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Economic and Fiscal Outlook – October 2017.pdf
The Canadian economy advanced at a robust pace in the first half of 2017. However, beginning in the second half, we project that growth in consumer spending will moderate and residential investment will continue to decline as borrowing rates rise and disposable income gains diminish.
We project real GDP growth to slow from 3.1 per cent in 2017 to 1.9 per cent in 2018 and then to 1.8 per cent in 2019 before averaging 1.7 per cent annually over 2020 to 2022. Real GDP growth over 2017 to 2022 is slightly higher (0.1 percentage points, on average) compared to our April outlook.
GDP inflation (a measure of economy-wide price increases) is projected to slow from 2.4 per cent in 2017 to 1.8 per cent in 2018 and then average 2.0 per cent annually. Nominal GDP—the broadest single measure of the tax base—is projected to grow at 4.1 per cent annually, on average, over 2017 to 2022, which is unchanged from our April outlook.
Compared to our April outlook, the projected level of nominal GDP is, on average, only $2 billion (0.1 per cent) lower per year over 2017 to 2022, with downward revisions to GDP price levels offsetting upward revisions to real GDP.
We assume that the Bank of Canada will maintain its policy interest rate at 1.0 per cent until January 2018. As core inflation continues to firm through 2018, we project that the Bank of Canada will gradually increase its policy rate by 25 basis points each quarter until the policy rate is returned to its (nominal) neutral level of 3.0 per cent by the end of 2019.
PBO’s economic outlook reflects the view that possible upside and downside outcomes are, broadly speaking, equally likely. In terms of downside risks, we maintain that the most important risk is weaker business investment. In terms of upside risks, we maintain that the most important risk is stronger household spending.
To illustrate the uncertainty surrounding our nominal GDP outlook, we have constructed confidence intervals around our projection. Relative to our baseline nominal GDP growth projection, 30, 50 and 70 per cent confidence intervals are consistent with average nominal GDP growth of ±0.4, ±0.7 and ±1.1 percentage points respectively.
The budgetary deficit in 2016-17 was $17.8 billion (0.9 per cent of GDP). This is $3.0 billion lower than we projected in April, reflecting lower-than-expected direct program expenses due, in part, to an estimated $1.8 billion in unspent infrastructure funding.
For the current fiscal year, 2017-18, we expect that the budgetary balance will show a deficit of $20.2 billion (0.9 per cent of GDP). We project that budgetary deficits will decline gradually, falling to $9.9 billion (0.4 per cent of GDP) in 2022-23. Lower direct program spending accounts for most of the reduction in the deficit over the projection horizon.
We are projecting budgetary deficits that are $2.2 billion lower, on average, over 2017-18 to 2021-22 compared to our April outlook.
Our revenue outlook is marginally higher. Corporate income tax (CIT) revenues have remained strong through an extended period of weak corporate profitability, so we have adjusted upward our medium-term projection for CIT.
Our spending projection is marginally lower compared to April. This reflects the Government’s medium-term plan for lower direct program spending. We also project fewer beneficiaries and lower average payments for elderly benefits and Employment Insurance payments over the medium-term horizon compared to April.
In Budget 2016, the Government committed to returning to balanced budgets and to reducing the federal debt to-GDP ratio to 31.0 per cent in 2020-21. Under current tax and spending plans, we project that the federal debt-to-GDP ratio will be 29.0 per cent in 2020-21, 2.0 percentage points of GDP below the target. As such, the Government has flexibility within its current fiscal plan to reach its medium-term debt-to-GDP target.
Given the possible scenarios surrounding our economic outlook, and on a status quo basis, it is unlikely that the budget will be balanced, or in a surplus position, over the medium term. We estimate that in 2019-20 there is, approximately, a 10 per cent chance that the budget will be balanced or in a surplus position. The probability of budgetary balance/surplus rises to 15 per cent in 2020-21 and to 30 per cent in 2022-23.
However, it is likely that the federal debt-to-GDP ratio will fall below its target level of 31.0 per cent over the period 2017-18 to 2022 23. We estimate that in 2020-21 there is, approximately, a 75 per cent chance that the federal debt-to-GDP ratio will be below its target.