|
![](/web/20061130011916im_/http://www.fin.gc.ca/images/clear.gif) |
![The Economic and Fiscal Update 2004](/web/20061130011916im_/http://www.fin.gc.ca/ec2004/images/header_e.jpg) - Table of Contents - Previous - Next -
Annex 3
Private Sector Five-Year Economic and Fiscal Projections
Highlights
- The Department of Finance meets each fall with economists from all regions
of the country, including the chief economists of the major chartered banks
and four private sector economic forecasting organizations. The objective of
this exercise, which was initiated in 1999, is to agree on a set of economic
assumptions for planning purposes, which the four forecasting organizations
then use to develop status quo fiscal projections of the budgetary balance
for the current year and each of the next five years.
- In this Economic and Fiscal Update the Government is reporting for the
first time the individual projections of the budgetary balance provided by
the private sector economic forecasting organizations. These projections
are prepared on a National Accounts basis. The average of these
projections has been translated to a Public Accounts basis by the
Department of Finance. Annex 4 provides details on how the projections are
translated from a National Accounts basis to a Public Accounts basis.
- The private sector economists strongly recommend that the Government
continue to set aside amounts in its fiscal plan for the Contingency
Reserve and for economic prudence.
- The Contingency Reserve is established to guard against unforeseen
developments. If it is not needed, it is used to reduce the federal
debt.
- Amounts set aside for economic prudence provide further protection
against going back into deficit. If these amounts are not needed, they
become available to fund new priorities.
- Based on the projections provided by the four forecasting organizations,
and after subtracting amounts for the Contingency Reserve and economic
prudence, the cost of the September and October 2004 First Ministers’
agreements on health, equalization and Territorial Formula Financing, and
the cost of other decisions made since the March 2004 budget, the surplus
is estimated at $5.9 billion for 2004–05, $0.5 billion for 2005–06,
$0.9 billion for 2006–07, $3.2 billion for 2007–08, $7.5 billion for
2008–09 and $11.5 billion for 2009–10.
- The key elements of the current approach to budget planning were
established following an independent review of the Government’s
forecasting methods in 1994. Much has changed since then—the elimination
of the deficit, the Government’s commitment to a balanced budget or
better each year, and the shift to full accrual accounting. To ensure that
the Government continues to use the most up-to-date forecasting methods,
and to benchmark Canadian practices against the best in the world, the
Government has launched a new review. Dr. Tim O’Neill, Chief Economist
and Executive Vice-President of BMO Financial Group, will lead this
review. As well, the International Monetary Fund (IMF) will be conducting
a comparative review of the budgeting practices and experiences in Canada
with those in other major industrial countries. Recommendations by Dr. O’Neill
will be submitted to the House of Commons Standing Committee on Finance
for their consideration.
Approach to budget planning
- The Government’s approach to budget planning involves a number of
important steps. The first step involves using private sector economic
forecasts for budget-planning purposes.
- The Department of Finance conducts surveys of private sector economic
forecasters. In total, about 20 forecasters are surveyed on a quarterly
basis.
- Each fall the Department of Finance conducts extensive consultations
with an economic advisory group, which includes the chief economists of
Canada’s major chartered banks and leading economic forecasting
organizations as well as representatives from different regions of the
country.
- The second step involves using the average private sector economic forecasts
to develop status quo fiscal projections for the fall Economic and Fiscal
Update.
- Four private sector economic forecasting organizations develop detailed
fiscal projections on a National Accounts basis, based on tax and spending
policies in place at the time of the last budget.
- The four organizations are Global Insight, the University of Toronto,
the Conference Board of Canada and the Centre for Spatial Economics.
- These projections are then translated to a Public Accounts basis by the
Department of Finance and presented in the fall Economic and Fiscal
Update. For the current fiscal year, year-to-date fiscal results are also
used to estimate the potential budgetary outcome.
- The impact of policy decisions since the last budget is then subtracted
from these fiscal projections.
- The third step adjusts the resulting fiscal projections for prudence to
derive the fiscal surpluses for budget-planning purposes.
- An annual Contingency Reserve is set aside to guard against unforeseen
circumstances. If not needed, it is applied to reduce the federal debt
(accumulated deficit). An additional amount for economic prudence is
included to provide further protection against falling back into deficit.
If this amount is not needed, it becomes available to fund new priorities.
- The Contingency Reserve is normally set at $3 billion per year, while
the economic prudence is generally set at $1 billion in the first year of
the five-year planning horizon, rising to $4 billion by year five.
- This prudent approach to budget planning has allowed the federal government
to record seven consecutive budgetary surpluses. In 2002 and 2003 Canada was
the only country among the Group of Seven (G-7) countries to record a
budgetary surplus on a total government basis. The Organisation for Economic
Co-operation and Development projects that Canada will be the only G-7 country
in surplus this year and next.
- Sound fiscal management means more than prudent planning, avoiding
deficits and reducing debt. It also means managing tax dollars responsibly
and delivering cost-effective and efficient government services. With this
in mind, the Government launched the Expenditure Review Committee (ERC) in
December 2003, with a mandate to conduct a fundamental review of all federal
programs and expenditures. In August of this year the Prime Minister
assigned a dual mandate to the ERC. The immediate task is to conduct a
thorough review of government spending to reallocate a cumulative $12
billion from 2005–06 to 2009–10 from lower-priority areas and areas of
inefficient spending to higher-priority areas. These savings are not built
into the status quo projections. To achieve this the ERC is focusing on both
improving government operations and assessing the relevance and
effectiveness of current government programs. The second, and equally
important, part of the ERC’s mandate is to develop a permanent mechanism
to review spending on an ongoing basis as part of the yearly budget cycle.
This will ensure that the review and reallocation processes are an embedded
part of how the federal government does business.
Independent review of economic and fiscal forecasts
- Many of the key elements of the current approach to budget planning were put
in place on the recommendation of an independent review of the Department of
Finance’s approach to economic and fiscal forecasting concluded in 1994.
