Annex 2: Details of Economic and Fiscal Projections

Contents

Budget 2019 economic and fiscal projections are detailed in this annex in the following sections:

1. Private Sector Economic Projections
2. Changes to the Fiscal Outlook since the 2018 Fall Economic Statement
   • 2.1 Economic and Fiscal Developments since the 2018 Fall Economic Statement
3. Fiscal Projections
   • 3.1 Summary Statement of Transactions
   • 3.2 Outlook for Budgetary Revenues
   • 3.3 Outlook for Program Expenses
   • 3.4 Financial Source/Requirement
4. Supplementary Information
   • 4.1 Policy Actions Announced since the 2018 Fall Economic Statement
   • 4.2 Other Budget 2019 Measures (Not Included in Previous Chapters)
   • 4.3 Policy Actions and Budget 2019 Investments by Department (Estimates Basis)
   • 4.4 Reconciliation of Budget 2019 Expenses with 2018–19 Main Estimates and 2019–20 Planned Estimates
   • 4.5 Sensitivity of Fiscal Projections to Economic Shocks

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 economic and fiscal forecast.  

The economic forecast presented in this section is based on a survey conducted in February 2019. The February 2019 survey includes the views of 14 private sector economists:

1. BMO Capital Markets,
2. Caisse de dépôt et placement du Québec,
3. Canadian Federation of Independent Business,
4. CIBC World Markets,
5. The Conference Board of Canada,
6. Desjardins,
7. IHS Markit,
8. Industrial Alliance Insurance and Financial Services Inc.,
9. Laurentian Bank Securities,
10. National Bank Financial Markets,
11. Royal Bank of Canada,
12. Scotiabank,
13. TD Bank Financial Group, and
14. the University of Toronto (Policy and Economic Analysis Program).

2. Changes to the Fiscal Outlook since the 2018 Fall Economic Statement

2.1 Economic and Fiscal Developments since the 2018 Fall Economic Statement

Relative to the 2018 Fall Economic Statement (FES 2018), budgetary revenues are projected to be higher across the forecast horizon, driven by strong fiscal results in 2018–19. This year-to-date strength is partly offset by a weaker economic outlook starting in 2019–20, as the projected level of nominal GDP is lower relative to expectations at the time of FES 2018. 

Income tax revenues have been revised up relative to FES 2018, driven by improvements across the various revenue streams. In 2018–19, upward revisions to corporate and non-resident income tax revenues account for the majority of the increase, due in large part to strength in year-to-date fiscal results. In particular, a number of large reassessments are contributing to 2018-19 corporate income tax revenue strength. Over the rest of the forecast horizon, income tax revenues are projected to be higher, with personal income tax revenues playing a larger role, driven by low unemployment and a strong labour market.

Excise taxes and duties have been revised up relative to FES 2018 due to stronger-than-expected year-to-date fiscal results. Of note, the upward revision is larger in the first two years than in the outer years due to the assumed continued application of steel and aluminum tariffs until the middle of 2019–20.

Employment Insurance (EI) premium revenues are projected to be lower across the forecast horizon than at the time of FES 2018. This is a result of slightly weaker-than-expected year-to-date results in 2018–19, and a projected decrease in the EI premium rate beginning in 2020 (not including Budget 2019 measures).

Other revenues, such as those resulting from the sales of goods and services, investments and loans, interest and penalties and Crown corporations’ net profits, are projected to be higher in 2018–19, primarily due to a better-than-expected financial performance by enterprise Crown corporations and interest and penalties revenues. Small downward revisions in future years mostly reflect lower expected returns on the Government’s interest-bearing investments, as a result of the lower interest rate outlook.

With respect to expenses, major transfers to persons have been revised downwards throughout the forecast horizon compared to FES 2018. EI benefits are lower, reflecting year-to-date results that have shown fewer-than-expected beneficiaries, largely due to a strengthening labour market. The outlook for spending on elderly benefits (including Old Age Security, Guaranteed Income Supplement and Allowance payments) has also been reduced, due to lower-than-projected year-to-date results and lower projected Consumer Price Index (CPI) inflation in the near term (to which these benefits are indexed).

Major transfers to other levels of government are broadly similar to FES 2018 projections. The increase in the early years is driven by revised tax point transfers under the Quebec Abatement, which are offset from 2020–21 onwards by lower forecasted Canada Health Transfer and Equalization transfer payments (reflecting a weaker outlook for nominal GDP).

Compared to FES 2018, direct program expenses are higher in 2018–19 through 2021–22, reflecting the anticipated revaluation of a number of liabilities, including higher pensions and employee future benefits expenses due to lower projected long-term interest rates, and Indigenous claims. Direct program expenses are slightly lower in the remaining years of the forecast horizon, reflecting small adjustments in departmental spending forecasts.

