GLOBAL ECONOMICS
| FISCAL PULSE March 22, 2017
Canada’s Federal 2017–18 Budget
NO SURPRISES, NO MARKET IMPACT ANTICIPATED
Stronger economic growth drives better underlying budgetary results through
fiscal year 2017-18 (FY18) once the re-introduced adjustment for risk of $3 billion
is taken into account. Slightly higher spending leads to marginally larger deficits
relative to the Fall Update following that. Overall, the cumulative deficit from
FY17 to FY22 is $1.7 billion less negative than the Fall Update forecast.
CONTACTS
Jean-François Perrault, SVP & Chief Economist
416.866.4214
Scotiabank Economics
[email protected]
Mary Webb
416.866.4202
Scotiabank Economics
[email protected]
Debt-to-GDP rises from 31.0% as of March 2016 to 31.4% this March 31, and
remains at this level through FY19. Only in FY20 does the debt burden begin
to edge lower, dropping below 31% by March 2022. The government has not
committed to a specific target for the debt-to-GDP ratio nor will it seek to
achieve a balanced budget within its mandate. In his comments, Minister
Morneau gave no indication that the government would consider a debt target
or a balanced-budget objective in future Budgets.
Federal Budget Balances ...
20
Potential developments in the United States loom large, though the Budget
continues to focus on delivering the Liberal government’s electoral platform
with no notable surprises. The government has delayed its full review of tax
expenditures, likely owing to the impending tax reform in the United States.
The government is clearly considering significant changes to the taxation of
private corporations, pointing to dividends and capital gains in particular.
These changes are expected in two or three months. No mention is made of
broader changes to the taxation of capital gains. The most significant
changes on the tax side are an increase in EI premium rates from $1.63 per
$100 of insurable earning in 2017 to $1.68 in 2018, the elimination of the tax
credit on public transportation, and a further crackdown on tax evasion.
Balances, LHS
$ billions
%
0
4
0
% of GDP,
RHS
-20
-4
-40
-8
-60
FY90 95
-12
00
05
10
15
20r
The government now estimates the fiscal impact of the measures
announced in the previous Budget will add 0.4 percentage points to growth in
2017 and provides no guidance on impact in 2018 and beyond. This is lower
than what we and the Bank of Canada have built into our forecast. Given the
stronger-than-expected growth in 2017 relative to earlier forecasts, we do not
think this will have a material impact on the Bank of Canada’s policy stance.
800
...and the Accumulated Deficit
80
% of GDP, RHS
600
60
400
40
Key areas of focus in the Budget include innovation, with the government
targeting six areas of particular focus: digital, clean technology, agri-food,
advanced manufacturing, bio-sciences, and clean resources. Additional attention
is directed towards the development of skills and training, early learning and
childcare, and the national housing strategy, while also providing more details on
how infrastructure spending will be directed. No new information is provided on
the Canadian Infrastructure Bank but $300 million is devoted to the new
Development Finance Institution under Export Development Canada.
200
20
Accumulated
Deficit, LHS
%
$ billions
0
FY90 95
00
05
10
15
0
20r
Source for charts: Finance Canada, nominal
GDP forecast: Scotiabank Economics.
On housing, nothing specifically is done in relation to the Toronto or
Vancouver housing markets, but $11.2 billion is set aside over 11 years in
support of a National Housing Strategy that will be largely focused on
affordable housing. Importantly, funding is provided to CMHC and Statistics
Canada to improve the quality of housing statistics nationwide.
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GLOBAL ECONOMICS
| FISCAL PULSE March 22, 2017
FURTHER PROGRAM SPENDING DETAILS
The program spending path outlined in Budget 2017 is very similar to the Fall Statement forecast. The surge in program expenditures remains
concentrated in FY16–FY18, with annual increases averaging 6.4%.
Program spending is still expected to climb 5% in FY18 following an
estimated 7.5% jump this fiscal year. For the following four years to
FY22, the planned rise in program spending is just 2.6%, representing,
for now, a modest decline on a real per capita basis.
New initiatives in Budget 2017 climb from $1.2 billion in FY17 to $8.2
billion by FY22. Over the six years to FY22, they total $31.8 billion.
However, freed-up departmental resources and projected revenues are
expected to sum to about $27 billion, trimming the net fiscal impact of
the Budget measures over the six years to just $4.8 billion.