- Much has changed since then—the elimination of the deficit, the
Government’s commitment to a balanced budget or better each year, and the
shift to full accrual accounting. To ensure that the Government continues to
use the most up-to-date economic and fiscal forecasting methods, and to
benchmark Canadian practices against the best in the world, the Government
of Canada has launched a new review. Dr. Tim O’Neill, Chief Economist and
Executive Vice-President of BMO Financial Group, will lead the review. Dr. O’Neill’s
review will identify and assess the source of differences between the budget
and fall update fiscal projections and the outcome. It will also include an
evaluation of the changes that have been made to the forecasting process
over the last decade.
- As part of this forecasting review, the IMF will be conducting a
comparative analysis of the budgeting practices and experiences in Canada
and other major industrial countries. The IMF will examine how Canada’s
fiscal environment compares to that of other countries, including the
structure of revenues and spending as well as the fiscal rules and targets.
It will compare Canada’s forecasting process to that of other nations and
provide statistical analysis of the quality of Canada’s forecasts as well
as the factors that might affect that quality. The IMF will report its
findings in the context of its annual review of Canada’s economic policy.
Its report will be shared with Dr. O’Neill to inform his review.
- Once this work is completed, Dr. O’Neill’s report will offer specific
recommendations with respect to:
- Improving the accuracy of the economic projections.
- Improving the preparation and accuracy of the fiscal projections.
- Addressing ways of dealing with the uncertainties in economic and
fiscal forecasting.
- The review is expected to be concluded in early 2005. The recommendations
will be referred to the House of Commons Standing Committee on Finance,
which has also been asked to make recommendations relating to the provision
of independent fiscal forecasting advice for parliamentarians, including the
consideration of the recommendations of the external expert.
Economic assumptions underlying the average private sector status quo fiscal
projections
Table 3.1 Average of Private Sector Economic Forecasts: September 2004 Survey
|
|
2004 |
2005 |
2006 |
2007–2009 |
|
|
(per cent) |
Real GDP growth |
3.0 |
3.2 |
3.1 |
2.9 |
GDP inflation |
3.1 |
2.1 |
1.8 |
1.7 |
Nominal GDP growth |
6.2 |
5.3 |
5.0 |
4.7 |
3-month Treasury bill rate |
2.1 |
3.2 |
4.4 |
4.7 |
10-year Government of Canada bond rate |
4.7 |
5.0 |
5.7 |
6.0 |
|
Notes: Based on a survey
conducted by the Department of Finance in mid-September.
The number of respondents declines from 18 in 2004 to 8 in 2009.
The survey results have been adjusted slightly after further consultations
with economists to reflect developments since September. |
- The average private sector forecast of real gross domestic product (GDP)
growth is 3.0 per cent in 2004, 3.2 per cent in 2005 and 3.1 per cent in
2006. The average growth forecast over the 2007 to 2009 period is 2.9 per
cent.
- GDP inflation is expected to be 3.1 per cent in 2004, decline to 2.1
per cent in 2005, and average around 1.7 per cent annually through 2009.
- As a result, nominal GDP growth is expected to average 6.2 per cent in
2004, up significantly from the growth of 4.1 per cent forecast in the
March 2004 budget. However, it is forecast to slow to 5.3 per cent in
2005, up slightly from the March 2004 budget forecast, and 5.0 per cent
in 2006. Over the 2007 to 2009 period, nominal GDP growth is forecast to
average 4.7 per cent. As a result of the higher growth expected for
2004, the level of nominal income—the broadest measure of the
Government’s tax base—is forecast to be higher throughout the
five-year period than forecast in the March 2004 budget.
- Short-term interest rates are expected to average 2.1 per cent in 2004
before rising to 3.2 per cent in 2005 and 4.4 per cent in 2006. Over the
2007 to 2009 period, short-term interest rates are expected to average 4.7
per cent. Private sector forecasters project a gradual rise in longer-term
interest rates between 2004 and 2009 from 4.7 per cent in 2004, to 5.7 per
cent by 2006 and averaging 6.0 per cent over the 2007 to 2009 period.
Planning assumptions used to develop the five-year status quo fiscal
projections
- The four private sector forecasting organizations derived projections of the
major components of the federal budgetary balance on a National Accounts
basis, using the economic forecasts outlined in Table 3.1. These projections
were converted to a Public Accounts basis, on a full accrual basis of
accounting, by the Department of Finance. For details, see Annex 4. The
projections are based on the following assumptions.
- The projections include the impact of the policy initiatives announced
in previous budgets. However, they do not include the impact of the
agreements reached at the recent First Ministers’ Meetings on health,
equalization and Territorial Formula Financing, as well as other policy
decisions taken since the 2004 budget.
- For direct program spending, the private sector projections are
consistent with expenses reported in the 2004 budget for 2004–05 and
2005–06. Starting in 2006–07, the projections assume underlying growth
of population plus inflation, except in circumstances where there are
economic or policy factors (reflecting past budget decisions) that drive
spending.
- In light of the detailed information required to prepare projections of
direct program spending and public debt charges, the private sector
organizations agreed to use National Accounts projections provided by the
Department of Finance. Major transfers to other levels of government were
set to be consistent with the September 16 meeting of First Ministers.
- In Budget 2003 the Government announced that it would consult on a new
permanent employment insurance (EI) rate-setting regime for 2005 and
beyond, based on the following rate-setting principles: premium rates
should be set transparently; premium rates should be set based on
independent expert advice; expected premium revenues should correspond to
expected program costs; premium rate setting should mitigate the impact of
the business cycle; and premium rates should be relatively stable over
time. Consistent with these principles, the four forecasting organizations
were asked to set projected premiums equal to their projected program
costs on an annual basis for 2005 to 2009.
