Economic and Fiscal Outlook – November 2019

Consistent with the Parliamentary Budget Officer’s legislated mandate, this report provides PBO’s economic and fiscal outlook.

PBO has downgraded its outlook for growth in the Canadian economy in the second half of 2019 reflecting, in part, increased trade tensions and related uncertainty. Real GDP growth is projected to be 1.7 per cent in 2020 and 1.6 per cent in 2021. This is, respectively, 0.3 percentage points and 0.2 percentage points lower than we projected in our June 2019 election proposal costing (EPC) baseline. The downward revision stems from weaker export performance, reduced contributions from inventory investment and lower provincial government spending in Alberta.

Summary Table 1

 

Projection

%

2018

2019

2020

2021

2022-2024

Real GDP growth

1.9

1.5

1.7

1.6

1.6

Consumer price inflation

2.2

1.9

1.9

2.0

2.0

Unemployment rate

5.8

5.7

5.7

5.6

5.4

Bank of Canada policy rate

1.75

1.75

2.25

2.50

2.50

Sources: Statistics Canada and Parliamentary Budget Officer.
Note: The Bank of Canada policy rate is presented on an end-of-period basis.

As the economy continues to operate close to its potential GDP and inflation remains close to its 2.0 per cent target, we expect the Bank of Canada to maintain its policy rate at its current level of 1.75 per cent until the second half of 2020. Thereafter, as trade tensions and related uncertainty dissipate, we project that the Bank of Canada will gradually increase its policy rate by 25‑basis point increments until it reaches a neutral rate of 2.50 per cent.

We have revised down our assumption for Canada’s neutral rate to 2.50 per cent from 2.75 per cent in our EPC baseline. In addition, we have revised down our long-term assumption for the term premium on 10-year Government of Canada bonds (relative to 3-month treasury bills) from 105 basis points to 80 basis points. Consequently, 10-year government bond rates are projected to ultimately settle at 3.25 per cent and 3-month treasury bills at 2.45 per cent.

PBO’s economic outlook reflects the view that possible upside and downside outcomes are, broadly speaking, equally likely. Although we have adjusted our outlook to reflect increased trade tensions and trade policy uncertainty, we continue to judge that the most important downside risk is weaker export performance due to a further escalation of trade disputes and protectionist policies.

In terms of upside risks, we judge that the most important upside risk is stronger-than-expected government spending. Based on status quo fiscal policy we project total government expenditure (that is, combined federal, provincial, territorial and local government current and capital spending) to decrease from 24.7 per cent of GDP in 2019 to 23.5 per cent of GDP in 2024, which is 1.2 percentage points below its long-term (1981 to 2018) historical average. As a share of the economy, this would lower government expenditure to levels last seen in 2008.

The fiscal outlook presented in this report is based on PBO’s current economic outlook. It incorporates policy measures announced in Budget 2019, as well as policy actions up to 11 September 2019. PBO is providing this outlook as an updated independent status quo planning assumption for the start of the 43rd Parliament. The fiscal outlook does not include commitments made by any party during the 2019 general election.

Final results for the 2018-19 fiscal year indicated that the budgetary deficit was $14.0 billion—essentially identical to our estimate in the EPC baseline. Revenues, program spending and public debt charges were each broadly in line with our June estimates.

Compared to our EPC baseline, we are projecting budgetary deficits that are $1.6 billion higher, on average, over 2019-20 to 2024-25 before any new policy decisions. Lower tax revenues and higher operating expenses more than offset the savings on debt charges resulting from downward revisions to our outlook for interest rates.

Summary Table 2

 

Projection

$ billions

2018-2019

2019-2020

2020-2021

2021-2022

2022-2023

2023-2024

2024-2025

Budgetary revenues

332.2

340.4

350.1

364.4

378.9

393.3

408.2

Program expenses

322.9

337.7

349.0

357.1

364.9

374.4

385.7

Public debt charges

23.3

23.8

24.4

26.3

28.6

31.4

33.6

Total expenses

346.2

361.5

373.4

383.4

393.5

405.8

419.3

Budgetary balance

-14.0

-21.1

-23.3

-19.0

-14.6

-12.5

-11.1

Federal debt

685.5

706.9

730.1

749.2

763.8

776.3

787.4

Federal debt (% of GDP)

30.9

30.8

30.8

30.5

30.0

29.4

28.7

Sources: Statistics Canada, Finance Canada and Parliamentary Budget Officer.

For the current fiscal year, on a status quo basis, we estimate that the budgetary deficit would rise to $21.1 billion, primarily due to a slowdown in corporate income tax revenues and spending increases on transfer payments. Thereafter, we project that the budgetary deficit would peak at $23.3 billion in 2020-21 before declining to $11.1 billion in 2024-25. We project the federal debt-to-GDP ratio would decline over the medium term, falling to 28.7 per cent in 2024-25.

The Government for the 43rd Parliament has not yet established fiscal anchors. Previously, the Government set anchors for the budgetary balance and the federal debt-to-GDP ratio. PBO will monitor the Government’s progress toward achieving new fiscal objectives once they are announced.

Without further policy actions, and based on the uncertainty surrounding our economic outlook, we estimate that on a status quo basis, there is currently about a 30 per cent chance that the budget will be balanced or in surplus at the end of our medium-term outlook in 2024‑25. In addition, we estimate that in 2024-25, there is approximately a 70 per cent chance that the federal debt-to-GDP ratio will be below its 2018-19 level of 30.9 per cent.

However, based on commitments made during the electoral campaign, it is expected that budgetary deficits over the medium term will be higher than our status quo projection, reducing the probability of balancing the budget by 2024-25, as well as reducing the probability that the debt-to-GDP ratio will be lower than 30.9 per cent in that year.

Data

News Release

Parliamentary Budget Officer downgrades economic and fiscal outlook ↗

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