Program Spending Growth
18
annual % change
14
10
Budget 2016
6
Budget 2017
Historical
2
-2
FY07
09
11
13
15
17r
19b
21b
Source: Finance Canada.
Early learning and child care receives significant funding of $7 billion over ten years, adding to last year’s $0.5 billion injection.
This is one of several measures intended to encourage broader labour force participation going forward.
On skills and training, a number of measures are proposed including an increased allocation for the Labour Market Development
Agreements. As a result, Employment Insurance (EI) premiums, now set according to a seven-year break-even mechanism, are
expected to rise to cover these expanded benefits.
Infrastructure outlays for FY17 in this Budget are $0.6 billion below the plans outlined in Budget 2016 and the Fall Statement.
In FY18, outlays on the Budget 2016 infrastructure are expected to be $275 million lower, with the catch-up from both years now
expected in FY19.
Reprofiling of the Fall Statement infrastructure investment also loads additional spending into FY19 and particularly FY20.
Thus, an extended path is now anticipated for this stimulus. Pursuing a trade and transportation focus, a National Trade Corridors
Fund will be created with $2 billion over 11 years targeted at relieving congestion at the Vancouver and Montreal ports and
improving the rail and highway corridors around Canada’s cities. Attention to Montreal reflects the increased trade anticipated from
CETA.
The Canadian Infrastructure Bank is still expected to be operational by late this Fall and enabling legislation is promised shortly.
As indicated prior to the Budget, the issue of possibly privatizing some or all of Canada’s largest airports or ports is still under
consideration.
REVENUE GROWTH PICKS UP
Total revenues, after an estimated 1.2% decline in FY17, are expected to rebound by 4.3% in FY18, propelled by tax revenues,
and specifically the personal income tax. From FY19 through FY22, solid increases averaging 4.0% annually are forecast.
Adding to the support provided by a relatively healthy economic outlook are multiple initiatives to make Canada’s tax system
more efficient and oriented towards the middle class. The government’s tax expenditure review to eliminate low-impact measures
has been extended, but in this Budget, this effort increases revenues by $0.2 billion in FY18, and a cumulative $1.3 billion over the
next five years, with the end of the Public Transit Credit dominating the revenue change.
Closing tax loopholes raises revenues by an average $60 million annually, while reducing tax evasion and tax avoidance is
expected to raise receipts by $1.9 billion through FY22, after a further investment of over $500 million over five years to step up
enforcement. In addition, federal fees going forward will be indexed to inflation.
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GLOBAL ECONOMICS
| FISCAL PULSE March 22, 2017
Tax increases this year include higher excise taxes on alcohol and tobacco (with the manufacturers’ surtax on tobacco products
removed) and adjustments to ensure that ride-sharing services operate under the same GST/HST framework as taxis. For the oil &
gas sector, expenses related to discovery wells must now be deducted gradually over time as an expense on an enduring asset
and are only immediately deductible if the well is deemed unsuccessful. Tax relief for families amounts to just $0.3 billion, focused
on an overhaul of the caregiver credit.
The Budget indicates that a number of legislative amendments to enhance the resiliency of the financial system will be
forthcoming. These include amendments that will seek to strengthen the bank resolution regime, modernize and enhance the
Canadian deposit insurance framework, and strengthen the oversight of financial market infrastructures.
Comparing Federal Deficit Projections
$ billions
1(a) Budget 2016: Deficits
(b) Deficits Ex $6bn Risk Adjustment
2.
Fall Statement*:Deficits (No Risk Adjustment)
3(a) Budget 2017*: Deficits
(b) Deficits Ex $3bn Risk Adjustment
Change**: Fall Statement vs Budget 2016 (2 vs 1b)
_____
Budget 2017 vs Fall Statement (3b vs 2)
Budget 2017 vs Budget 2016 (3b vs 2b)
FY16
-5.4
FY17r
-29.4
-23.4
FY18r
-29.0
-23.0
FY19r
-22.8
-16.8
FY20r
-17.7
-11.7
FY21r
-14.3
-8.3
FY22f
n.a.
n.a.
FY17-FY21r
-113.2
-83.2
FY17-FY22r
n.a.
n.a.
-1.0
-25.1
-27.8
-25.9
-19.3
-16.8
-14.6
-114.9
-129.5
-1.0
-23.0
-23.0
-28.5
-25.5
-27.4
-24.4
-23.4
-20.4
-21.7
-18.7
-18.8
-15.8
-101.0
-112.0
-142.8
-127.8
4.5
0
4.5
-1.7
2.1
0.4
-4.8
2.3
-2.5
-9.2
1.5
-7.6
-7.6
-1.1
-8.7
-8.5
-1.9
-10.4
n.a.
