Annex 1 - Details of Economic and Fiscal Projections

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Economic Projections

The average of private sector forecasts has been used as the basis for fiscal planning since 1994. 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 2019.

The September 2019 survey includes the views of 14 private sector economists:

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

Fiscal Projections

Changes to the Fiscal Outlook Since Budget 2019

Economic and Fiscal Developments Since Budget 2019

Relative to Budget 2019, budgetary revenues are projected to be higher over the forecast horizon, driven primarily by better-than-expected personal and corporate income tax revenues.

Corporate income tax revenues are expected to be higher relative to Budget 2019 due to strength in year-to-date fiscal results, as well as an improvement in the outlook for corporate profits.

Relative to Budget 2019, personal income tax revenues are expected to be higher across the forecast horizon, reflecting the carry-forward of stronger-than-expected revenues in 2018–19 and strength in year-to-date fiscal results.

These increases are partially offset by downward revisions to revenue from excise taxes and duties, reflecting both the carry-forward of weaker-than-expected net Goods and Services Tax (GST) revenue in 2018–19 and lower expected growth in taxable consumption over the forecast horizon. Of note, the downward revision to revenues in 2019–20 is larger than in other years due to the earlier-than-projected removal of retaliatory tariffs on steel, aluminum and other products.

Employment Insurance (EI) premium revenues are projected to be higher in 2019–20 relative to Budget 2019 due to strength in year-to-date fiscal results. Across the remainder of the horizon, declines in the premium rate result in a downward revision to EI premium revenues. For 2020, the Canada Employment Insurance Commission has set the premium rate at $1.58 (per $100 of insurable earnings), three cents lower than projected in Budget 2019 and, as a result of a better-than-expected labour market outlook, the rate is now projected to decrease further in 2021 to $1.55.

Other revenues, such as those resulting from sales of goods and services, investments and loans, interest and penalties and Crown corporations' revenues, are lower starting in 2020–21, reflecting lower expected interest rates, which translate into lower returns on Crown assets.

With respect to expenses, major transfers to persons have been revised downwards across the forecast horizon relative to Budget 2019. This revision is primarily driven by a reduction in the forecast for EI benefits. A stronger-than-expected labour market has resulted in a lower forecasted unemployment rate, which is expected to lead to fewer EI beneficiaries.

Major transfers to other levels of government are lower than Budget 2019 projections. This decrease is largely a result of higher amounts recovered for the Quebec Abatement due to strength in the Quebec economy. This is partly offset in later years by an increase in forecasted Canada Health Transfer and Equalization transfer payments (reflecting a higher nominal gross domestic product (GDP) forecast, to which the transfers are indexed).

Compared to Budget 2019, direct program expenses are higher across the forecast horizon due in large part to increased expenses related to pensions and other employee future benefits as well as higher other operating and transfer expenses. With respect to pension and benefit costs, significantly lower projected interest rates relative to Budget 2019 mean higher expenses are attributed to the benefits earned during the year as well as to the Government's existing pension and benefit obligations. For additional information on the impact of pensions and other employee future benefits on the Government's expenses, refer to Details of the Increase in Pensions and Other Employee Future Benefit Expenses. The remaining increase in operating and transfer payments can be attributed to higher provisions for future claims and litigation, higher expenses for Canada Revenue Agency bad debt expense and refundable tax credits, and higher projected personnel expenses.

Over the fiscal horizon, policy actions announced since Budget 2019 are entirely offset by stronger projected personal and corporate income tax revenues. Costs related to the Basic Personal Amount are also partially offset by these revenue gains. 

The Government will also launch the first phase of a comprehensive review of government spending and tax expenditures, to ensure that resources are efficiently allocated to continue to invest in people and keep the economy strong and growing. This review will result in $1.5 billion in annual savings, starting in 2020-21.

Compared to Budget 2019, public debt charges are lower across the forecast horizon, reflecting lower projected interest rates, which result in lower interest expenses on market debt, and pension and other employee future benefit obligations.

Summary Statement of Transactions

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

This outlook includes new policy actions taken since Budget 2019.

Outlook for Budgetary Revenues

Table A1.5 sets out the Government's projection for budgetary revenues. Overall, budgetary revenues are expected to increase by 2.4 per cent in 2019–20, largely reflecting temporary factors impacting corporate income tax revenues, customs import duties and other revenues. Over the remainder of the forecast horizon, revenues are projected to grow at an average annual rate of 4.0 per cent, in line with projected growth in nominal GDP.

Personal income tax (PIT) revenues—the largest component of budgetary revenues—are projected to increase by $7.7 billion, or 4.7 per cent, to $171.6 billion in 2019–20. This reflects continuing strength in the labour market and better-than-expected 2018–19 results that are expected to carry forward. Over the remainder of the projection period, PIT revenues are forecast to increase faster than growth in nominal GDP, averaging 3.8 per cent annually, reflecting the progressive nature of the income tax system combined with projected real income gains.

Corporate income tax (CIT) revenues are projected to decrease by $3.6 billion, or 7.1 per cent, to $46.8 billion in 2019–20, due to the cost of tax incentives introduced in the 2018 Fall Economic Statement to encourage business investment. Over the remainder of the projection period, CIT revenues are expected to grow at an average annual rate of 4.9 per cent, driven by growth in corporate profits and a lower cost of the tax measures as they mature.

Non-resident income tax revenues are income taxes paid by non-residents on Canadian-sourced income, notably dividends and interest payments. For 2019–20, non-resident income tax revenues are projected to increase by $0.3 billion, or 3.2 per cent. Over the remainder of the forecast horizon, these revenues are projected to grow at an average annual rate of 2.0 per cent.

