Annex 1 – Details of Economic and Fiscal Projections

Economic Projections—Average Private Sector Forecasts

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

The Department of Finance 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 February 2016.¹

The February 2016 survey includes the views of 15 private sector economists:

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

In the February 2016 survey, private sector economists revised down the average outlook for real GDP and GDP inflation for 2016 compared to the November 2015 Update of Economic and Fiscal Projections (2015 Fall Update), reflecting impacts of sharp declines in crude oil prices since the 2015 Fall Update and ongoing elevated uncertainty in the global economy. However, for 2017 and onward, the growth outlook is little changed from the 2015 Fall Update.

Private sector economists now expect real GDP growth of 1.4 per cent in 2016, lower than the 2.0 per cent in the 2015 Fall Update. Real GDP growth in 2017 and beyond is, on average, unchanged from the 2015 Fall Update (Table A1.1).

West Texas Intermediate (WTI) crude oil prices continued to fall over the end of 2015 and in the beginning of this year. The economists now expect WTI crude oil prices to remain low at US$40 per barrel on average in 2016 and then to rise to US$63 per barrel by 2020. This compares to a rise from US$54 to US$74, over the same period, in the 2015 Fall Update.

Low crude oil prices have led the private sector economists to revise down their expectations for GDP inflation (the broadest measure of economy-wide price inflation) but only for 2016. The February survey forecasts GDP inflation of 1.0 per cent in 2016 (compared to 2.1 per cent in the 2015 Fall Update).

As a result of these developments, nominal GDP growth in the February survey of private sector economists is expected to be 2.4 per cent in 2016 (compared with expectations of 4.2 per cent in the 2015 Fall Update). Overall, the projected level of nominal GDP (the broadest single measure of the tax base) in the February survey is lower by $27 billion per year, on average, over the 2016–2020 period, compared to the 2015 Fall Update planning assumption.

The economists have revised up their outlook for the unemployment rate by 0.1 percentage points per year, on average, over the 2016–2020 period. They expect the unemployment rate to average 7.1 per cent in 2016 before falling to 6.3 per cent by 2020.

The outlook for Consumer Price Index inflation has been revised down to 1.6 per cent in 2016 from the forecast of 2 per cent in the 2015 Fall Update. Beyond 2016, the inflation rate is expected to remain at around 2 per cent.

The economists have again revised down their expectations for both short- and long-term interest rates by about 30 basis points over the 2016–2020 period relative to the 2015 Fall Update, reflecting weaker-than-expected economic developments.

As noted in the introductory chapter, for fiscal planning purposes, the private sector forecast for nominal GDP has been lowered by $40  billion per year for 2016 through 2020. This is roughly equivalent to reducing the average private sector forecast for nominal GDP growth by 2.0 percentage points in 2016. As a result, the projected level of nominal GDP for fiscal planning purposes in Budget 2016 is lower by $67 billion per year, on average, over the 2016–2020 period compared to the 2015 Fall Update planning assumption.

Fiscal Projections

Summary Statement of Transactions

Table A1.2 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, and factor in an adjustment of $40 billion per year for 2016 through 2020 to the private sector forecast for nominal GDP.

After accounting for Budget 2016 measures, the budgetary balance is expected to show deficits of $5.4 billion in 2015–16 and $29.4  billion in 2016–17. Over the remainder of the forecast horizon, deficits are expected to decline gradually from $29.0 billion in 2017–18 to $14.3 billion in 2020–21. The federal debt-to-GDP ratio is projected to decline beginning in 2017–18 to the end of the fiscal horizon.

Outlook for Budgetary Revenues

Table A1.3 sets out the Government’s projection for budgetary revenues. Overall, budgetary revenues are expected to increase by 3.1 per cent in 2015–16. Revenues are projected to decline by 1.2 per cent in 2016–17 due to the weaker economic outlook and a projected decrease in other revenues, before growing by an average of 4.6 per cent per year from 2017–18 to 2020–21, in line with the outlook for nominal GDP and interest rates. The decline in other revenues in 2016–17 is primarily due to gains from asset sales in 2015–16 that are not expected to recur.

Personal income tax revenues—the largest component of budgetary revenues—are projected to increase by $6.9 billion, or 5.1 per cent, to $142.7 billion in 2015–16. Over the remainder of the projection period, personal income tax revenues are forecast to increase somewhat faster than growth in nominal GDP, averaging 4.4 per cent annual growth, reflecting personal income growth combined with the progressive nature of the personal income tax system.