Status quo fiscal projections on a National Accounts basis
Table 3.2 Private Sector Surplus Projections
|
|
2004–05
|
2005–06
|
2006–07
|
2007–08
|
2008–09
|
2009–10 |
|
|
(billions of dollars) |
Global Insight |
10.2 |
11.3 |
13.7 |
17.3 |
22.2 |
27.0 |
University of Toronto |
8.4 |
10.1 |
12.7 |
15.7 |
19.8 |
23.7 |
Conference Board of Canada |
6.9 |
8.8 |
11.2 |
15.0 |
20.0 |
24.8 |
Centre for Spatial Economics |
7.8 |
7.7 |
12.3 |
16.1 |
20.5 |
24.6 |
Average |
8.3 |
9.5 |
12.5 |
16.0 |
20.7 |
25.0 |
Forecast range |
3.3 |
3.6 |
2.6 |
2.3 |
2.4 |
3.3 |
|
- The private sector organizations provided projections of the Government’s
budgetary balance before subtracting amounts for economic prudence and the
Contingency Reserve. The projections do not include the impact of policy
decisions announced since the 2004 budget. In particular, these projections do
not reflect the proposed cost of commitments made at the two recent First
Ministers’ Meetings on health, equalization and Territorial Formula
Financing.
- On average, the four forecasting organizations project a surplus of $8.3
billion in 2004–05, $9.5 billion in 2005–06, $12.5 billion in 2006–07,
rising thereafter to reach $25.0 billion in 2009–10.
- The differences in the projections primarily reflect differing assumptions
about the responsiveness of tax revenues to growth in the various income tax
bases.
- Global Insight projects the highest surpluses on average, primarily
because it expects a higher rate of growth of personal income tax
revenues in 2004–05 relative to the other three forecasting
organizations.
- In 2004–05 and 2005–06, the Centre for Spatial Economics projects
relatively low surpluses, largely because it expects weaker corporate
income tax revenues.
- The Conference Board of Canada and the University of Toronto project
surpluses that are largely in line with average projections, although
the Conference Board projects a relatively low surplus in 2004–05.
- The range in the projections peaks at $3.6 billion in 2005–06. In other
years the difference in projections ranges between $2.3 billion and $3.3
billion. These differences are relatively small in relation to combined
federal revenues and expenses of $360 billion. For example, a 1-per-cent
change in revenues and expenses translates into a difference of $3.6 billion
in the budgetary balance.
Status quo fiscal projections on a Public Accounts basis
Table 3.3 Average Private Sector Surplus Projection—Status Quo (Not Including New Policy Initiatives Since the 2004 Budget)
|
|
Actual |
Projection |
|
2003–04
|
2004–05
|
2005–06
|
2006–07
|
2007–08
|
2008–09
|
2009–10
|
|
|
(billions of dollars) |
National Accounts basis |
|
|
|
|
|
|
|
Average of private
sector surplus projections |
3.7 |
8.3 |
9.5 |
12.5 |
16.0 |
20.7 |
25.0 |
Adjustments for 2004–05 |
|
|
|
|
|
|
|
Personal income tax |
|
3.4 |
3.6 |
3.8 |
4.0 |
4.3 |
4.6 |
Corporate income tax |
|
-2.8 |
-2.8 |
-2.9 |
-2.9 |
-2.9 |
-2.9 |
Goods and services tax |
|
-0.5 |
-0.5 |
-0.5 |
-0.5 |
-0.5 |
-0.6 |
|
|
Total |
|
0.1 |
0.3 |
0.4 |
0.6 |
0.9 |
1.1 |
Adjustments—National |
|
|
|
|
|
|
|
Accounts to Public Accounts |
|
|
|
|
|
|
|
Provisions related to
transfers to other levels
of government |
4.2 |
2.1 |
|
|
|
|
|
Asset sales and
revaluations |
0.3 |
2.2 |
0.1 |
0.1 |
-0.1 |
-0.1 |
-0.2 |
Pension amortization |
-2.0 |
-2.4 |
-2.8 |
-3.2 |
-3.9 |
-4.1 |
-4.1 |
Other |
2.9 |
2.5 |
2.4 |
1.8 |
2.5 |
3.0 |
3.5 |
|
|
Total |
5.4 |
4.4 |
-0.3 |
-1.3 |
-1.5 |
-1.2 |
-0.8 |
Public Accounts basis |
9.1 |
12.8 |
9.5 |
11.6 |
15.2 |
20.3 |
25.3 |
|
- A detailed reconciliation of the National Accounts and Public Accounts
projections by component is provided in Annex 4. Some of the key adjustments
of the translation to a Public Accounts basis are provided in Table 3.3.
- The first step in converting projections from a National Accounts basis
to a Public Accounts basis is to incorporate the most recent fiscal data
available.
- Estimates of government revenues and expenses on a National Accounts
basis normally lag Public Accounts estimates by several months. For
example, the second-quarter National Accounts data reflect fiscal data
through June 2004 and do not incorporate the final 2003–04 results.
- The Department of Finance made three adjustments to the private sector
projections on the basis of the final results for 2003–04 and the tax
collections experience through September 2004.
- First, fiscal data through September 2004 suggest that personal income
tax revenues should increase by about 5 per cent in 2004–05. The private
sector projections were increased by $3.4 billion in 2004–05 to achieve
this growth. In future years this adjustment is assumed to grow in line
with National Accounts personal income tax revenues. As a result, the
growth in personal income tax revenues in future years is consistent with
the economic growth forecast by the private sector forecasters.
- Second, corporate income tax receipts in 2003–04 were affected by a
one-time gain in corporate income tax receipts in the financial services
industry. The one-time gain was related to downward revaluations of
U.S.-dollar-denominated liabilities as a result of the increase in the
value of the Canadian dollar. To reflect the one-time nature of these
gains, the private sector projections were adjusted down by $2.8 billion
in 2004–05, with the adjustment growing in line with National Accounts
corporate income tax revenues over the planning period.
- Third, the average private sector projection of goods and services tax (GST)
revenues was adjusted downward to reflect expected GST revenues over the
remainder of 2004–05. Over the planning period, the adjustment grows in
line with National Accounts GST revenues.
