 2013–2014
  (millions of dollars)
Major transfers
 to persons
             
  Elderly benefits 31,955 33,350 35,160 36,595 38,420 40,525 42,630
  Employment
   Insurance
   benefits1
14,298 15,585 18,920 18,960 16,740 16,785 16,945
  Children’s
   benefits2
11,894 11,935 12,270 12,520 12,800 12,960 12,990
 
  Total 58,147 60,870 66,350 68,075 67,960 70,270 72,565
Major transfers to
  other levels of
   government
             
  Federal transfers
   in support of
   health and other
   social programs
31,346 33,325 35,100 36,855 38,715 40,680 42,750
  Fiscal
   arrangements3
14,603 15,110 16,045 16,455 16,955 17,875 18,895
  Alternative
   payments
   for standing
   programs4
-2,720 -3,155 -3,080 -3,200 -3,425 -3,680 -3,940
  Canada’s
   cities and
   communities
778 1,000 2,000 2,000 2,000 2,000 2,000
  Other 2,145            
 
  Total 46,152 46,280 50,065 52,110 54,245 56,875 59,705
Direct program
 expenses
95,199 99,610 112,670 116,305 112,920 117,365 121,790
 
Total program expenses 199,498 206,760 229,085 236,490 235,125 244,510 254,060
Per cent of GDP              
  Major transfers to
   persons
3.8 3.8 4.3 4.2 3.9 3.8 3.7
  Major transfers to
   other levels of
   government
3.0 2.9 3.2 3.2 3.1 3.1 3.1
  Direct program
   expenses
6.2 6.2 7.2 7.2 6.5 6.4 6.3
  Total program
   expenses
13.0 12.9 14.7 14.5 13.6 13.3 13.1
Note: Totals may not add due to rounding.

1 EI benefits include regular, 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 $1.8 billion in 2007–08) relate mainly to administration costs.

2 Consists of the Canada 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.

Table 4.6 provides an overview of the projections for program expenses by major component, including the cost of measures proposed in this budget. Program expenses are divided into three components: major transfers to persons, major transfers to other levels of government and direct program expenses.

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

  • Elderly benefits are projected to grow in line with the elderly population and changes in consumer prices, to which benefits are fully indexed.
  • Employment Insurance benefits are projected to increase by 9.0 per cent to $15.6 billion in 2008–09, reflecting higher unemployment, as well as the growth in the maximum weekly benefit, which is indexed to the growth in the average industrial wage. In 2009–10, Employment Insurance benefits are projected to increase by 21.4 per cent to $18.9 billion, and remain at that level in 2010-11, largely due to the two-year $2.9 billion of enhanced EI benefits and training proposed in this budget.
  • Children’s benefits, including the Canada Child Tax Benefit and the Universal Child Care Benefit, increase slightly over the Budget forecast horizon, largely reflecting increases to the National Child Benefit and Canada Child Tax Benefit announced in this budget.

Major transfers to other levels of government are projected to increase from $46.2 billion in 2007–08 to $59.7 billion in 2013–14, averaging 5.2 per cent growth per year over the next five years. This reflects changes outlined by the Minister of Finance at the November 3, 2008 Federal-Provincial-Territorial Finance Ministers Meeting to put Equalization on a sustainable growth path, and ensure that it grows in line with the economy.

Direct program expenses include operating expenses for National Defence and other departments, transfers administered by departments for farm income support, for natural resource royalties paid to provinces, student financial assistance and expenses of Crown corporations. The growth in direct program spending reflects the impact of past budget measures, as well as initiatives announced in Budget 2009.

In 2009-10, direct program spending increases by $13.1 billion, or 13.1 per cent, reflecting initiatives under the Economic Action Plan to support Canada’s economy and Canadians, including funding for infrastructure and sectoral initiatives, and stimulating investment in housing. Direct program expenses decline in 2011-12 by 2.9 per cent as temporary measures end. Direct program expenses are expected to grow on average by 4.1 per cent over the next five years.

Under the Economic Action Plan proposed in Budget 2009, the program expenses-to-GDP ratio will increase temporarily.

The Government remains committed to focused and disciplined spending and will ensure that program spending as a share of GDP comes back to current levels in the medium term.

Chart 4.6 - Progarm Expenses-to-GDP Ratio

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.

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.