Corporate income tax revenues are projected to decline by $0.6 billion, or 1.5 per cent, to $38.8 billion in 2015–16. This reflects the expectation that despite strong revenue growth through January, low oil prices will have a significant negative impact on final corporate income tax liabilities, particularly as corporations can carry back losses to request refunds of taxes paid over the past three years. Any remaining losses can also be carried forward against future tax liabilities, which is expected to have a negative impact on revenues in future years. As a result, corporate income tax revenues are projected to grow at an average annual rate of 2.8 per cent over the remainder of the projection period.

Non-resident income tax revenues are income taxes paid by non-residents on Canadian-sourced income, notably dividends and interest payments. For 2015–16, non-resident income tax revenues are projected to increase by $0.1 billion, or 1.7 per cent. Over the remainder of the projection period, non-resident income tax revenues are projected to increase at an average annual rate of 2.6 per cent.

Goods and Services Tax (GST) revenues are forecast to grow by 5.6 per cent in 2015–16, based on projected growth in taxable consumption and year-to-date results. Over the remainder of the projection period, GST revenues are forecast to grow by 3.8 per cent per year on average, based on projected growth in taxable consumption and in the Goods and Services Tax/Harmonized Sales Tax Credit.

Customs import duties are projected to increase by 13.2 per cent in 2015–16, reflecting strong year-to-date overall import growth and the removal of benefits for certain countries under Canada’s General Preferential Tariff regime, effective January 1, 2015. Customs import duties are projected to decrease slightly over the remainder of the projection period, mainly as a result of the expected impacts of the ongoing implementation of the Canada-Korea Free Trade Agreement, as well as the planned introduction of the Canada-European Union Comprehensive Economic and Trade Agreement and the potential introduction of the Trans-Pacific Partnership.

Other excise taxes and duties are projected to increase by 2.4 per cent in 2015–16, consistent with year-to-date results, and decline slightly thereafter, due to lower projected excise taxes on tobacco and the expiry of the 2006 Canada-United States Softwood Lumber Agreement in October 2015. The expiration of the Softwood Lumber Agreement has no impact on the budgetary balance as export taxes collected under the agreement are a flow-through item with an equal and offsetting impact on expenses.

Employment Insurance (EI) premium revenues are projected to grow by 1.9 per cent in 2015–16, reflecting growth in insurable earnings and the impact of the Small Business Job Credit. EI premium revenues are projected to decline significantly in 2016–17 and 2017–18 following the introduction of the seven-year break-even rate mechanism in 2017. Reflecting the measures proposed in this budget, the break-even EI premium rate would be $1.61 in 2017, thereby ensuring that premium revenues are set equal to the projected status quo EI program costs over the seven-year period starting that year. The projected premium revenues do not take into consideration the Government’s commitments to further improving Compassionate Care Benefits and parental leave benefits.

Other revenues are made up of three broad components: Crown corporation revenues from consolidated Crown corporations and 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 foreign exchange revenues.

Crown corporation revenues tend to be volatile, owing to the net gains or losses from enterprise Crown corporations and the impact of returns on Crown borrowing. For example, in 2014–15, large fiscal gains were realized on the transfer to Ontario of the province’s one-third share of the Government’s holdings of General Motors common shares and on the repositioning of the Canada Mortgage and Housing Corporation’s mortgage loan insurance investment portfolio.

In 2015–16, Crown corporation revenues are projected to decline by 3.1 per cent, despite significant gains that were realized on the sale of the Government’s remaining holdings of General Motors common shares in April 2015. This is due to expected declines in net income for the Canada Mortgage and Housing Corporation, Canada Post and Export Development Canada, which reflect, in part, that revenues in the previous year were elevated due to one-time events (e.g. gains on the repositioning of the Canada Mortgage and Housing Corporation’s mortgage loan insurance investment portfolio). Crown corporation revenues are projected to further decrease by 20.1 per cent in 2016–17, primarily as gains from the sale of shares in 2015–16 are not expected to recur. From 2017–18 to 2020–21, these revenues are projected to grow at an average annual rate of 6.8 per cent.

Other program revenues are affected by interest rate movements, 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 were raised in 2014–15 by foreign exchange gains on loans and investments. For 2015–16, a decline of 5.4 per cent is projected based on lower foreign exchange gains on loans and investments and lower interest and penalty revenues. Over the remainder of the projection period, other program revenues are projected to increase at an average annual rate of 4.5 per cent.