- The remaining adjustments reflect differences in the accounting treatment of
revenues and expenses between the two accounting systems.
- There are differences related to when liabilities are recognized under
the two accounting systems. For example, payments made to provinces
through Canada Health and Social Transfer supplements in the 2004 budget
are reported in 2004–05 in the National Accounts, while they were
recorded in 2003–04 on a Public Accounts basis.
- The net revenue gain from the sale of the Government’s remaining
shares in Petro-Canada is not accounted for in the National Accounts.
These are added to the Public Accounts estimate of the surplus. Similarly,
the impact of foreign exchange revaluations of financial assets is not
part of the budget balance in the National Accounts but is captured in the
Public Accounts.
- The National Accounts projection assumes high and constant capital
transfers from persons to the Government related to the amortization of
surpluses in employee pension accounts. In the Public Accounts this
amortization is much lower and continues to fall over the projection
period.
- Finally, there are a large number of other adjustments, mostly
reflecting the fact that the National Accounts do not yet incorporate the
final 2003–04 Public Accounts information.
- The average of the four forecasting organizations’ fiscal projections,
converted to a Public Accounts basis, but prior to adjusting for new policy
decisions since the 2004 budget, or any allocation for the Contingency Reserve
and economic prudence, results in a fiscal surplus of $12.8 billion in 2004–05,
$9.5 billion in 2005–06, $11.6 billion in 2006–07, $15.2 billion in 2007–08,
$20.3 billion in 2008–09 and $25.3 billion in 2009–10.
- To derive the fiscal balance for planning purposes, decisions made since
the 2004 budget must be deducted from these amounts as well as amounts for
the Contingency Reserve and economic prudence.
Fiscal impact of policy initiatives since the 2004 budget
Table 3.4 Initiatives Announced Since the March 2004 Budget
|
|
2004–05
|
2005–06
|
2006–07
|
2007–08
|
2008–09
|
2009–10
|
Total
|
|
|
(millions of dollars) |
10-Year Plan to Strengthen
Health Care |
|
|
|
|
|
|
|
Federal transfers |
|
|
|
|
|
|
|
Close
short-term
Romanow gap |
1,000 |
2,000 |
|
|
|
|
3,000 |
Addition to Canada Health
Transfer base (home care/
catastrophic drug coverage) |
|
500 |
|
|
|
|
500 |
Escalator (6%
growth
starting
in 2006–07) |
|
|
2,240 |
2,098 |
2,429 |
2,787 |
9,555 |
Wait Times Reduction Fund |
625 |
625 |
1,200 |
1,200 |
600 |
250 |
4,500 |
Medical equipment |
500 |
|
|
|
|
|
500 |
|
|
Total |
2,125 |
3,125 |
3,440 |
3,298 |
3,029 |
3,037 |
18,055 |
Direct federal initiatives: |
|
|
|
|
|
|
|
Aboriginal health |
|
65 |
110 |
175 |
175 |
175 |
700 |
Territorial Health
Access Fund |
|
30 |
30 |
30 |
30 |
30 |
150 |
|
|
Total |
|
95 |
140 |
205 |
205 |
205 |
850 |
Equalization/Territorial
Formula |
|
|
|
|
|
|
|
Financing framework1 |
|
|
|
|
|
|
|
Equalization |
1,321 |
1,390 |
1,772 |
2,166 |
2,575 |
2,998 |
12,222 |
Territorial Formula
Financing |
133 |
200 |
270 |
342 |
417 |
495 |
1,858 |
|
|
Total |
1,454 |
1,590 |
2,042 |
2,508 |
2,992 |
3,493 |
14,080 |
Total First Ministers’
Meetings commitments |
3,579 |
4,810 |
5,622 |
6,011 |
6,226 |
6,735 |
32,985 |
Other initiatives |
|
|
|
|
|
|
|
Additional bovine spongiform
encephalopathy initiatives |
311 |
187 |
24 |
12 |
12 |
|
544 |
Other |
40 |
35 |
73 |
61 |
42 |
42 |
294 |
|
|
Total |
351 |
222 |
97 |
73 |
54 |
42 |
839 |
Total spending decisions
since Budget 2004 |
3,930 |
5,032 |
5,719 |
6,084 |
6,280 |
6,777 |
33,824 |
|
Note: Numbers may
not add due to rounding.
1 Amounts for the Atlantic and Nova Scotia offshore agreements
are not included as they are currently under discussion. |
- The Government is committed to proposed new funding of nearly $75 billion
over 10 years to the provinces and territories in support of health,
equalization and Territorial Formula Financing (subject to the passage of
authorizing legislation).
- At the First Ministers’ Meeting in September 2004, the Government,
all the provincial premiers and all territorial leaders signed the
10-Year Plan to Strengthen Health Care, which will provide $41.3 billion
over 10 years to the provinces and territories. Over the planning
period, this agreement will increase federal funding for health care by
$18.9 billion, including $18.1 billion in the form of transfers to
provinces and territories.
- In October 2004, the Government committed to increasing equalization
and Territorial Formula Financing by more than $33 billion over the next
10 years relative to Budget 2004 levels for 2004–05. Over the planning
period, this agreement will increase transfers to provinces and
territories by $14.1 billion.
- Total commitments arising from the First Ministers’ Meetings amount to
$3.6 billion in 2004–05, rising to $6.7 billion in 2009–10, for a
cumulative total of $33.0 billion over the six-year period.
- Since the March 2004 budget, the Government has announced additional
assistance to help the Canadian cattle and beef industry to offset the
impact of border closures following the discovery of a single cow with
bovine spongiform encephalopathy, as well as other initiatives such as
increased funding for the Canadian Strategy on HIV/AIDS and support for the
auto sector.
