Annex 2 - Details of Economic and Fiscal Projections

Contents

Budget 2018 Economic and Fiscal Projections are detailed in this Annex in the following sections:

1. Private Sector Economic Projections

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

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 December 2017.

The December 2017 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 Global Insight,
• 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).

2. Economic and Fiscal Developments and Policy Actions since the 2017 Fall Economic Statement

2.1 Impact of Economic and Fiscal Developments since the 2017 Fall Economic Statement

Relative to the 2017 Fall Economic Statement, budgetary revenues are projected to be lower in 2017–18 and 2018–19 primarily as a result of a downward revision to projected revenues from consolidated Crown corporations (particularly the Canadian Commercial Corporation) in the other revenue category. Revenues are up slightly over the remainder of the forecast horizon, due largely to higher projected excise taxes and duties.

Relative to FES 2017, income tax revenues are expected to be higher over most of the projection horizon. In 2017–18, upward revisions to corporate income tax and non-resident income tax revenues—primarily reflecting year-to-date developments—result in an increase of $1.0 billion. Over the remainder of the forecast horizon, income tax revenues were revised up slightly by an average of $0.2 billion, per year.

Excise taxes and duties have been revised up relative to FES 2017 due to stronger-than-expected year-to-date fiscal results for customs and import duties and a projected strengthening in the taxable consumption base.

Employment Insurance (EI) premium revenues are projected to be lower than at the time of FES 2017. This is a result of the lower projected unemployment rate, which results in lower projected EI benefits and a projected decrease in the EI premium rate on a status quo basis (before Budget 2018 measures).

With respect to expenses, major transfers to persons are projected to be lower throughout the forecast horizon compared to FES 2017, as the improved labour market outlook leads to lower projected EI benefit expenses.

Major transfers to other levels of government are broadly similar to FES 2017 projections. The small increase in 2017–18 is due to a lower expected value for the Quebec Abatement. The increase in the last three years of the horizon reflects higher Territorial Formula Financing transfers compared to FES 2017.

Compared to FES 2017, direct program expenses are lower, reflecting lower projected expenses for consolidated Crown corporations (particularly the Canadian Commercial Corporation), year-to-date results (including lower bad debt expenses on tax receivables) and updated departmental outlooks. Partially offsetting this, expenses related to pensions and employee future benefits are higher, reflecting the actuarial loss on plan liabilities as a result of lower projected interest rates compared to FES 2017.

Public debt charges are higher in 2017–18 compared to FES 2017, as a decrease in expected returns on pension fund assets leads to higher interest expenses. In 2018–19 and 2019–20, public debt charges are lower as lower forecast interest rates more than offset higher pension fund interest expenses from lower expected returns. From 2020–21, increases to both pension fund interest expenses and higher financial requirements lead to increased public debt charges compared to FES 2017.

2.2 Policy Actions Announced since the 2017 Fall Economic Statement

2.3 Other Budget 2018 Measures (Not Included in Previous Chapters)

3. Fiscal Projections

3.1 Summary Statement of Transactions

3.2 Outlook for Budgetary Revenues

Table A2.7 sets out the Government’s projection for budgetary revenues. Overall, budgetary revenues are expected to increase by 5.5 per cent in 2017–18, reflecting strong economic growth and year-to-date results. Over the remainder of the forecast horizon, revenues are projected to grow at an average annual rate of 3.8 per cent, in line with projected growth in nominal GDP.

Personal income tax revenues—the largest component of budgetary revenues—are projected to increase by $8.6 billion, or 6.0 per cent, to $152.3 billion in 2017–18. The strong growth in 2017–18 reflects an improved economic outlook and the unwinding of the impact of tax planning that suppressed revenues in 2016–17, whereby high-income individuals recognized additional income in the 2015 tax year and lower income in the 2016 tax year when the 33 per cent tax bracket came into effect. Over the remainder of the projection period, personal income tax revenues are forecast to increase faster than growth in nominal GDP, averaging 4.5 per cent annually, reflecting the progressive nature of the income tax system combined with projected real income gains.

