pbo economic and fiscal outlook - june 2011

8/6/2019 PBO Economic and Fiscal Outlook - June 2011

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PBOEconomicandFiscalOutlookOttawa,Canada

June1,2011

www.parl.gc.ca/pbodpb


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PBOEconomicandFiscalOutlook

i

Preparedby: RussellBarnett,JeffDanforthandChrisMatier*

__________________________________________________________________________________________

*TheauthorswouldliketothankMostafaAskariforhishelpfulcomments. Anyerrorsoromissions

aretheresponsibilityoftheauthors.

TheParliamentofCanadaActmandatestheParliamentaryBudgetOfficer(PBO)toprovideindependentanalysistotheSenateandHouseofCommons

onthestateofthenationsfinances,governmentestimatesandtrendsinthe

nationaleconomy. ThefollowingpresentsPBOsstatusquoeconomicand

fiscaloutlookbasedondatareceivedupto26May2011.


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SummaryToenhancePBOsindependentanalysisonthestateofthenationsfinancesandtrendsinthe

nationaleconomyandgiventhedownsideriskstotheaverageprivatesectoroutlook,PBOis

providingforthefirsttimeitsownmediumtermeconomicoutlook.1 Previously,PBOhadused

theaverageforecastsfromFinanceCanadassurveyofprivatesectoreconomiststoprepareitsfiscal

projections. PBOseconomicoutlookincorporatesitsjudgementofthebalanceofrisksandasa

resultitcanbeviewedasabalancedprojection,whichmeansthathigherorloweroutcomesare

equallylikely.

PBOEconomicOutlookandRiskAssessmentTheworldeconomycontinuestorecoverfromtheworstglobalrecessionsincetheSecondWorld

War. Manyadvancedeconomiesremainwellbelowtheirproductivecapacitiesandgrowthcontinues

toberestrainedbyongoingbalancesheetadjustments. Atthesametime,globalgrowthis

increasingly

being

driven

by

emerging

market

economies.

In

this

context,

commodity

prices

have

recoveredstronglysinceearly2009,butstillremainwellbelowprerecessionpeaks. Recent

economicdatashowthattheCanadianeconomyexpandedby3.9percent(annualrate)inthefirst

quarterof2011. Despitethisstronggrowth,theunemploymentrateremainselevatedandaverage

weeklyhoursworkedremainsbelowprerecessionlevels(Slide1). PBOcontinuestoestimatethat

theCanadianeconomyisoperatingbelowitsfullcapacity(Slide2).

Lookingahead,PBOprojectsthatsluggishU.S.growthcombinedwiththeCanadiandollarremaining

aboveparitywillsubdueneartermgrowthintheCanadianeconomyandrestrainthedeclineinthe

unemploymentrate. PBOprojectsrealgrossdomesticproduct(GDP)togrowby2.2and2.3percent

in2012and2013respectivelyandaverage2.8percentoverthe20142016period(Slide3)whilethe

unemploymentrateremainsabove7percentuntil2016(Slide4). Reflectingthesluggishrecovery,

PBOprojectsthattheoutputgapwillclosegradually,restrainingthepaceofinterestratehikesbythe

BankofCanada.

RelativetoPBOseconomicprojection,theaverageprivatesectorforecastofrealGDPgrowth

presentedintheMarch2011budgetsuggestsamorerapidrecovery(Slide5). However,PBOjudges

thatthebalanceofriskstotheprivatesectoroutlookcontinuestobetiltedtothedownside(Slide6).

First,PBObelievesthereisdownsiderisktotheaverageU.S.outlookrelatedtoongoingbalance

sheetadjustments,persistentlyhighunemploymentlevelsandtheimpendingfiscalconsolidation.

Second,therecentstrengthintheCanadiandollarhasoutpacedthereboundincommodityprices,

which

likely

reflects

portfolio

shifts

and

broader

based

U.S.

dollar

depreciation.

PBO

projects

that

thesefactorswillpersistthroughthemediumterm,resultinginahigherexchangeratethanprivate

sectoreconomists,onaverage,anticipate. Third,exceptionallylowinterestrateshavehelpedfuel

thereboundinconsumerspendingbuthavealsohelpedpushhouseholdindebtednesstohistoric

1TheMay2011PBOeconomicandfiscaloutlookisbasedondatareceiveduptoMay26,2011andthereforedoesnot

includetherecentlyreleasedMarch2011FiscalMonitorandthefirstquarter2011NationalIncomeandExpenditure

Accounts. However,incorporatingthesedatawouldnotsignificantlyimpactPBOsoveralleconomicandfiscaloutlook.