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 were lowered by a large foreign exchange loss in 2014–15. As significant foreign exchange losses are not expected to recur, 2015–16 net foreign exchange revenues are expected to be $0.7 billion higher than in 2014–15. Over the remainder of the projection period, net foreign exchange revenues are projected to grow at an average annual rate of 8.5 per cent, reflecting projected increases in interest rates.

Outlook for Program Expenses

Table A1.4 provides an overview of the projections for program expenses by major component. Program expenses consist of major transfers to persons, major transfers to other levels of government and direct program expenses.

Major transfers to persons are projected to increase from $83.1 billion in 2015–16 to $104.0 billion in 2020–21. 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 $45.6 billion in 2015–16 to $60.1 billion in 2020–21, or approximately 5.7 per cent per year—faster than nominal GDP, which is projected to grow on average by 3.9 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 seniors’ population as well as the increase in the Guaranteed Income Supplement for single seniors announced in this budget.

EI benefits are projected to increase by 7.4 per cent to $19.4  billion in 2015–16. This growth is in line with year-to-date results and reflects the weakening of the labour market, particularly in oil-producing provinces. Over the remainder of the projection period, EI benefits are projected to grow moderately, averaging 2.7 per cent annually. This is due to growth in average weekly benefits, including the EI measures announced in this budget, being partially offset by a decline in the number of regular beneficiaries, reflecting the expected improvement in the labour market.

Children’s benefits are projected to rise from $18.1 billion in 2015–16 to $21.8 billion in 2020–21, reflecting the new Canada Child Benefit, which will replace the Canada Child Tax Benefit and the Universal Child Care Benefit as of July 2016.

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 $65.8 billion in 2015–16 to $78.1 billion in 2020–21.

The CHT is projected to grow from $34.0 billion in 2015–16 to $41.9 billion in 2020–21. In 2016–17, the CHT is legislated to grow by 6.0 per cent. Starting in 2017–18, the CHT will grow 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, increasing from $13.0 billion in 2015–16 to $15.0 billion in 2020–21.

The Gas Tax Fund is projected to grow from $2.0 billion in 2015–16 to $2.2 billion in 2020–21 as these payments are indexed at 2.0 per cent per year, with increases applied in $100 million increments.

Direct program expenses are projected to rise to $122.0  billion in 2015–16 and further to $141.1 billion in 2020–21, largely as a result of measures announced in this budget. Direct program expenses include operating expenses, transfer payments administered by departments and capital amortization.

The projected increase in direct program expenses is driven by an increase in transfer payments administered by departments, including transfers to provincial, municipal and Aboriginal governments and post-secondary institutions for investment in infrastructure, as well as funding for education. Overall, transfer payments are projected to increase from $34.1 billion in 2015–16 to $46.0 billion in 2020–21.

Operating expenses reflect the cost of doing business for more than 100 government departments and agencies. Operating expenses are projected to increase from $82.8 billion in 2015–16 to $88.7 billion in 2020–21 due in part to measures announced in Budget 2016, including enhanced benefits for veterans.

Capital amortization is expected to increase from $5.2  billion in 2015–16 to $6.5 billion in 2020–21 as a result of recent and planned investments and upgrades to existing federal capital.

Public debt charges are projected to increase from $25.7 billion in 2015–16 to $35.5 billion in 2020–21, due to a projected rise in interest rates over the forecast horizon and a higher anticipated stock of interest-bearing debt, reflecting an increase in borrowing requirements.

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 A1.5, a financial requirement is projected over the entire forecast period. The projected financial requirements for 2015–16 to 2020–21 largely reflect requirements associated with the budgetary balance, increases in retained earnings of enterprise Crown corporations and growth in other assets, including financing of the Exchange Fund Account.

A financial source is projected for pensions and other accounts for 2015–16 to 2019–20. Pensions and other accounts include the activities of the Government of Canada’s employee pension plans and those of federally appointed judges and Members of Parliament, as well as a variety of other employee future benefit plans, such as health care and dental plans and disability and other benefits for war veterans and others. The financial source for pensions and other accounts largely reflects adjustments for pension and benefit expenses not funded in the period.

Financial requirements for non-financial assets mainly reflect the difference between cash outlays for the acquisition of new tangible capital assets and the amortization of capital assets included in the budgetary balance. They also include disposals of tangible capital assets and changes in inventories and prepaid expenses. A net cash requirement of $2.4 billion is estimated for
2016–17.