Corporate income tax revenues are projected to increase by $6.0 billion, or 14.2 per cent, to $48.2 billion in 2017–18, as a result of higher corporate profits and the associated strength in recent year-to-date financial results. Revenues are then expected to decline in 2018–19 by 1.8 per cent due in part to the reduction in the small business tax rate announced in the 2017 Fall Economic Statement as well as a projected dampening of corporate profits. Over the remainder of the projection period, corporate income tax revenues are expected to grow at an average annual rate of 2.5 per cent, less than the rate of growth in nominal GDP, reflecting the anticipated use of loss carry-forwards, and the reduction of the small business tax rate to 9 per cent.

Non-resident income tax revenues are income taxes paid by non-residents on Canadian-sourced income, notably dividends and interest payments. For 2017–18, non-resident income tax revenues are projected to increase by $1.1 billion, or 15.2 per cent, based on strong year-to-date results and an expected increase in dividend, investment and interest income from stronger corporate profits. Over the remainder of the forecast horizon, they are projected to grow at an average annual rate of 1.9 per cent.

Goods and Services Tax (GST) revenues are forecast to grow by 6.2 per cent in 2017–18 based on recent financial results and strong projected growth in taxable consumption over the rest of the year. Over the remainder of the projection period, GST revenues are forecast to grow by 3.6 per cent per year, on average, based on the outlook for taxable consumption.

Customs import duties are projected to grow 1.2 per cent, in 2017–18. Over the remainder of the projection horizon, annual growth in customs import duties is projected to slow to an average of 0.5 per cent, largely due to the expected coming into force of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

Other excise taxes and duties (OETD) are projected to increase by $0.1 billion, or 0.8 per cent, to $11.6 billion in 2017–18. OETD revenues are then expected to increase by 4.6 per cent in 2018–19, partially due to expected additional excise duty revenues from cannabis legalization. Over the remainder of the projection horizon, OETD revenues are expected to grow at an average annual rate of 1.3 per cent based on historical consumption trends.

EI premium revenues are projected to decline by 7.1 per cent in 2017–18 due to a reduction in the EI premium rate to $1.63 per $100 of insurable earnings as a result of the introduction of the seven-year break-even mechanism in 2017. EI premium revenues are then expected to increase in 2018–19 as the EI premium rate increases to $1.66 per $100 of insurable earnings for 2018 (as announced by the Canada Employment Insurance Commission). Over the remainder of the forecast horizon, EI premium revenues are expected to continue on their upward trend based on projected growth in insurable earnings and a projected EI premium rate for 2019 of $1.66 per $100 of insurable earnings, after taking into account new EI measures announced in Budget 2018.

Other revenues are made up of three broad components: net income from enterprise Crown corporations; other program revenues, particularly from consolidated Crown corporation revenues, 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 2.7 per cent in 2017–18, and grow at an average annual rate of 9.2 per cent over the remainder of the forecast horizon, generally reflecting the outlooks presented in respective enterprise Crown corporation corporate plans.

Other program revenues are affected by consolidated Crown corporation revenues, interest and exchange rate movements (which affect the Canadian-dollar value of foreign-denominated assets), and flow-through items that give rise to an offsetting expense and therefore do not impact the budgetary balance. These revenues are projected to increase by 1.2 per cent in 2017–18. Over the remainder of the projection period, other program revenues are projected to increase at an average annual rate of 3.9 per cent, reflecting the impact of higher interest rates and outlooks presented in consolidated Crown corporation corporate plans.