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iii

highs. PBOexpectsthatthecombinationofhighhouseholddebtandrisinginterestrateswillrestrain

growthbyalargeramountintheneartermthanappearstobefactoredinbyprivatesector

economists(onaverage). Lastly,althoughtherearealsorisksrelatedtosovereigndebtissuesin

Europe,PBOhasnotexplicitlyincorporatedthebalanceoftheserisksintoitseconomicprojection.

Thatsaid,PBObelievesthattheriskstoitseconomicoutlookareroughlybalanced.

ToillustratetheuncertaintyandbalanceofriskstotheaverageprivatesectorforecastsofrealGDP

andshortterminterestrates,PBOpresentsfanchartsbasedontheirhistoricalforecastperformance

(Slides7and8).

PBOStatusQuoFiscalOutlookIncontrasttoitspreviouspracticeofpreparingfiscalprojections,PBOisnowbasingitsfiscaloutlook

onitsowneconomicprojection. Further,PBOscurrentfiscaloutlookispresentedonastatusquo

basisi.e.,excludingnewmeasuresannouncedintheGovernmentsMarch2011budget,whichwas

tabledintheHouseofCommonsbutnotadoptedpriortothedissolutionofParliamentonMarch26,

2011.

Astheeconomyrecovers,PBOprojectsgrowthinbudgetaryrevenuestooutpacegrowthinnominal

GDPthebroadestmeasureoftheGovernmentstaxbase(Slide9). Thisreflectsacyclicalrebound

inrevenuesaswellasincreasesinEmploymentInsurance(EI)premiumratesthatarerequiredto

balancetheEIprogramovertime. PBOprojectsEIpremiumratestorisebythemaximumallowable

amountfrom$1.73(per$100ofinsurableearnings)in2010to$2.18in2015. However,theimpact

ofthispolicyactiononbudgetaryrevenuesisdampenedbythelegislatedreductionsinthegeneral

corporateincometaxrateto16.5percentonJanuary1,2011andto15percentonJanuary1,2012.

PBOprojectstheGovernmentsprogramexpensestogrowat2percentannually,onaverage,from

201011to201516(Slide10). However,projectedgrowthacrossindividualprogramcategories

variessignificantly. Forexample,PBOprojectselderlybenefitstoincreaseby5.2percentannually

whiletransferpaymentsadministeredbydepartmentsforfarmincomesupport,naturalresource

royaltypaymentsandstudentfinancialassistance(whichareincludedindirectprogramexpenses)

areprojectedtodeclineby4.4percentannually,onaverage,overthesameperiod. Thedeclinein

transferpaymentsreflects,inpart,theunwindingoftheEconomicActionPlanstimulusmeasures.

PBOprojectspublicdebtchargestoincreasefrom$30.9billionin201011to$39.3billionin201516

asinterestratesrisefromcurrentlevelsandbudgetarydeficitsaddtothestockofinterestbearing

debt. However,theunwindingoftheInsuredMortgagePurchaseProgram(IMPP)partiallyoffsets

this

increase

in

the

stock

of

interest

bearing

debt.

Sincebudgetaryrevenuesareincreasingatafasterpacethantotalexpenses(programexpensesplus

publicdebtcharges)thebudgetarybalanceimprovessteadilyoverthemediumtermfromadeficitof

$39.5billion(2.4percentofGDP)in201011toadeficitof$7.3billion(0.4percentofGDP)in2015

16(Slide11). PBOprojectsbudgetarydeficitsthataremoderatelylarger,onaverage,thanFinance

CanadasprojectionofthestatusquobudgetarybalancepresentedintheMarch2011budget. Ona

cumulativebasis,PBOprojectsbudgetarydeficitstotalling$128.2billionovertheperiod201011to


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iv

201516,whichissignificantlyhigherthanthe$93.6billionprojectedbyFinanceCanadaoverthe

sameperiod. ThisdiscrepancyprimarilyreflectsPBOshigherprojectedoperatingexpenses.