Public debt charges are lower across the forecast horizon compared to FES 2018. Public debt charges are expected to be lower in 2018–19, largely due to lower inflation, which results in lower CPI adjustments on Real Return Bonds. From 2019–20 onwards, the improvement over FES 2018 largely reflects lower projected interest rates, which result in lower interest expenses on market debt, pensions and employee future benefits.

3. Fiscal Projections

3.1 Summary Statement of Transactions

3.2 Outlook for Budgetary Revenues

Table A2.5 sets out the Government’s projection for budgetary revenues. Overall, budgetary revenues are expected to increase by 6.7 per cent in 2018-19, reflecting robust year-to-date results and economic growth. Over the remainder of the forecast horizon, revenues are projected to grow at an average annual rate of 3.5 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 $9.2 billion, or 6.0 per cent, to $162.8 billion in
2018–19. The strong growth in 2018–19 is driven, in particular, by high employment, reflecting a strong labour market. Over the remainder of the projection period, personal income tax revenues are forecast to increase somewhat faster than growth in nominal GDP, averaging 4.3 per cent annually, given the progressive nature of the income tax system combined with projected real income gains.

Corporate income tax revenues are projected to increase by $4.2 billion, or 8.7 per cent, to $52.0 billion in 2018–19. This increase reflects growth in year-to-date revenues from a number of sectors, including finance, manufacturing, and wholesale trade, as well as several large reassessments resulting from audits. Revenues are then expected to decline in 2019–20 by 10.9 per cent, primarily due to the temporary cost of new tax measures to promote business investment announced in the 2018 Fall Economic Statement, as well as a projected slowdown in corporate profits. Over the remainder of the projection period, corporate income tax revenues are expected to grow at an average annual rate of 3.3 per cent.

Non-resident income tax revenues are taxes paid by non-residents on Canadian-sourced income, notably dividend and interest income. For 2018–19, non-resident income tax revenues are projected to increase by $1.7 billion, or 21.9 per cent, based on strong year-to-date results and the associated increase in dividend and interest income. Over the remainder of the forecast horizon, these revenues are projected to grow at an average annual rate of 0.7 per cent.

Goods and Services Tax (GST) revenues are forecast to grow by 7.8 per cent in 2018–19 based on year-to-date fiscal results. Over the remainder of the projection period, GST revenues are forecast to grow by 3.5 per cent per year, on average, in line with the outlook for taxable consumption.

Customs import duties are projected to grow 27.0 per cent in 2018–19, largely due to the temporary application of the steel and aluminum retaliatory tariffs. Over the remainder of the projection horizon, customs import duties are projected to decline at an average of 1.8 per cent, due to the assumed removal of steel and aluminum tariffs and the phase-out of tariffs under various trade agreements, including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the Canada-United States-Mexico Agreement.

Other excise taxes and duties (OETD) revenues are projected to increase by $0.4 billion, or 3.2 per cent, to $12.0 billion in 2018–19, largely due to the higher excise duty on tobacco products announced in Budget 2018. Over the remainder of the projection horizon, OETD revenues are expected to grow at an average annual rate of 1.1 per cent based on historical consumption trends as well as the forecast of cannabis revenue.

Beginning in 2019–20, the revenue outlook includes an estimate for fuel charge proceeds that arise from the federal carbon pollution pricing system. The Government will return all direct proceeds from the fuel charge to the jurisdiction of origin. For jurisdictions that do not meet the Canada-wide federal standard for reducing carbon pollution—Ontario, New Brunswick, Manitoba and Saskatchewan—the bulk of these proceeds will be going to individuals and families through Climate Action Incentive payments. For jurisdictions that voluntarily adopted the federal system—Yukon and Nunavut—all direct proceeds will be returned to the governments of those jurisdictions.

EI premium revenues are projected to increase by 1.3 per cent in 2018–19 due to modest growth in insurable earnings coupled with an increase in the EI premium rate to $1.66 per $100 of insurable earnings in 2018. In 2019–20, EI premium revenues are then expected to grow 2.6 per cent, as stronger expected growth in earnings more than offsets the reduction in the EI premium rate in 2019 to $1.62 per $100 of insurable earnings (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 2020 of $1.61 per $100 of insurable earnings, after taking into account new EI measures announced in Budget 2019.

Other revenues are made up of three broad components: net income from enterprise Crown corporations; other program revenues, particularly consolidated Crown corporation revenues, returns on investments, proceeds from the sales of goods and services; and revenues in the Exchange Fund Account.