Net foreign exchange revenues, which consist mainly of returns on investments held in the Exchange Fund Account, are volatile and sensitive to fluctuations in foreign exchange rates and foreign interest rates. These revenues are expected to decrease in 2017–18, due in large part to a decrease in the expected return on assets held in the Exchange Fund Account. Over the remainder of the projection period, net foreign exchange revenues are projected to grow at an average annual rate of 16.6 per cent, reflecting a projected increase in interest rates and the anticipated appreciation of the Canadian dollar by private sector forecasters.

3.3 Outlook for Program Expenses

Table A2.8 provides an overview of the projections for program expenses, on an accrual basis, by major component. A more detailed outlook for 2018–19 can be found in Table A2.12, which also provides a full reconciliation of the planned estimates and the budget outlook. 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 $94.4 billion in 2017–18 to $116.1 billion in 2022–23. 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 $50.9 billion in 2017–18 to $67.0 billion in 2022–23, or approximately 5.6 per cent per year. The expected increase in elderly benefits is due to projected consumer price inflation, to which benefits are fully indexed, and a projected increase in the population of seniors.

EI benefits are projected to be $20.1 billion in 2017–18. Over the remainder of the projection period, EI benefits are projected to grow moderately, averaging 3.6 per cent annually, reflecting growth in average weekly benefits.

Children’s benefits are projected to rise from $23.4 billion in 2017–18 to $25.1 billion in 2022–23, or approximately 1.4 per cent annually, largely reflecting the indexation of benefits beginning in 2018–19.

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 $70.5 billion in 2017–18 to $84.7 billion in 2022–23.

The CHT is projected to grow from $37.1 billion in 2017–18 to $44.9 billion in
2022–23. 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. Announced in Budget 2017, home care and mental health transfers in support of provincial and territorial home care and mental health initiatives will grow from $0.3 billion in 2017–18 to $1.2 billion in 2022–23.

Direct program expenses are projected to rise to $139.7 billion in 2017–18 and further to $149.3 billion in 2022–23. Direct program expenses include transfer payments administered by departments and operating expenses.

The projected increase in direct program expenses is driven, in large part, by an increase in transfer payments administered by departments over the forecast horizon, including transfers to provincial, municipal and Indigenous governments and post-secondary institutions for investment in infrastructure. Overall, transfer payments are projected to increase from $44.1 billion in 2017–18 to $52.0 billion in 2022–23.

Operating expenses reflect the cost of doing business for more than 100 government departments, agencies and Crown corporations, and are projected to reach $95.6 billion in 2017–18, reflecting year-to-date results and the introduction of Pension for Life for veterans, which results in a significant one-time expense in 2017–18. From 2018–19 onwards, operating expenses are projected to grow by about 1.1 per cent annually, reaching $97.3 billion in
2022–23. The growth in operating expenses is composed of growth in departmental expenses, which is partially offset by falling expenses related to pensions and employee future benefits, reflecting the projected rise in long-term interest rates.

3.4 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 A2.9, a financial requirement is projected over the entire forecast period. The projected financial requirements for 2017–18 to 2022–23 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 2017–18 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 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 $3.0 billion is estimated for 2018–19.

Loans, investments and advances include the Government’s investments in enterprise Crown corporations, such as Canada Mortgage and Housing Corporation (CMHC), Export Development Canada, 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 2017–18 to 2022–23 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.

4. Supplementary Information

4.1 Policy Actions and Budget Investments by Department (Cash Basis)

4.2 Reconciliation of Budget 2018 Expenses with 2018–19 Planned Estimates

Under this reconciliation, the accrual expense forecast is decomposed into eight building blocks beginning with Planned Estimates authorities, Budget 2018 measures, additional Estimates authorities for which Parliamentary approval may be sought later in the fiscal year, amounts forecasted to remain unspent or carried forward from total authorities, further spending financed by departmental revenues, spending-like programs delivered through the tax system, and remaining accrual and consolidation adjustments required to put the forecast on the same accounting basis as the Public Accounts of Canada Volume I. These building blocks are consistent with concepts and definitions used in the Public Accounts of Canada Volume II.