Goods and Services Tax (GST) revenues are forecast to grow by 3.6 per cent in 2019–20 based on recent financial results and projected growth in taxable consumption over the rest of the year. Over the remainder of the projection period, GST revenues are forecast to grow by 3.8 per cent per year, on average, based on the outlook for taxable consumption.

Customs import duties are projected to decline 16.6 per cent in 2019–20 due to the removal of retaliatory tariffs on steel, aluminum and other products. Over the remainder of the projection horizon, annual customs import duties are projected to increase at an average of 2.5 per cent, based on the outlook for imports.

Other excise taxes and duties (OETD) are projected to increase by $0.4 billion, or 3.2 per cent, to $12.5 billion in 2019–20, based on recent financial results. Over the remainder of the projection horizon, OETD revenues are expected to grow at an average annual rate of 0.6 per cent based on historical consumption trends.

The revenue outlook includes an estimate for fuel charge proceeds that arise from the provinces and territories that are part of the federal pollution pricing system. In Ontario, Manitoba, Saskatchewan and Alberta, these proceeds will be returned primarily through Climate Action Incentive payments to eligible individuals and families in those provinces. In Yukon and Nunavut, proceeds will be returned directly to those governments.

EI premium revenues are projected to rise by 1.6 per cent in 2019–20 as growth in employment earnings is partially offset by declines in the EI premium rate, from $1.66 per $100 of insurable earnings in 2018 to $1.62 in 2019, and to $1.58 in 2020 (as announced in September by the Canada Employment Insurance Commission). EI premiums are then projected to decrease by 0.7 per cent in 2020–21, as the premium rate is expected to decline further to $1.55 in 2021. Over the remainder of the forecast horizon, EI premium revenues are projected to grow at an average of 2.6 per cent annually, driven by growth in employment and in earnings.

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 increase by 2.4 per cent in 2019–20, and grow thereafter at an average annual rate of 6.7 per cent over the remainder of the forecast horizon, reflecting outlooks presented in the corporate plans of respective enterprise Crown corporations and higher projected revenue from the Crown Borrowing Program, reflecting the projected increase in interest rates over the horizon.

Other program revenues are affected by consolidated Crown corporation revenues, interest rates, inflation, exchange rate movements (which affect the Canadian-dollar value of foreign-denominated assets) and flow-through items that give rise to an offsetting expense and therefore do not impact the budgetary balance. These revenues are projected to decrease by 3.0 per cent in 2019–20, reflecting a decrease in interest and penalty revenues and lower interest revenues from Canada Student Loans. Over the remainder of the forecast horizon, these revenues are projected to grow at an average annual rate of 3.2 per cent as a result of growth in revenue from sales of goods and services and interest and penalty revenues.

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 increase by 22.7 per cent in 2019–20, due in large part to an increase in the expected income of the Exchange Fund Account. From 2020–21 to 2024–25, net foreign exchange revenues are expected to grow at an average annual rate of 10.2 per cent, largely as a result of a projected increase in interest rates.

Outlook for Program Expenses

Table A1.6 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—are projected to increase from $99.5 billion in 2019–20 to $125.5 billion in 2024–25.

Elderly benefits, which are comprised of Old Age Security, Guaranteed Income Supplement and Allowance payments to qualifying seniors, are projected to grow from $56.1 billion in 2019–20 to $74.2 billion in 2024–25, or approximately 5.8 per cent per year. The expected increase in elderly benefits is primarily due to a projected increase in the population of seniors.

EI benefits are projected to be $19.3 billion in 2019–20. Over the remainder of the projection period, EI benefits are projected to grow at an average of 4.9 per cent annually, reflecting expected gains in average weekly benefits and growth in the number of beneficiaries.

Children's benefits are projected to rise from $24.1 billion in 2019–20 to $26.8 billion in 2024–25, or approximately 2.1 per cent annually, reflecting the indexation of benefits and an increase in the projected number of children eligible for the benefit.

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 $76.3 billion in 2019–20 to $91.0 billion in 2024–25.

The CHT is projected to grow from $40.4 billion in 2019–20 to $48.6 billion in 2024–25. The CHT grows in line with a three-year moving average of nominal GDP growth, with funding guaranteed to increase by at least 3.0 per cent per year. The CST is legislated to grow at 3.0 per cent per year. Gas Tax Fund payments are indexed at 2.0 per cent per year, with increases applied in $100 million increments. Home care and mental health transfers are projected to grow from $1.1 billion in 2019–20 to $1.2 billion in 2024–25.

Direct program expenses—which include transfer payments administered by departments, operating expenses and the losses (gains) from employee future benefits—are projected to rise to $165.0 billion in 2019–20 and further to $172.6 billion in 2024–25.

The projected increase in direct program expenses is driven by Climate Action Incentive payments and fuel charge proceeds returned through other mechanisms, which is expected to increase from $3.0 billion in 2019–20 to $7.5 billion in 2024–25. Transfer payments administered by departments are expected to be relatively stable over the forecast horizon, increasing from $55.8 billion in 2019–20 to $57.9 billion in 2024–25.

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 reach $95.4 billion in 2019–20. Across the projection period, operating expenses are projected to grow by about 2.4 per cent annually, reaching $107.4 billion in 2024–25.

Losses from employee future benefit plans represent changes in the measurement of the Government's obligations for pensions and other employee future benefits accrued in previous fiscal years. These losses are expected to increase in 2019–20, due mainly to a decrease in the discount rates used to value the obligations. Thereafter, losses are expected to gradually decrease over the forecast horizon, reflecting a projected rise in discount rates, leading to a forecast gain of $0.3 billion in 2024–25. 

Policy Actions Taken Since Budget 2019

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