StatusQuoBudgetaryBalanceProjections2010 2011 2012 2013 2014 2015

2011 2012 2013 2014 2015 2016

PBOMay2011 39.5 26.1 22.8 19.3 13.3 7.3

FinanceCanadaMarch2011 40.4 27.8 19.0 9.7 0.5 3.8

($billions)

BasedonPBOsmeasureoftheeconomicuncertaintysurroundingtheprivatesectorforecast,

FinanceCanadasfiscalsensitivities,andgiventhebalanceofrisks,PBOestimatesthatonastatus

quobasisthelikelihoodofrealizingbudgetarybalanceorbetterin201415isapproximately20per

centandapproximately35percentin201516(Slide12).

Theprojectedreductioninthebudgetarydeficitoverthemediumtermlargelyreflectsacyclical

improvementintheeconomy. PBOestimatesthattheGovernmentsstructuraldeficitwilldecline

graduallyto$5.9billionin201516(Slide13)or0.3percentofpotentialincome,whichissignificantly

smallerthanthestructuraldeficitsinthe1980sandearly1990s(Slide14). PBOsestimateofthe

structuraldeficitdoesnotmeanthattheGovernmentsbudgetwillnotreturntobalanceorthatits

fiscalstructureisnotsustainable. Rather,itsuggeststhatpolicyactionstoincreaserevenuesand/or

reducespendingwouldberequiredtoensurethatthebudgetisbalancedoncetheeconomyreturns

toitspotential. Further,toassesswhetheragovernmentsfiscalstructureissustainablerequires

lookingbeyondprojectionsofbudgetdeficitsanddebtoveramediumtermhorizontotakeinto

accounttheeconomicandfiscalimplicationsofpopulationageing. PBOwillbeprovidinganupdate

ofitsassessmentoftheGovernmentsfinancesoverthelongterminitsforthcomingFiscal

Sustainability

Report.


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UnemploymentRateandAverageHoursWorked

hoursperweek percent

9.035.0

6.5

7.0

7.5

8.0

8.5

34.0

34.2

34.4

34.6

34.8

Source: OfficeofthePBO;StatisticsCanada Slide1

5.0

5.5

6.0

33.2

33.4

33.6

.

2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1

Averagehoursworked(leftaxis)

Unemployment rate(rightaxis)

RealandPotentialGDP

billionsofchained(2002)dollars

1,3951,395

1,295

1,320

1,345

1,370

1,295

1,320

1,345

1,370 Actual

PBOpotential2.3%

2011Q1

Source: OfficeofthePBO;StatisticsCanada Slide2

1,220

1,245

1,270

1,220

1,245

1,270

2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1


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OutputGap

percentofpotentialGDP

662010

0

2

4

0

2

4BasedonFinanceCanadaMarch2011survey

Source: OfficeofthePBO;StatisticsCanada;FinanceCanada Slide5

6

4

6

4

1976 1981 1986 1991 1996 2001 2006 2011 2016

PBOMay2011projection(balancedrisks)

PBOAssessmentofKeyRiskstothePrivateSectorEconomicOutlook

External

weakerU.S.realGDPgrowthreflectingbalancesheetrepair,

persistent y ig unemp oymentan isca conso i ation

sovereigndebtconcernsinEuropecouldrestrainglobalgrowthand

putupwardpressureonglobalinterestrates

Currencyandcommodityprices

strongerCanadiandollarreflectinghighercommoditypricesbut

alsoportfolio shiftsandbroaderbasedU.S.dollarweakness

Domestic highlevelofhouseholddebtfurtherrestrainingconsumerspending

andresidentialinvestment

Slide6

Overalldownsiderisksuggestsamoresluggisheconomicrecovery

PBOsprojectionattemptstoadjustforthebalanceofrisks


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RealGDPForecasts

billionsofchained(2002)dollars

1,7001,700

1,400

1,500

1,600

1,400

1,500

1,600

70percentconfidence

50percentconfidence

March2011privatesectorsurvey


1,200

1,300

1,200

1,300

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016


3MonthTreasuryBillRateForecasts

percent

77

2

3

4

5

6

2

3

4

5

6

70percentconfidence

50percentconfidence

March2011privatesectorsurvey


1

0

1

1

0

1

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016



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PBOStatusQuoRevenueProjection

