Economic and Fiscal Outlook - April 2019

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PBO projects growth in the Canadian economy to slow from 1.8 per cent in 2018 to 1.6 per cent in 2019. This slowdown primarily reflects the impacts of transitory factors related to the collapse in Canadian crude oil prices in late 2018.

As these impacts dissipate, we project that quarterly real GDP growth will rebound through 2020 as business and residential investment recover and exports provide a boost. Economic growth is then projected to downshift somewhat—to 1.7 per cent in 2021 and 1.6 per cent in 2022—as growth in exports and business investment moderates.

With the economy rising above potential GDP and inflation edging above target, we assume that the Bank of Canada will resume raising its policy rate in October, increasing it by 25 basis points and then gradually raising it until it reaches the neutral rate of 2.75 per cent in mid-2020.

PBO’s economic outlook reflects the view that possible upside and downside outcomes are, broadly speaking, equally likely. In terms of downside risks, we continue to judge that the most important risk is weaker export performance due to rising protectionism in global trade policies. In terms of upside risks, we maintain that the most important risk is stronger household spending fuelled by increased household indebtedness.

PBO’s fiscal outlook accounts for all policy actions taken since the 2018 Fall Economic Statement, which amount to $27.0 billion over 2018-19 to 2023-24 ($4.5 billion per year, on average). Our projections reflect PBO’s own independent cost estimates for 11 measures included in Budget 2019. Altogether, PBO’s costing of new measures is $0.3 billion (1 per cent) higher than the Government’s estimates provided in Budget 2019.

For 2018-19, we expect that the budgetary balance will show a deficit of $15.7 billion (0.7 per cent of GDP). We project the budgetary deficit to increase to $22.3 billion in 2020-21 due, in part, to foregone revenues from introducing accelerated expensing of capital investment for businesses.

The budgetary deficit is then projected to decline to $11.9 billion (0.4 per cent of GDP) in 2023-24 as growth in the Government’s personnel costs (mostly related to pension liabilities) is restrained. We project the federal debt-to-GDP ratio to decline over the medium term, falling to 28.9 per cent in 2023-24.

Without further policy actions, and based on the uncertainty surrounding our economic outlook, we estimate that there is approximately a 15 per cent chance that the budget will be balanced or in surplus in 2021-22. The probability of budgetary balance/surplus rises to 30 per cent in 2023-24. In addition, we estimate it is likely that the federal debt-to-GDP ratio will be below the Government’s anchor level of 31.9 per cent over the period 2019‑20 to 2023-24.

Budget 2019:  Key Issues for Parliamentarians

Economic and fiscal outlook comparison

PBO’s outlook for nominal GDP is $4 billion lower annually, on average, over 2019 to 2023 compared to the private sector forecast in Budget 2019. This difference is due to GDP inflation and real GDP growth in the fourth quarter of 2018 that was weaker than anticipated in Finance Canada’s survey of private sector forecasters.

PBO’s estimate of the budgetary deficit in 2018-19 ($15.7 billion) is $0.8 billion higher compared to Budget 2019. Our higher deficit estimate reflects lower expected revenue in 2018-19.

Over 2019-20 to 2023-24, PBO is projecting budgetary deficits that are $0.7 billion higher per year, on average, compared to Budget 2019. Our higher deficit forecast over this period reflects lower GST and non‑resident income tax revenues as well as higher operating expenses.

Budget-Estimates alignment

The Government made significant changes to the Estimates process last year with the goal to better align the Estimates with the budget. To address concerns raised by parliamentarians last year, the 2019-20 Main Estimates creates individual votes within departments and agencies for Budget 2019 measures. While this is an important improvement to the process, it does not address the issue of parliamentarians voting on items which have yet to be scrutinized or refined by the Treasury Board.

Operating expense details

Budget 2019 provides information on key growth components within Finance Canada’s outlook for operating expenses. The disclosure of information related to departmental expenses in Budget 2019 is a step forward but is less than ideal.

Parliamentarians may wish to seek more quantifiable details on the major cost components within Finance Canada’s outlook for operating expenses, especially for pension and benefit expenses.

Non-announced measures

Budget 2019 provisions ‑$3.8 billion for non-announced measures. Explicit reporting of these measures is an improvement upon prior practice, under which unannounced measures were included with other fiscal developments. The negative amount indicates a net source of funds, which suggests either increased taxes and/or reductions in expenses.

Budget 2019 funding for non-announced measures includes “provisions for anticipated Cabinet decisions not yet made”. However, this masks important details on the source of funds for up to $3.9 billion in support for farmers in supply managed sectors, as well as from anticipated revenue due to limiting benefits of employee stock option deductions for high-income individuals.

Given their materiality, parliamentarians may wish to seek quantifiable details regarding the spending envelopes for non-announced measures in Budget 2019, particularly the amounts allocated to future Cabinet funding decisions.

The Government’s fiscal anchors

PBO has been monitoring the Government’s progress in meeting the two fiscal anchors it identified in 2015:  balancing the budget in 2019-20 and continuing to reduce the federal debt-to-GDP ratio throughout its mandate.

Budget 2019 does not mention the Government’s commitment to balancing the budget in 2019-20 nor does it mention committing to return to a balanced budget. That said, it does note that the federal debt-to-GDP ratio is projected to decline continuously over the projection horizon.

Without further policy actions, and based on the uncertainty surrounding our economic outlook, we estimate there is a near-zero likelihood that the budget would be balanced in 2019‑20 and an 80 per cent likelihood that the federal debt ratio would be below the Government’s anchor of 31.9 per cent of GDP in 2020-21.

Parliamentarians may wish to request regular and realistic reporting on the Government’s progress against consistent and measurable fiscal anchors in its budgets and Fall Economic Statements.

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