Economic and Fiscal Outlook October 2016

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Economic and Fiscal Outlook October 2016.pdf

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EFO_OCT2016_Figures.xlsx 

Summary
This report responds to the 4 February 2016 Standing Committee on Finance motion. It incorporates data available up to and including 14 October 2016. Our outlook reflects the 20 June 2016 agreement in principle on the Canada Pension Plan (CPP) enhancement; however, the report does not incorporate the Government’s housing market measures or its proposed approach to pricing carbon pollution that were announced on 3 October 2016.

PBO projects that growth in real gross domestic product (GDP) will rebound from 1.2 per cent in 2016 to 2.3 per cent in 2017 and 2.2 per cent in 2018 as federal fiscal measures and monetary stimulus boost domestic demand. Economic growth is then projected to shift lower over 2019 to 2021 as growth in business investment and exports moderates.

With the recovery in commodity prices, GDP inflation (a measure of economy-wide price increases) is projected to rise from 0.5 per cent in 2016 to 2.5 per cent in 2017 and then average 2.0 per cent annually over the remainder of the projection horizon. Nominal GDP—the broadest single measure of the tax base—is projected to grow at 3.7 per cent annually, on average, over 2016 to 2021.

Economic outlook

%

2016

2017

2018

2019-2021

Real GDP growth

1.2

2.3

2.2

1.7

GDP inflation

0.5

2.5

2.1

2.0

Nominal GDP ($ billions)

2,017

2,117

2,208

2,379

On balance, the outlook for the Canadian economy is unchanged from our April report, as weaker real GDP growth in the near term is offset by stronger growth over the medium term due to increased subnational government spending, as well as additional monetary stimulus and a lower term premium. Over 2016 to 2021, we project real GDP growth to average 1.8 per cent annually, the same average growth rate projected in our April report.

Average annual growth in nominal GDP of 3.7 per cent is only marginally lower than the 3.8 per cent we projected in April. This revision reflects weaker GDP inflation in 2016. Adjusted for historical revisions, the level of nominal GDP is, on average, $15 billion (0.7 per cent) lower per year over 2016 to 2021 compared to April.

Relative to the Government’s planning assumption for nominal GDP in Budget 2016 our projection is, on average, $26 billion (1.2 per cent) higher per year over 2016 to 2020. This difference has narrowed somewhat since PBO’s April projection, which was $40 billion (1.8 per cent) higher per year, on average, over 2016 to 2020.

PBO has revised down its long-term assumptions for 3-month treasury bill and 10-year government bond rates. The downward adjustments reflect the April 2016 change to the Bank of Canada’s estimate of the neutral rate, as well as a lower assumed term premium on the 10-year government bond rate. These revised assumptions contribute to downward revisions to our interest rate outlook relative to our April report.

Our fiscal outlook is largely unchanged from April. We continue to project that the deficit will decline over the medium term, falling from $22.4 billion in 2016-17 to $9.4 billion by 2021-22. Compared to our April report, we are now projecting slightly larger deficits in 2016-17 and 2017-18 but smaller deficits thereafter.

Fiscal outlook

Forecast

$ billions

2015-2016

2016-2017

2017-2018

2018-2019

2019-2020

2020-2021

2021-2022

Budgetary revenues

295.5

292.8

304.7

317.2

331.6

346.4

362.0

Program expenses

270.8

291.3

305.2

308.9

314.7

324.2

336.4

Public debt charges

25.6

24.0

24.5

26.4

29.9

32.9

35.0

Total expenses

296.4

315.2

329.7

335.3

344.6

357.0

371.4

Budgetary balance

-1.0

-22.4

-24.9

-18.2

-13.0

-10.6

-9.4

Federal debt (% of GDP)

31.1

31.7

31.3

30.9

30.3

29.7

29.0

For revenues, weak income tax receipts in 2016-17 should bounce back over the medium term as the economy recovers and corporate profits rebound from temporary declines in the spring of 2016. Downward revisions to our outlook for interest rates result in lower spending on public debt charges, as the Government continues to refinance debt at even lower rates than we previously projected throughout our medium term horizon.

PBO’s outlook for the budgetary deficit over 2016-17 to 2020-21 is $4.8 billion lower, on average, than Budget 2016. This difference is roughly in line with the Government’s forecast adjustment, which removed the equivalent of $6 billion in revenues in each year of its planning horizon.

In Budget 2016, the Government committed to reducing the federal debt to-GDP ratio to a lower level over a five-year period ending in 2020-21. This translates into a fiscal anchor of 31 per cent debt-to-GDP (or lower) in 2020-21. Under current tax and spending plans, we project that the federal debt-to-GDP ratio will be 29.7 per cent in 2020-21. Based on PBO’s economic and fiscal outlook, the Government is on track to reach its debt-to-GDP target two years ahead of schedule. As such, the Government has flexibility within its current fiscal plan to reach its medium-term debt-to-GDP target.

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

  • 19 April 2016

    This report responds to the 4 February 2016 Standing Committee on Finance motion. It incorporates data available up to and including 12 April 2016.