-1.2
n.a.
-31.8
2.9
-28.8
n.a.
1.7
n.a.
* Final FY16 deficit in Fall Statement and 2017 Budget. ** A negative difference indicates a wider deficit. Source: Finance Canada.
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GLOBAL ECONOMICS
| FISCAL PULSE March 22, 2017
OTTAWA’S FISCAL PLAN
Federal Budget Economic Assumptions
annual % change except where noted
$ billions except where noted
Scotiabank Economics, March 7, 2017
2016 2017f 2018f
Canada: Real GDP
1.4
2.2
2.0
Nominal GDP
2.0
4.6
4.0
CPI - All Items
1.4
2.1
2.0
Unemployment Rate*,%
7.0
6.8
6.7
3-month T-bills*,%
10-year Bonds*,%
Cdn Dollar*, US¢
0.5
1.3
76
0.5
1.8
73
0.9
2.2
75.5
U.S.: Real GDP
WTI Oil Price*, US$/bbl
1.6
43
2.3
58
2.4
61
Finance Canada March 2017 Budget**
2016 2017f 2018f
2019-21f
Canada: Real GDP
1.3
1.9
2.0
1.7
Nominal GDP
2.0
4.1
4.0
3.7
CPI - All Items
1.5
2.0
2.0
1.9
Unemployment Rate*,%
7.0
6.9
6.7
6.6
3-month T-bills*,%
10-year Bonds*,%
Cdn Dollar*, US¢
U.S.: Real GDP
WTI Oil Price*, US$/bbl
_______
0.5
0.6
0.9
1.8
1.3
75.5
1.6
43
1.8
74.5
2.3
54
2.3
76.1
2.3
59
3.0
79.3
1.9
60
*Annual averages. ** Based on private-sector survey, Dec. 2016.
Source: Finance Canada, Statistics Canada, BEA, Scotiabank
Economics.
20
Ottawa's
Updated
Fiscal
Ottawa’s
Updated
Fiscal
Plan
Plan
% of GDP
18
Revenue
16
14
12
Program Spending
10
FY90 95
00
05
10
15 20r
Source: Finance Canada; Statistics Canada;
nominal GDP forecast: Scotiabank Economics.
Federal Budget Arithmetic
FY16
Final
144.9
41.4
33.0
242.7
23.1
29.7
295.5
FY17
Rev.
143.2
42.5
33.7
243.0
22.3
26.7
292.1
FY18
Bud
152.1
43.6
35.1
254.3
21.2
29.1
304.7
FY19
Bud
157.8
44.4
36.4
262.5
22.4
30.6
315.6
FY22*
Bud
178.6
50.1
41.0
295.5
25.0
35.5
356.0
Elderly Benefits
Employ. Insurance (EI) Benefits
Children's Benefits
Major Transfers to Persons
Transfers to Other Levels of Gov't
Direct Program Spending
Total Program Spending
Debt Service
Total Expenditure
Reserve
45.5
19.4
18.0
82.9
65.9
122.1
270.8
25.6
296.4
48.3
21.0
21.9
91.2
68.7
130.9
290.9
24.3
315.1
51.1
22.0
23.0
96.1
70.2
139.1
305.4
24.7
330.2
3.0
53.9
22.0
22.8
98.8
72.5
142.4
313.7
26.3
340.0
3.0
63.7
23.7
23.2
110.6
80.1
147.8
338.5
33.3
371.8
3.0
Budget Balance
Non-Budgetary Transactions
Fin.Source(+) / Requirement(-)
Accumulated Deficit
Net Debt
-1.0
-18.5
-19.5
616.0
693.8
-23.0
2.0
-21.0
637.1
716.3
-28.5
-10.2
-38.7
665.5
745.9
-27.4
-6.5
-33.9
692.9
774.4
-18.8
-13.4
-32.3
756.9
839.8
Elderly Benefits
Employ. Insurance (EI) Benefits
Children's Benefits
Major Transfers to Persons
Transfers to Other Levels of Gov't
Direct Program Spending
Total Program Spending
Total Expenditure
6.7
5.1
5.1
6.2
2.2
4.6
3.1
7.6
26.0
8.4
4.3
6.8
6.7
5.7
-1.2
2.5
2.3
0.1
-3.3
-1.2
6.2
8.1
21.5
10.0
4.3
7.2
7.4
6.3
6.2
2.6
4.2
4.7
-5.0
4.3
5.8
4.8
5.0
5.4
2.2
6.2
5.0
4.8
3.7
1.8
3.7
3.2
5.7
3.6
5.5
0.0
-0.9
2.8
3.3
2.4
2.7
3.0
4.2
4.1
4.0
4.0
3.7
4.1
5.7
2.5
0.6
3.8
3.4
1.2
2.6
3.0
Memo Items, %
Tax Revenue / GDP
Total Revenue / GDP
12.2
14.9
12.0
14.4
12.0
14.4
11.9
14.3
12.0
14.4
13.6
0.0
31.0
34.9
8.7
14.3
-1.1
31.4
35.3
8.3
14.4
-1.3
31.4
35.2
8.1
14.2
-1.2
31.4
35.1
8.3
13.7
-0.8
30.7
34.0
9.4
Personal Income Tax (PIT)
Corporate Income Tax (CIT)
Goods & Services Tax (GST)
Total Tax Revenue
Employ. Insurance (EI) Premiums
Other Revenue
Total Revenue
