An Assessment of the Government’s Fiscal Outlook

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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.

Forecast comparison

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.

Comparison of outlooks for the budgetary balance ($ billions)
2015-16 2016-17 2017-18 2018-19 2019-20 2020-21
PBO 1.2 -3.0 -4.7 -5.0 -4.6 -4.2
Finance Canada -3.0 -3.9 -2.4 -1.4 1.7 6.6
Difference -4.2 -0.9 2.3 3.6 6.3 10.8
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).

Forecast revisions

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.

Related posts

  • 10 November 2015

    PBO projects a sluggish recovery for the Canadian economy as it adjusts to lower commodity prices and rebalances—shifting away from consumer spending and housing toward exports and business investment. Based on Budget 2015 measures only, PBO projects annual deficits averaging $4.3 billion (0.2 per cent of GDP) over 2016-17 to 2020-21. Federal debt is projected to fall from 31 per cent of GDP in 2014-15 to 26.2 per cent by 2020-21.

    2015 2016 2017 2018 2019 2020
    -2016 -2017 -2018 -2019 -2020 -2021
    Budgetary balance ($ billions) 1.2 -3.0 -4.7 -5.0 -4.6 -4.2
    Federal debt ratio (% of GDP) 30.8 29.9 28.8 27.9 27.1 26.2

  • 28 April 2015

    House of Commons Standing Committee on Finance (April 2015) - Statement by Jean-Denis Fréchette (PBO) to the House of Commons Standing Committee on Finance including post-Budget 2015 revisions to forecast