billionsofdollars,excludingMarch2011budgetmeasures

2010 2011 2012 2013 2014 20152011 2012 2013 2014 2015 2016

Incometaxes

Personalincometax 113.5 127.6 134.3 141.6 149.7 158.7

Corporateincometax 29.9 28.3 27.5 29.1 30.4 32.0

Nonresidentincometax 5.3 6.2 6.4 6.8 7.3 7.7

Totalincometax 148.7 162.1 168.2 177.5 187.4 198.4

Excisetaxes/duties

GoodsandServices Tax 28.2 29.3 30.7 31.9 33.3 35.0

Customimportduties 3.5 3.7 3.8 4.0 4.1 4.3

Otherexcisetaxes/duties 10.8 10.9 10.9 10.9 10.7 10.8

Source: OfficeofthePBO

Totalexcisetaxes/duties 42.5 43.9 45.4 46.8 48.2 50.1

EIpremiumrevenues 17.6 19.2 21.2 23.4 25.9 27.9

Otherrevenues 27.2 28.1 29.3 30.1 29.8 31.0

Totalbudgetaryrevenues 236.1 253.3 264.2 277.9 291.3 307.4

Slide9

PBOStatusQuoExpenditureProjection


2010 2011 2012 2013 2014 20152011 2012 2013 2014 2015 2016

Majortransferstopersons

Elderlybenefits 35.6 37.7 39.9 42.2 44.5 47.0

EmploymentInsurancebenefits 20.2 19.8 20.5 21.1 21.4 21.5

Children'sbenefits 12.7 13.1 13.5 13.7 13.8 13.9

Total 68.5 70.6 74.0 77.0 79.7 82.4

MajortransferstoOLG 53.1 55.4 57.0 59.8 62.3 65.2

Directprogramexpenses

Transferpayments 41.3 35.7 33.1 31.8 30.3 30.5

Source: OfficeofthePBO Slide10

. . . . . .

Otheroperatingexpenses 22.1 23.1 24.5 25.5 25.8 26.7

Operatingexpensessubjecttofreeze 55.2 57.1 59.0 61.0 63.0 65.1

Total 123.1 120.7 121.6 123.5 124.5 127.8

Publicdebtcharges 30.9 32.8 34.4 37.0 38.0 39.3

Totalexpenses 275.6 279.4 287.0 297.2 304.5 314.8


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PBOStatusQuoFiscalProjection Summary


2010 2011 2012 2013 2014 20152011 2012 2013 2014 2015 2016

Budgetaryrevenues 236.1 253.3 264.2 277.9 291.3 307.4

Programexpenses 244.7 246.6 252.5 260.2 266.5 275.4


Totalexpenses 275.6 279.4 287.0 297.2 304.5 314.8

Budgetarybalance 39.5 26.1 22.8 19.3 13.3 7.3

Federaldebt 555.5 581.6 604.3 623.6 636.9 644.2

PercentofGDP

Budgetaryrevenues 14.6 14.7 14.7 14.8 14.9 15.0

Source: OfficeofthePBO

Programexpenses 15.1 14.3 14.1 13.9 13.6 13.4


Budgetarybalance 2.4 1.5 1.3 1.0 0.7 0.4

Federaldebt 34.3 33.8 33.7 33.3 32.5 31.4

Slide11

StatusQuoBudgetaryBalanceOutcomesGivenEconomicUncertainty

billionsofdollars

3030

90percentconfidence 35%chanceofbalance

20

10

0

10

20

20

10

0

10

2070percentconfidence

50percentconfidence

or e er n

20%chanceofbalance

orbetterin201415

5% chanceofbalance

orbetterin201314

Source: OfficeofthePBO;FinanceCanada Slide12

60

50

40

30

60

50

40

30

200708 200809 200910 201011 201112 201213 201314 201415 201516



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StructuralandCyclicalBalanceEstimates

billionsofdollars

2009 2010 2011 2012 2013 2014 20152010 2011

Budgetarybalance 55.6 39.5 26.1 22.8 19.3 13.3 7.3

Structural balance 20.3 15.5 18.7 14.9 11.3 7.4 5.9

Cyclical balance 35.3 24.0 7.3 7.9 8.0 5.9 1.5


StructuralBalance

percentofpotentialincome

22

4

2

0

4

2

0

200910


8

6

8

6

197677 198283 198889 199495 200001 200607 201213

pbo economic and fiscal outlook - june 2011

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