Loans, investments and advances include the Government’s investments in enterprise Crown corporations, such as Canada Mortgage and Housing Corporation (CMHC), Export Development Canada (EDC), the Business Development Bank of Canada (BDC) and Farm Credit Canada (FCC). They also include loans, investments and advances to national and provincial governments and international organizations, and for government programs. The requirements for enterprise Crown corporations projected from 2015–16 to 2020–21 reflect retained earnings of enterprise Crown corporations as well as the Government’s decision in Budget 2007 to meet all the borrowing needs of CMHC, BDC and FCC through its own domestic debt issuance. In general, loans, investments and advances are expected to generate additional revenues for the Government in the form of interest or additional net profits of enterprise Crown corporations, which partly offset debt charges associated with these borrowing requirements. These revenues are reflected in projections of the budgetary balance.

Other transactions include the payment of tax refunds and other accounts payable, the collection of taxes and other accounts receivable, the conversion of other accrual adjustments included in the budgetary balance into cash, as well as foreign exchange activities. Projected cash requirements associated with other transactions mainly reflect forecast increases in the Government’s official international reserves held in the Exchange Fund Account, as per the prudential liquidity plan, as well as projected growth in accounts receivable, in line with historical trends.

Sensitivity of the Budgetary Balance to Economic Shocks

Risks associated with the economic outlook are the greatest source of uncertainty for fiscal projections. To help quantify these risks in respect of their impact on the fiscal outlook, tables illustrating the sensitivity of the budgetary balance to a number of economic shocks are provided below.

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 (assuming that the Consumer Price Index moves in line with 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, and are meant to provide a broad illustration of the impact of economic shocks on the outlook for the budgetary balance. Actual economic shocks may have different fiscal impacts. For example, they may be concentrated in specific sectors of the economy or cause different responses in key economic variables (e.g. GDP inflation and Consumer Price Index inflation may have different responses), or they may interact with particular provisions of the tax system (e.g. loss carrybacks and carryforwards).

A 1-percentage-point decrease in real GDP growth proportional across income and expenditure components reduces the budgetary balance by $5.0 billion in the first year, $5.2 billion in the second year and $5.1 billion in the fifth year (Table A1.6).

• Tax revenues from all sources fall by a total of $4.0 billion in the first year and by $4.0 billion in the second year. Personal income tax revenues decrease as employment and the underlying tax base 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.
• EI premium revenues decrease as employment and wages and salaries fall. In order to isolate the direct impact of the economic shock and provide a general overview of the fiscal impacts, the EI premium revenue impacts do not include changes in the premium rate.
• Expenses rise, mainly reflecting higher EI benefits (due to an increase in the number of unemployed) and higher public debt charges (reflecting a higher stock of debt due to the lower budgetary balance). This rise is partially offset by lower other program expenses (as certain programs are linked to growth in nominal GDP).

A 1-percentage-point decrease in nominal GDP growth proportional across income and expenditure components resulting solely from lower GDP inflation (assuming that the Consumer Price Index moves in line with GDP inflation) lowers the budgetary balance by $2.2 billion in the first year, $1.8 billion in the second year and $1.0 billion in the fifth year (Table A1.7).

• Lower prices result in lower nominal income and, as a result, personal income tax revenues decrease, reflecting declines in the underlying nominal tax base. As the parameters of the personal income tax system are indexed to inflation and automatically adjust in response to the shock, the fiscal impact is smaller than under the real shock. For the other sources of tax revenue, the negative impacts are similar under the real and nominal GDP shocks.
• EI premium revenues decrease in response to lower earnings. In order to isolate the direct impact of the economic shock and provide a general overview of the fiscal impacts, the EI premium revenue impacts do not include changes in the premium rate.
• Other revenues decline slightly as lower prices lead to lower revenues from the sales of goods and services.
• Partly offsetting lower revenues are the declines in the cost of statutory programs that are indexed to inflation, such as elderly benefit payments, and downward pressure on federal program expenses. Payments under these programs are smaller if inflation is lower. In addition, other program expenses are also lower as certain programs are linked to growth in nominal GDP or the Consumer Price Index.
• 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.

An increase in interest rates decreases the budgetary balance by $0.9 billion in the first year, $1.9 billion in the second year and $3.3 billion in the fifth year (Table A1.8). The decline stems entirely from increased expenses associated with public debt charges. 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 other revenues. The impacts of changes in interest rates on public sector pension and benefit expenses are excluded from the sensitivity analysis.