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Economic and Fiscal Outlook – April 2018.pdf
Growth in the Canadian economy slowed sharply in the second half of 2017 following robust advances in the first half of the year. Beginning in 2018, we project that growth in exports will rebound from a weak second half of 2017 as consumer spending decelerates and residential investment contracts.
We project real GDP to advance by 1.9 per cent in 2018 and in 2019 before slowing to average growth of 1.5 per cent annually over 2020 to 2022. This reflects in part the impact of the gradual increase in the carbon pricing levy. Over the medium term, we expect the Canadian economy to rely less on consumer spending and the housing sector as business investment and exports make a greater contribution to economic growth.
We assume that the Bank of Canada will maintain its policy interest rate at 1.25 per cent until May, with policy rate increases of 25 basis points each quarter until the policy rate is returned to its (nominal) neutral level of 3.0 per cent by the first quarter of 2020.
For 2017-18, we expect that the budgetary balance will show a deficit of $18.8 billion, which is $1.4 billion lower than our October projection. Our downward revision mainly reflects a lower estimate for direct program expenses, due in part to infrastructure spending delays.
We project that budgetary deficits will decline gradually, falling to $10.6 billion (0.4 per cent of GDP) in 2022-23. Over the medium term, we project that revenues, especially income taxes, will grow faster than nominal GDP while growth in the Government’s operating expenses remains restrained. This restraint reflects projected declines in future benefits for federal employees, as well as—based on the Government’s current hiring plans—modest decreases in the number of federal personnel through 2019 20.
We estimate that there is approximately a 5 per cent chance that the budget will be balanced or in surplus in 2020-21, and a 75 per cent chance that the federal debt-to-GDP ratio will be below the Government’s anchor of 30.9 per cent.
PBO has independently estimated the fiscal impact of 10 revenue and spending measures announced since the FES and included in Budget 2018. Altogether, PBO’s costing of new measures is $1.4 billion (7 per cent) higher than the Government’s estimates provided in Budget 2018.
For 2017-18, our projected deficit is $0.6 billion lower than the Government’s estimate in Budget 2018. Beyond 2017-18, PBO is projecting budgetary deficits that are $1.4 billion higher per year, on average, compared to Budget 2018. This difference largely reflects our higher forecast for public debt charges, direct program expenses and children’s benefits.