Allocation for prudence
![Contingency Reserve and Economic Prudence](/web/20061130011916im_/http://www.fin.gc.ca/ec2004/images/eca3_1e.gif)
- Private sector forecasters strongly advise that the Government maintain the
$3-billion annual Contingency Reserve and set aside additional amounts for
economic prudence. Despite the recent strengthening of the economy, high oil
prices, the rise of the Canadian dollar and the U.S. budgetary deficit pose
risks to the economic outlook, as described in Annex 2.
- The Contingency Reserve is set at $3 billion annually. Economic prudence
is set at $1 billion in the first year of the five-year planning horizon,
rising to $4 billion by year five.
- The Contingency Reserve and economic prudence are used to absorb the
fiscal impact of short- and longer-term economic and other shocks. They
provide a buffer to protect the annual balanced budget target, to avoid
having to undo previous budget initiatives, and to avoid going back into
deficit.
- If the Contingency Reserve is not required, it is applied to reduce the
federal debt (accumulated deficit). If the economic prudence is not
required, it is made available for budget planning.
Average of private sector projections of the fiscal surplus
Table 3.5 Surpluses for Purposes of Fiscal Planning
|
|
2004–05 |
2005–06 |
2006–07 |
2007–08 |
2008–09 |
2009–10 |
|
|
(billions of dollars) |
Average of private
sector surplus projection: status quo |
12.8 |
9.5 |
11.6 |
15.2 |
20.3 |
25.3 |
Initiatives announced since the
March 2004 budget |
3.9 |
5.0 |
5.7 |
6.1 |
6.3 |
6.8 |
Allocation for prudence |
|
|
|
|
|
|
Contingency Reserve |
3.0 |
3.0 |
3.0 |
3.0 |
3.0 |
3.0 |
Economic prudence |
|
1.0 |
2.0 |
3.0 |
3.5 |
4.0 |
|
|
Total |
3.0 |
4.0 |
5.0 |
6.0 |
6.5 |
7.0 |
Surplus for planning purposes |
5.9 |
0.5 |
0.9 |
3.2 |
7.5 |
11.5 |
|
Note: Numbers may not add due to
rounding. |
- Table 3.5 adjusts the status quo projections for initiatives announced
since the 2004 budget and for the Contingency Reserve and economic prudence.
- As a result, the surplus for planning purposes is $5.9 billion in 2004–05,
$0.5 billion in 2005–06, $0.9 billion in 2006–07, $3.2 billion in
2007–08, $7.5 billion in 2008–09 and $11.5 billion in 2009–10.
Over the six-year period, the cumulative surplus for planning purposes
totals $29.5 billion.
- The $5.9-billion surplus in 2004–05 reflects a number of factors.
- The net proceeds from the sale of the Government’s remaining shares
in Petro-Canada increase revenues by $2.6 billion.
- The release of $1 billion in economic prudence set aside in the 2004
budget for the current year, as is normal practice in the fall Economic
and Fiscal Update.
Average of private sector fiscal projections
Table 3.6 Summary Statement of Transactions
|
|
Actual |
Projection |
|
2003–04
|
2004–05
|
2005–06
|
2006–07
|
2007–08
|
2008–09
|
2009–10
|
|
|
(billions of dollars) |
Budgetary transactions |
|
|
|
|
|
|
|
Budgetary revenues |
186.2 |
194.0 |
199.4 |
209.7 |
220.3 |
231.2 |
242.3 |
Total expenses |
|
|
|
|
|
|
|
Program expenses |
-141.4 |
-150.5 |
-159.1 |
-166.8 |
-173.9 |
-180.2 |
-186.7 |
Public debt charges |
-35.8 |
-34.7 |
-35.9 |
-37.0 |
-37.3 |
-37.0 |
-37.1 |
|
|
Total expenses |
-177.1 |
-185.2 |
-194.9 |
-203.8 |
-211.2 |
-217.2 |
-223.8 |
Budgetary surplus |
9.1 |
8.9 |
4.5 |
5.9 |
9.2 |
14.0 |
18.5 |
Prudence |
|
|
|
|
|
|
|
Contingency Reserve |
|
3.0 |
3.0 |
3.0 |
3.0 |
3.0 |
3.0 |
Economic prudence |
|
|
1.0 |
2.0 |
3.0 |
3.5 |
4.0 |
|
|
Total |
|
3.0 |
4.0 |
5.0 |
6.0 |
6.5 |
7.0 |
Planning surplus |
9.1 |
5.9 |
0.5 |
0.9 |
3.2 |
7.5 |
11.5 |
Federal debt |
|
|
|
|
|
|
|
Assuming balanced budget |
501.5 |
501.5 |
501.5 |
501.5 |
501.5 |
501.5 |
501.5 |
Assuming Contingency
Reserve applied to
debt reduction |
501.5 |
498.5 |
495.5 |
492.5 |
489.5 |
486.5 |
483.5 |
Per cent of GDP |
|
|
|
|
|
|
|
Budgetary revenues |
15.3 |
15.0 |
14.6 |
14.7 |
14.7 |
14.7 |
14.8 |
Program expenses |
11.6 |
11.6 |
11.7 |
11.7 |
11.6 |
11.5 |
11.4 |
Public debt charges |
2.9 |
2.7 |
2.6 |
2.6 |
2.5 |
2.4 |
2.3 |
Total expenses |
14.5 |
14.3 |
14.3 |
14.3 |
14.1 |
13.9 |
13.6 |
Planning surplus |
0.7 |
0.5 |
0.0 |
0.1 |
0.2 |
0.5 |
0.7 |
Federal debt |
|
|
|
|
|
|
|
Assuming balanced budget |
41.1 |
38.8 |
36.8 |
35.1 |
33.5 |
32.0 |
30.6 |
Assuming Contingency
Reserve applied to
debt reduction |
41.1 |
38.6 |
36.4 |
34.5 |
32.7 |
31.0 |
29.5 |
|
Note: Numbers may not add due
to rounding. |
- Table 3.6 sets out the details of the fiscal projections to 2009–10.