Table 4.7
The Budgetary Balance, Non-Budgetary Transactions and Financial Source/Requirement
  Actual
Projection
  2007–2008 2008–2009 2009–2010 2010–2011 2011–2012 2012–2013 2013–2014
  (billions of dollars)
Budgetary balance 9.6 -1.1 -33.7 -29.8 -13.0 -7.3 0.7
Non-budgetary
 transactions
             
  Pensions and
   other accounts
6.1 3.6 3.4 3.5 3.2 3.1 3.1
  Non-financial assets -2.0 -1.4 -1.7 -1.7 -0.6 -0.4 -0.4
  Loans, investments
   and advances
             
    Enterprise Crown
     Corporations
-4.6 -25.5 -24.3 -7.3 -7.0 2.7 -8.7
    Insured Mortgage
     Purchase Program
     (net)
  -74.6 -45.2 4.6 4.1 3.6 50.9
    Other -1.1 -0.5 -0.5 -0.3 -0.2 -0.1 -0.1
 
  Total -5.7 -100.6 -70.0 -3.0 -3.1 6.2 42.1
Other transactions 6.5 -4.2 0.8 0.3 2.1 2.3 1.8
 
Total 4.9 -102.6 -67.5 -0.9 1.6 11.2 46.6
Financial source/
 requirement
14.5 -103.7 -101.2 -30.7 -11.4 3.9 47.3

As shown in Table 4.7, significant financial requirements are projected from 2008–09 to 2011–12, respectively of $103.7 billion in 2008–09, $101.2 billion in 2009–10, $30.7 billion in 2010–11, $11.4 billion in 2011–12, as well as financial sources of $3.9 billion in 2012–13 and of $47.3 billion in 2013–14. The requirements result largely from government initiatives to support access to financing under the Extraordinary Financing Framework (EFF). The projected budgetary deficits also increase the financial requirements.

The large increase in market debt associated with the Insured Mortage Purchase Program (IMPP) does not affect federal debt or the federal government’s net debt levels as the borrowings and associated interest costs are matched by an increase in revenue-earning assets. Other borrowings undertaken to strengthen the financial system are also offset by interest-earning assets.

The financial source associated with pensions and other accounts is expected to be $3.6 billion in 2008–09. 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 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.

Financial requirements for non-financial assets include the cash outlay for the acquisition of new tangible capital assets, proceeds from the net losses or gains of tangible capital assets, the amortization of existing tangible assets, 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 tangible assets is included. In the calculation of the financial source/ requirement, this is reversed. A net cash requirement of $1.4 billion is estimated for 2008–09.

Loans, investments and advances include the Government’s investments in enterprise Crown corporations, such as Canada Mortgage and Housing Corporation (CMHC), Canada Post Corporation (CPC), Export Development Canada (EDC) 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. The large requirements projected from 2008–09 to 2010–11 under this category are the result of the Government’s decision to purchase mortgages under the Insured Mortgage Purchase Program of CMHC. The increase in loans also reflects the Government’s commitment to meet all the borrowing needs of the CMHC, BDC and Farm Credit Canada through direct lending in order to reduce overall borrowing costs and improve the liquidity of the government securities market.

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.

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 corporate tax projections in this chapter assume a sharp rise in corporate losses, based on the broad decline in net corporate profits. As discussed in the box entitled Automatic Fiscal Stabilizers, the income tax system allows corporations to use certain losses to reduce taxable income in the three preceding years or the 20 following years. There is, however, considerable uncertainty as to the magnitude and timing of these losses, and their implications for corporate income tax revenues. The actual level of corporate losses in 2009 will depend on how the profit decline is spread across various industries and the profitability of those industries going into the downturn. The degree to which these losses affect revenues and the timing of this impact will depend on the ability of individual taxpayers to use losses to claim refunds of taxes paid in 2006 to 2008.
  • Following the sharp decline in the S&P/TSX composite index over the latter months of 2008, capital gains income could be weaker than projected over the forecast period. Markets typically recover prior to an economic recovery, but market-related income is inherently difficult to forecast. This is all the more true in times of financial turmoil, introducing a greater level of uncertainty to the personal and corporate income tax revenue projections.
  • 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. As announced in the Economic and Fiscal Statement, this Government is taking actions to better align departmental appropriations with spending requirements on an ongoing basis. 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 growth resulting solely from a one-year, 1-percentage-point decrease in the rate of GDP inflation.
  • A sustained 100-basis-point increase in all interest rates.

