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An Assessment of the Government’s Fiscal Outlook.PDF
PBO’s assessment is that the Government’s outlook for the economy and federal budget over the medium term is optimistic. Based on forecast comparisons and forecast revisions, PBO believes that there is downside risk to the Government’s medium-term outlook for the budgetary balance in the fiscal years 2019-20 and 2020-21.
On balance, the outlooks for the budgetary balance between 2015-16 and 2018-19 are similar. Finance Canada projects budget deficits averaging $2.7 billion a year while PBO projects budget deficits averaging $2.9 billion.
However, for the fiscal years 2019-20 and 2020-21, the Government projects budget surpluses of $1.7 billion and $6.6 billion respectively, while PBO projects deficits of $4.6 billion and $4.2 billion. Relative to gross domestic product (GDP), the difference in outlooks amounts to 0.3 percentage points in 2019-20 and 0.4 percentage points in 2020-21.
Sources: Finance Canada and Parliamentary Budget Officer.
The difference in budgetary balance projections over 2017-18 to 2020-21 stems from the Government’s more optimistic outlook for revenues from personal and corporate income taxes (PIT and CIT), as well as the Goods and Services Tax (GST).
Finance Canada’s downward revision to its planning assumption for nominal gross domestic product (GDP) from Budget 2015 averages $40 billion a year (-1.8 per cent) over 2016 to 2019. Even so, relative to Budget 2015 the department shows only a modest downward revision to its outlook for revenues from PIT, CIT and GST, averaging $1.1 billion (-0.4 per cent) a year over 2016-17 to 2019-20. This reflects Finance Canada’s assumption that higher-than-expected revenues observed in 2014-15 and 2015-16 (year to date) carry forward over the entire forecast horizon.
In contrast, PBO does not assume that higher-than-expected revenues carry forward over the entire forecast.
Finance Canada’s forecast adjustment
To account for the possibility of lower oil prices or weaker-than-expected global growth in its Update, the Government adjusted downward the private sector forecast of nominal GDP from Finance Canada’s October 2015 survey.
In PBO’s view, the Government’s forecast adjustment would only balance the downside risk to the private sector outlook for oil prices. PBO believes that downside risk remains to the Government’s planning assumption for nominal GDP. This reflects a relatively optimistic private sector forecast of real GDP growth over 2018 to 2020.
A note of clarification: PBO’s fiscal outlook provided to the House of Commons Standing Committee on Finance in April 2015 was based on the fiscal measures and fiscal structure from Budget 2015. Our April outlook indicated—based on our economic outlook at the time—that this structure would generate relatively small deficits over the medium term.
In November we downgraded our fiscal projection on the basis of a weaker projected economic outlook. We now believe that the current fiscal structure will lead to a deficit in 2016-17 and larger deficits over the rest of the forecast period relative to PBO’s April forecast.