- The profile of the budget-planning surplus in 2004–05 and 2005–06
reflects the combination of policy decisions related to tax reductions and
spending increases, as well as a one-time gain in 2004–05 from the sale of
the Government’s remaining shares in Petro-Canada.
- Budgetary revenues are expected to increase by $7.9 billion in 2004–05,
and $5.4 billion in 2005–06. Thereafter revenues increase by about $11
billion per year. The increase in revenues reflects strong growth in nominal
income. The revenue gains in 2004–05 and 2005–06 are tempered by the
impact of previously announced tax reductions, the one-time gain from the
sale of the Government’s shares in Petro-Canada and a decline in EI
premium revenues in 2005–06.
- Reflecting primarily the impacts of the February 2003 First Ministers’
Accord on Health Care Renewal and the September and October 2004 First
Ministers’ agreements on health, equalization and Territorial Formula
Financing, program expenses are expected to increase by $9.1 billion in 2004–05,
$8.6 billion in 2005–06, $7.8 billion in 2006–07 and by about $6.5
billion per year thereafter.
- Public debt charges are expected to decline by $1.1 billion in 2004–05,
reflecting the impact of lower short-term interest rates. Thereafter the
increase in short-term interest rates and the refinancing of maturing
long-term bonds at higher interest rates push up public debt charges by $1.2
billion in 2005–06 and a further $1.1 billion in 2006–07.
- The revenue-to-GDP ratio was 15.3 per cent in 2003–04, down
significantly from 17.0 per cent in 2000–01, primarily reflecting the
impact of tax reduction measures. It is expected to decline to 15.0 per cent
in 2004–05, reflecting the incremental impact of tax measures announced in
and since the 2000 budget. The revenue ratio declines further in 2005–06,
reflecting the one-time gain in 2004–05 from the sale of the Government’s
Petro-Canada shares.
- The program expenses-to-GDP ratio was 11.6 per cent in 2003–04, well
below the level of 15.7 per cent in 1993–94. It is projected to remain
stable until 2006–07 before falling slightly in the last three years.
- Public debt charges as a per cent of GDP were 2.9 per cent in 2003–04, a
significant drop from the peak of 6.6 per cent in 1990–91. Public debt
charges are expected to fall to 2.7 per cent of GDP in 2004–05 and to
continue to decline throughout the planning horizon. As a percentage of
revenues, public debt charges are projected to decline to 15.3 per cent in
2009–10 from 19.2 per cent in 2003–04.
- The federal debt-to-GDP ratio (accumulated deficit) stood at 41.1 per cent
in 2003–04, down dramatically from its peak of 68.4 per cent in 1995–96.
Assuming no incremental debt reduction, it would fall to about 30.6 per cent
by 2009–10.
Average private sector projections of budgetary revenues
Table 3.7 Average Private Sector Projections of Budgetary Revenues
|
|
Actual |
Projection |
|
2003–04
|
2004–05
|
2005–06
|
2006–07
|
2007–08
|
2008–09
|
2009–10
|
|
|
(millions of dollars) |
Tax revenues |
|
|
|
|
|
|
|
Income tax |
|
|
|
|
|
|
|
Personal income tax |
84,895 |
89,257 |
95,056 |
101,597 |
108,665 |
116,273 |
124,147 |
Corporate income tax |
27,431 |
28,025 |
28,426 |
29,265 |
29,403 |
29,270 |
29,397 |
Other income tax |
3,142 |
3,525 |
3,543 |
3,641 |
3,732 |
3,801 |
3,847 |
|
|
Total income tax |
115,468 |
120,808 |
127,026 |
134,503 |
141,800 |
149,344 |
157,390 |
Excise taxes/duties |
|
|
|
|
|
|
|
Goods and services tax |
28,286 |
29,498 |
30,773 |
32,237 |
33,991 |
35,747 |
37,324 |
Customs import duties |
2,887 |
2,785 |
2,882 |
3,048 |
3,180 |
3,373 |
3,450 |
Other excise taxes/duties |
10,192 |
10,490 |
10,631 |
10,767 |
10,957 |
11,179 |
11,400 |
|
|
Total excise taxes/duties |
41,365 |
42,773 |
44,285 |
46,052 |
48,128 |
50,299 |
52,174 |
|
|
Total tax revenues |
156,833 |
163,581 |
171,311 |
180,555 |
189,928 |
199,643 |
209,565 |
Employment insurance premium revenues |
17,546 |
17,190 |
16,827 |
17,174 |
17,675 |
18,420 |
19,098 |
Other revenues |
11,829 |
13,275 |
11,289 |
11,959 |
12,721 |
13,140 |
13,642 |
Total budgetary revenues |
186,208 |
194,045 |
199,426 |
209,688 |
220,325 |
231,203 |
242,305 |
Per cent of GDP |
|
|
|
|
|
|
|
Personal income tax |
7.0 |
6.9 |
7.0 |
7.1 |
7.3 |
7.4 |
7.6 |
Corporate income tax |
2.3 |
2.2 |
2.1 |
2.0 |
2.0 |
1.9 |
1.8 |
Goods and services tax |
2.3 |
2.3 |
2.3 |
2.3 |
2.3 |
2.3 |
2.3 |
Other excise |
1.1 |
1.0 |
1.0 |
1.0 |
0.9 |
0.9 |
0.9 |
|
|
Tax revenues |
12.9 |
12.7 |
12.6 |
12.6 |
12.7 |
12.7 |
12.8 |
Employment insurance
premium revenues |
1.4 |
1.3 |
1.2 |
1.2 |
1.2 |
1.2 |
1.2 |
Other revenues |
1.0 |
1.0 |
0.8 |
0.8 |
0.9 |
0.8 |
0.8 |
|
|
Total |
15.3 |
15.0 |
14.6 |
14.7 |
14.7 |
14.7 |
14.8 |
|
Note: Numbers may not add due to
rounding. |
- Budgetary revenues are projected to increase by 4.2 per cent in 2004–05.