These sensitivities are generalized rules of thumb that assume any decrease in economic activity is proportional across income and expenditure components. Consistent with the budget plan, EI premium rates are assumed to be fixed during the first and second calendar years. Equal and opposite impacts would result from an increase of equal magnitude in real or nominal GDP growth. A corresponding 100-basis-point decrease in all interest rates is not feasible, as several key interest rates are currently, or projected to be, below 1 per cent.

Table 4.8
Estimated Impact of a One-Year, 1-Percentage-Point Decrease in Real GDP Growth on Federal Revenues, Expenses and Budgetary Balance
  Year 1 Year 2
  (billions of dollars)
Federal Revenues    
Tax revenues    
  Personal income tax -1.7 -1.8
  Corporate income tax -0.3 -0.4
  Goods and Services Tax -0.3 -0.3
  Other -0.2 -0.2
 
  Total tax revenues -2.5 -2.6
Employment Insurance premiums -0.1 -0.2
Other revenues 0.0 0.0
Total budgetary revenues -2.7 -2.8
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 -0.2
Public debt charges 0.0 0.1
Total expenses 0.4 0.5
Budgetary balance -3.1 -3.3
Note: Numbers may not add due to rounding.

A 1-percentage-point decrease in real GDP growth reduces the budgetary balance by $3.1 billion in the first year and $3.3 billion in the second year.

  • Tax revenues from all sources fall by a total of $2.5 billion in the first year and $2.6 billion by 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.
  • Employment Insurance (EI) premiums decrease as employment, wages and salaries fall. Consistent with the budget plan, the EI premium rate is kept constant in both years.
  • Expenses rise, mainly reflecting higher EI benefits (due to an increase in the number of unemployed).
Table 4.9
Estimated Impact of a One-Year, 1-Percentage-Point Decrease in GDP Inflation on Federal Revenues, Expenses and Budgetary Balance
  Year 1 Year 2
  (billions of dollars)
Federal Revenues    
  Tax revenues    
  Personal income tax -1.7 -1.4
  Corporate income tax -0.3 -0.4
  Goods and Services Tax -0.3 -0.3
  Other -0.2 -0.2
 
  Total tax revenues -2.5 -2.2
Employment Insurance premiums -0.1 -0.1
Other revenues -0.1 -0.1
Total budgetary revenues -2.7 -2.4
Federal Expenses    
Major transfers to persons -0.2 -0.4
  Elderly benefits -0.1 -0.1
  Employment Insurance benefits -0.1 -0.1
  Children’s benefits -0.4 -0.6
 
  Total -0.8 -1.1
Other program expenses -0.3 -0.4
Public debt charges -0.3 0.0
Total expenses -1.4 -1.5
Budgetary balance -1.3 -1.0

A 1-percentage-point decrease in nominal GDP growth resulting solely from lower GDP inflation (assuming that the Consumer Price Index moves in line with GDP inflation) lowers the budgetary balance by $1.3 billion in the first year and $1.0 billion in the second year.

  • Lower prices result in lower nominal income and, as a result, personal income tax, corporate income tax and GST revenues all decrease, reflecting declines in the underlying nominal tax bases. For the other sources of tax revenue, the negative impacts are similar under the real and nominal GDP shocks. 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. 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 4.10
Estimated Impact of a Sustained 100-Basis Point
Increase in All Interest Rates on Federal Revenues, Expenses and Budgetary Balance
  Year 1 Year 2
  (billions of dollars)
Federal revenues 2.0 2.2
Federal expenses 2.6 3.7
Budgetary balance -0.6 -1.6

An increase in interest rates decreases the budgetary balance by $0.6 billion in the first year and $1.6 billion in the second. The decline stems entirely from increased expenses associated with public debt charges. The greater sensitivity to interest rates relative to previous estimates reflects increased borrowing and returns on investments related to the Government’s Extraordinary Financing Framework initiatives, notably the Insured Mortgage Purchase Program. The impact on debt charges rises through time as longer-term debt matures and is refinanced at higher rates. Moderating the overall impact is an increase in revenues associated with the increase in the rate of return on the Government’s interest-bearing assets, which are recorded as part of non-tax revenues.

Table of Contents - Previous - Next