Enterprise Crown corporation revenues are projected to decrease slightly in 2018-19 and 2019-20 driven by expected declines in net income reported by Export Development Canada and Canada Mortgage and Housing Corporation. Revenue is expected to grow at an average annual rate of 8.1 per cent over the remainder of the forecast horizon, 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 9.4 per cent in 2018–19, largely reflecting an increase in interest and penalties revenues due to higher interest rates and large company reassessments. Over the remainder of the forecast horizon, other program revenues are projected to increase at an average annual rate of 2.3 per cent as a result of growth in revenue from sales of goods and services and interest and penalties 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 expected to decrease in 2018–19, due in large part to a decrease in the expected net income for the Exchange Fund Account. Over the remainder of the projection period, net foreign exchange revenues are projected to increase, largely as a result of a projected increase in interest rates.

3.3 Outlook for Program Expenses

Table A2.6 provides an overview of the projections for program expenses, on an accrual basis, by major component. A more detailed outlook for 2018–19 and 2019–20 can be found in Tables A2.13 and A2.14, which provide a full estimates-budget reconciliation. 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 $96.0 billion in 2018–19 to $121.5 billion in 2023–24. 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 $53.3 billion in 2018–19 to $70.6 billion in 2023–24, or approximately 5.8 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 decrease by 4.7 per cent to $18.8 billion in 2018-19, driven by a falling unemployment rate. Over the remainder of the horizon, EI benefits are projected to grow at an average of 5.7 per cent annually, reflecting expected gains in average weekly benefits and modest increases in the number of EI beneficiaries as the unemployment rate is projected to stabilize at around 6.0 per cent after 2019, based on the outlook provided by private sector forecasters.

Canada Child Benefits (CCB) are projected to rise from $23.9 billion in 2018-19 to $26.1 billion in 2023–24, or approximately 1.7 per cent annually, largely reflecting the full indexation of the CCB to consumer price inflation.

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 $76.0 billion in 2018–19 to $88.1 billion in 2023–24.

The CHT is projected to grow from $38.6 billion in 2018–19 to $46.6 billion in 2023-24. 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 commitments are expected to increase to $4.3 billion in 2018-19 due to a one-time transfer of $2.2 billion proposed in this budget.  In 2019-20 and beyond, base Gas Tax Fund commitments 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 $0.9 billion in 2018–19 to $1.2 billion in 2023–24.

Direct program expenses are projected to rise to $151.5 billion in 2018–19 and further to $159.4 billion by 2023–24. 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 the introduction of the federal carbon pollution pricing system and the associated return of direct fuel charge proceeds, which are expected to increase from $0.6 billion in 2018–19 to $5.7 billion in 2023–24. There is also a projected increase in other transfer payments administered by departments over the forecast horizon, including transfers to provincial, municipal and Indigenous governments and post-secondary institutions for investments in infrastructure. Other transfer payments are projected to increase from $54.1 billion in 2018–19 to $56.4 billion in 2023–24.

Operating expenses reflect the cost of doing business for more than 100 government departments, agencies and Crown corporations, and are projected to reach $96.7 billion in 2018–19. Operating expenses are projected to decrease to $95.0 billion in 2021–22, and then grow to $97.3 billion in 2023–24. The growth in operating expenses is composed of average annual growth of about 3 per cent in departmental expenses, which is 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 A2.7, a financial requirement is projected over the entire forecast period. The projected financial requirements for 2018–19 to 2023–24 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 2018–19 to 2021–22. 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 $2.6 billion is estimated for 2019–20.

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 2018–19 to 2023–24 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 Announced since the 2018 Fall Economic Statement

The Government’s spending plans are generally laid out in the annual budget. Due to operational reasons, some funding decisions may be required between budgets. All such “off-cycle” funding decisions taken since the 2018 Fall Economic Statement that are not discussed in the previous chapters are detailed in this table.

*Public Sector accounting rules require that the present value of all increased future payments to eligible recipients be recognized up-front when changes are made to benefit plans as well as on an annual basis based on actuarial forecasts. As such, funding adjustments on an accrual basis have already been accounted for. The actual cost of adjustments for approved benefits for all eligible recipients is reflected in the cash table (see Table A2.10)

4.2 Other Budget 2019 Measures (Not Included in Previous Chapters)

4.4 Reconciliation of Budget 2019 Expenses with 2018–19 Main Estimates and 2019–20 Planned Estimates

Under this reconciliation, the accrual expense forecast is broken out into nine building blocks. These begin with Main Estimates authorities for 2018–19 or Planned Estimates authorities for 2019–20, and also include Budget Implementation Vote (BIV) allocations-to-date in 2018–19, Budget 2019 measures, additional Estimates authorities for which Parliamentary approval may be sought through Supplementary Estimates, 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.