This reflects the impact of strong growth in personal income, somewhat
offset by the impact of the implementation of the final phase of the
$100-billion Five-Year Tax Reduction Plan on personal income tax revenues
(via the increase in the income threshold to which the statutory rates
apply) and on corporate income tax revenues (via the 2-point reduction in
the corporate income tax rate from 23 to 21 per cent).
- In 2005–06 budgetary revenues are projected to grow by only 2.8 per
cent, primarily due to decreases in EI premium revenues and other revenues,
the latter reflecting the one-time gain in 2004–05 from the sale of the
Government’s Petro-Canada shares. Beyond 2005–06 the average of the
private sector projections for revenue growth is broadly in line with the
growth in nominal GDP.
- Personal income tax—the largest component of budgetary revenues—falls
slightly as a percentage of GDP in 2004–05, reflecting the final impact of
the $100-billion Five-Year Tax Reduction Plan. Thereafter it increases as a
percentage of GDP, reflecting the progressivity of the income tax system.
- In 2004–05 corporate income tax revenues are expected to increase 2.2
per cent following a 23.4-per-cent, or $5.2-billion, increase in 2003–04.
Much of the increase in 2003–04 resulted from a one-time foreign exchange
gain by the chartered banks, which is not expected to carry forward over the
planning period. Beyond 2004–05 corporate income tax revenues are expected
to grow broadly in line with corporate profits.
- Excise taxes and duties are expected to increase by 3.4 per cent in 2004–05,
after remaining relatively flat in 2003–04. The projection for GST
revenues includes the impact of providing a 100-per-cent rebate to
municipalities for GST paid on their inputs. Excise taxes and duties as a
percentage of GDP remain relatively stable over the outlook.
- Over the projection period, EI premium revenues are assumed to match EI
program costs. The decline in EI premium revenues in 2004-05 and 2005–06
reflects the private sector projected decline in EI benefits.
- Other revenues include revenues from enterprise Crown corporations,
foreign exchange revenues, return on investments and sales of goods and
services. These revenue sources are volatile, owing partly to the impact of
revaluations of exchange rate movements on foreign-denominated
interest-bearing assets and to net gains/losses from enterprise Crown
corporations. In 2004–05 other revenues are projected to increase 12.2 per
cent, or $1.4 billion, which largely reflects a one-time gain from the sale
of the Government’s Petro-Canada shares, offset somewhat by losses
realized on revaluations of U.S.-dollar-denominated assets.
Revenue ratio
![Revenue Ratio (as a per cent of GDP)](/web/20061130011916im_/http://www.fin.gc.ca/ec2004/images/eca3_2e.gif)
- A more revealing picture of movements in tax revenue can be obtained by
examining the "revenue ratio"—total federal revenues in relation
to the total income in the economy (or GDP).
- This ratio primarily reflects the impact of policy decisions and economic
developments. The ratio declines during economic downturns and tends to
increase during recoveries, reflecting the progressive nature of the tax
system and the cyclical nature of corporate profits.
- The decrease in the ratio in 2001–02 was largely attributable to the
implementation of the $100-billion Five-Year Tax Reduction Plan. Thereafter
the decline in the ratio reflects both the incremental impact of the
Five-Year Tax Reduction Plan and the tax reductions announced in the
February 2003 budget.
- The revenue ratio is projected to decline from 17.0 per cent in 2000–01
to 14.6 per cent in 2005–06, remaining in the 14.7 to 14.8 per cent range
over rest of the planning period.
- As mentioned above, the decline in the revenue ratio in 2004–05 and 2005–06
reflects the implementation of the final phase of the $100-billion Five-Year
Tax Reduction Plan in January 2004, lower EI premium revenues in 2005–06,
and the one-time boost to revenues in 2004–05 from the sale of the
Government’s shares in Petro-Canada.
Average private sector projections of program expenses
Table 3.8 Average Private Sector Projections of Program Expenses
|
|
Actual |
Projection |
|
2003–04
|
2004–05
|
2005–06
|
2006–07
|
2007–08
|
2008–09
|
2009–10
|
|
|
(millions of dollars) |
Major transfers to persons |
|
|
|
|
|
|
|
Elderly benefits |
26,902 |
27,802 |
28,893 |
30,011 |
31,222 |
32,596 |
34,046 |
Employment insurance
benefits |
15,058 |
15,012 |
15,201 |
15,689 |
16,182 |
16,988 |
17,650 |
|
|
Total |
41,960 |
42,814 |
44,094 |
45,700 |
47,404 |
49,584 |
51,696 |
Major transfers to other levels of government |
|
|
|
|
|
|
|
Federal transfers in
support of health and
other social programs |
22,741 |
24,175 |
27,850 |
29,840 |
31,348 |
32,279 |
33,587 |
Fiscal arrangements |
9,351 |
12,206 |
12,321 |
12,737 |
13,163 |
13,606 |
14,054 |
Alternative Payments for
Standing Programs |
-2,700 |
-2,668 |
-2,765 |
-2,928 |
-3,110 |
-3,295 |
-3,536 |
|
|
Total |
29,392 |
33,713 |
37,406 |
39,649 |
41,401 |
42,590 |
44,105 |
Other program expenses |
70,003 |
73,961 |
77,552 |
81,485 |
85,077 |
88,017 |
90,920 |
Total program expenses |
141,355 |
150,488 |
159,052 |
166,834 |
173,882 |
180,191 |
186,721 |
Per cent of GDP |
|
|
|
|
|
|
|
Major transfers to persons |
|
|
|
|
|
|
|
Elderly benefits |
2.2 |
2.2 |
2.1 |
2.1 |
2.1 |
2.1 |
2.1 |
Employment insurance
benefits |
1.2 |
1.2 |
1.1 |
1.1 |
1.1 |
1.1 |
1.1 |
|
|
Total |
3.4 |
3.3 |
3.2 |
3.2 |
3.2 |
3.2 |
3.2 |
Major transfers to other levels of government |
|
|
|
|
|
|
|
Federal transfers in
support of health and
other social programs |
1.9 |
1.9 |
2.0 |
2.1 |
2.1 |
2.1 |
2.1 |
Fiscal arrangements |
0.8 |
0.9 |
0.9 |
0.9 |
0.9 |
0.9 |
0.9 |
Alternative Payments for Standing Programs |
-0.2 |
-0.2 |
-0.2 |
-0.2 |
-0.2 |
-0.2 |
-0.2 |
|
|
Total |
2.4 |
2.6 |
2.7 |
2.8 |
2.8 |
2.7 |
2.7 |
Direct program expenses |
5.7 |
5.7 |
5.7 |
5.7 |
5.7 |
5.6 |
5.5 |
Total program expenses |
11.6 |
11.6 |
11.7 |
11.7 |
11.6 |
11.5 |
11.4 |
|
Note: Numbers may not add due to
rounding. |
- Table 3.8 provides projections of program expenses that include the cost
of policy decisions announced since the 2004 budget, as set out in Table
3.4.
