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Consistent with its mandate, the PBO committed to publish a 10-year economic and fiscal baseline projection prior to the start of the pre-election period. The baseline projection and its underlying assumptions will be used to prepare financial cost estimates during the election proposal costing (EPC) period. Political parties may use these assumptions and projections to prepare their own cost estimates.
The baseline projection incorporates Budget 2019 measures. In addition, we have incorporated new policy actions that were not reflected in Budget 2019 projections.
To assist political parties and the public with estimating the potential revenue impacts that would arise from adjusting various federal tax rates, credits, and brackets for the current calendar year, we have updated our online Ready Reckoner tool to incorporate the EPC baseline.[i] In addition, we are providing an online tool[ii] that political parties and the public can use to estimate the potential impact of policy measures on public debt charges.[iii]
The EPC baseline projection presented below is an update of the baseline presented in PBO’s April 2019 Economic and Fiscal Outlook.[iv] The EPC baseline incorporates data and information up to and including 10 June 2019. The following highlights key changes to the baseline projection.
EPC economic baseline projection
The economic baseline is largely unchanged from our April outlook.
Although first quarter real GDP growth was weaker than we anticipated at the time of our April report, we are projecting slightly stronger economic growth from net exports over the medium term that offsets this weakness. GDP inflation in the first quarter was higher than we expected, however, we have revised down modestly our near-term outlook for GDP inflation to reflect lower commodity prices.
Consequently, our projection of nominal GDP growth (that is, real GDP growth and GDP inflation combined) is 0.1 percentage points lower per year, on average, over 2019 to 2023 compared to our April outlook. The level of nominal GDP—the single broadest measure of the Government’s tax base—is $7 billion (0.3 per cent) lower per year, on average, over 2019 to 2029.[v]
We have also revised slightly our near-term assumptions for monetary policy in the U.S. and Canada. Consistent with recent communications by the U.S. Federal Reserve and the Bank of Canada, we have delayed the resumption of policy interest rate increases by one quarter. In our April report, we assumed that gradual increases in policy rates would begin in October 2019.
EPC fiscal baseline projection
On balance, the fiscal baseline projection for the budgetary balance is marginally lower compared to our April outlook.
Based on monthly financial results through March 2019, we expect that the budgetary deficit in 2018-19 will be $14.0 billion (0.6 per cent of GDP), which is $1.8 billion lower than we anticipated in April. This downward revision is primarily due to stronger-than-expected income tax revenues. However, over the medium term, revenues are projected to be largely unchanged from April as lower nominal GDP offsets the underlying strength in income tax revenues.[vi]
We project higher program expenses due to new policy actions announced after Budget 2019 (such as the Hibernia Dividend Backed Annuity Agreement with Newfoundland and Labrador announced on 1 April 2019) and from revisions to estimates of policy measures in Budget 2019. Public debt charges are projected to be lower, reflecting the revised trajectory for interest rates.
Over the period 2019-20 to 2028-29, the budgetary balance is projected to be $0.7 billion lower per year, on average, compared to our April outlook. The profile of the federal debt-to-GDP ratio is 0.2 percentage points higher, on average, due to larger budgetary deficits and lower nominal GDP.
The detailed fiscal baseline projection is provided in an online spreadsheet.
Summary of Budget 2019 measures and new policy actions
PBO is also providing a line-item costing of Budget 2019 measures based on Finance Canada and PBO estimates, should political parties choose to adjust the baseline for their fiscal planning purposes. Table 3 below presents a high-level summary of Budget 2019 measures as well as new policy actions that were not reflected in Budget 2019 projections.
The detailed line-item costing of Budget 2019 measures and new policy actions is provided in an online spreadsheet.
[iii]. For example, the baseline fiscal projection could be adjusted by removing certain Budget 2019 measures, which would have a direct impact on the fiscal room available for planning purposes. However, there would also be a secondary impact on public debt charges that could increase or decrease (depending on the measure) the amount of fiscal room. Our online tool can be used to provide an estimate of this secondary impact.
[v]. The difference in projected nominal GDP levels is adjusted for historical revisions.
[vi]. To assess contributions of revisions to the budgetary balance, we control for flow-through changes to revenue and expense categories. For example, revisions to our projection of revenues fuel charge proceeds flow through one-for-one to expenses of fuel charge proceeds returned.