- Program expenses are divided into three major components: major transfers
to persons, major transfers to other levels of government and other program
expenses—the latter include subsidies and other transfers, expenses of
Crown corporations, and defence and all other departmental operating
expenses.
- Program expenses are expected to increase by $9.1 billion, or 6.5 per
cent, in 2004–05, with about one-half of this increase due to higher
transfers to other levels of government, reflecting the impact of the recent
First Ministers’ agreements on health, equalization and Territorial
Formula Financing as well as the February 2003 First Ministers’ Accord on
Health Care Renewal. Thereafter, based on the average of the projections
provided by the four forecasting organizations, total program expenses are
estimated to increase broadly in line with the increase in nominal GDP
before falling off in the last three years of the planning period.
- Major transfers to persons, consisting of elderly and EI benefits, are
expected to increase by $0.9 billion in 2004–05. The growth in elderly
benefits of $0.9 billion, or 3.3 per cent, is largely determined by the
growth in the elderly population and average benefits, which are fully
indexed to quarterly changes in consumer prices. EI benefits are essentially
unchanged. Beyond 2004–05, major transfers to persons increase in line
with nominal GDP, reflecting growth in both elderly and EI benefits.
- Major transfers to other levels of government in 2004–05 are $4.3 billion (14.7 per cent) higher than in 2003–04, and are projected to grow
by another $3.7 billion (11.0 per cent) in 2005–06. Growth in the outer
years averages around 4 per cent per year. Transfers increase from $29.4
billion in 2003–04 to $44.1 billion in 2009–10. This is a 50-per-cent
increase, almost double the growth in the other components of program
spending over this period.
- Other program expenses are projected to grow by $4.0 billion, or 5.7 per
cent, in 2004–05. In 2005–06, other program expenses are projected to
grow by $3.6 billion, or 4.9 per cent. Over the remainder of the period,
growth in spending is consistent with population growth plus inflation
(except for components of program expenses that are clearly linked with
economic factors).
- In December 2003 the Prime Minister launched the Expenditure Review
Committee (ERC) to undertake an extensive and rigorous review of all
government expenditures to ensure that government programs are better
aligned with the priorities of Canadians and that they are delivered in the
most cost-effective way.
- The ERC will identify total cumulative savings of $12 billion by 2009-10
from existing programs, which will be reallocated to fund new priorities. As
in the March 2004 budget, these savings are not built into the status quo
projections.
Program expense-to-GDP ratio
![Program Expense-to-GDP Ratio](/web/20061130011916im_/http://www.fin.gc.ca/ec2004/images/eca3_3e.gif)
- Program expenses as a per cent of GDP are 11.6 per cent in 2004–05,
unchanged from 2003–04.
- The ratio has declined significantly from the levels of the 1980s and
early 1990s. This is primarily attributable to the expenditure reduction
measures implemented in the 1995 and 1996 budgets, which structurally
lowered program expenses. In light of the recent First Ministers’
agreements on health, equalization and Territorial Formula Financing, this
ratio is expected to remain relatively stable over the projection period.
Financial management and accountability
- In the March 2004 budget, the Government announced five significant new
initiatives to strengthen financial management, oversight and accountability
in departments and agencies. These initiatives are being carried out under the
leadership of the President of the Treasury Board.
- On May 6, 2004, the Government announced the appointment of Mr.
Charles-Antoine St-Jean as the new Comptroller General for Canada. The
Comptroller General will provide overall leadership in ensuring that
departments comply with Treasury Board policies for strong expenditure
control and rigorous stewardship of public funds. The Comptroller General
will review and sign off on policy proposals to ensure that expenditure
plans are sound.
- Re-establishing the Office of the Comptroller General is a key part of the
Government’s effort to strengthen financial oversight across the federal
government. Some of the initiatives the Comptroller General has chosen to
undertake include:
- Providing leadership to ensure appropriate frameworks, and policies
and guidance on controls, are available across the federal public
service.
- Promoting transparency and openness of financial activity, including
systems for accounting, asset management and procurement.
- Building financial management and audit capacity to nurture and manage
professional development of the financial management and internal audit
communities, including establishing accreditation and certification
standards and advising on the modules of the public service learning
curriculum.
- The Government is working on the appointment of professionally accredited
comptrollers to sign off on all new spending initiatives in every government
department.
- The Government is also planning to introduce modern, real-time information
systems to track all spending and provide appropriate tools for effective
scrutiny and decision making. As an example, a new Expenditure Management
Information System will integrate government-wide information and provide a
common database for all departments, agencies and the Treasury Board
Secretariat. This will enable on-line sharing of expenditure management and
performance information. Information on Government of Canada contracts for
goods and services over $10,000, and on the travel and hospitality expenses
of political staff and senior Government of Canada officials, is now
available on-line.
- Finally, the Government has undertaken a review of governance rules for
Crown corporations. The results of the review will be released shortly.
- Table of Contents - Previous - Next -
|