Annual Change, %
Personal Income Tax (PIT)
Corporate Income Tax (CIT)
Goods & Services Tax (GST)
Total Tax Revenue
EI Premiums
Total Revenue
Total Program Spending / GDP
Budget Balance / GDP
Accumulated Deficit / GDP
Net Debt / GDP
Debt Service / Revenue
__________
*Average annual growth for FY20-FY22. Source: Finance Canada; Statistics Canada; nominal
GDP forecasts: Scotiabank Economics.
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GLOBAL ECONOMICS
| FISCAL PULSE March 22, 2017
Appendix: 2017–18 Debt Management Strategy
The $21 billion FY17 financial requirement is significantly lower than
expected due to the narrower deficit and non-budgetary transactions that net
to a small $2.0 billion source of funds rather than a significant requirement.
FY18 financial requirements surge to $39 billion, and subsequently average
just over $30 billion annually through FY22.
Parliamentary approval of the government’s borrowing program will be
restored with legislation, aiming to increase the transparency and
accountability of this process.
Federal Financial
Source (+) / Requirement (-)
25
0
-25
-50
-75
-100
$ billions
00
Gross bond issuance, after a $42 billion jump to $135 billion in FY17, is
expected to climb a further $7 billion to $142 billion in FY18.
The net increase in Canadian dollar bonds outstanding rises from $16
billion in FY16 to an estimated $33 billion in FY17 and $39 billion in FY18. As
of March 2018, bonds outstanding are expected to total $575 billion.
200
Over the mid-term, the average term to maturity of the domestic market
debt is projected to remain relatively stable at roughly 5.5–6.5 years.
08
12
16
20r
Federal Treasury
Bills Outstanding
$ billions
160
120
The debt strategy for FY18 will continue to be tilted towards short- and
medium-term bond issuance (2-, 3- and 5-year). This is intended to meet the
market’s liquidity needs for core existing sectors, while providing stable, lowcost funding.
The number of planned bond auctions for FY18 is 16 for two-year bonds,
eight for three- and five-year issues, five for ten-year bonds and four for Real
Return Bonds. For the 30-year bond in response to feedback, issuance is now
allocated over three auctions instead of two.
04
80
40
0
FY00
04
08
12
16
Gross Federal Bond Issuance*
160
$ billions
120
80
40
Ultra-long bond issues may be issued on a ‘tactical basis’. Similar to last
year’s Strategy, they will only be issued if market conditions are favourable
and they are believed to add to the government’s objective of stable, low-cost
funding.
0
FY00
04
08
12
16
* Includes Real Return Bonds. Source for
top three charts: Finance Canada.
General Government Net Debt
To accommodate the higher bond issuance in FY17–FY18, Treasury bills
outstanding are expected to end March 2017 lower by $8 billion at $130
billion, and similarly finish FY18 close to that level.
90
75
% of GDP
G7
US
Germany
60
The sales of new Canada Savings Bonds will be discontinued in 2017 given
the significant administrative costs of the program, its declining popularity, and
the many alternative investment vehicles available for consumers.
45
30
Canada
15
0
-15
Australia
01 03 05 07 09 11 13 15 17
* Calendar year. Source: IMF, October 2016.
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5
GLOBAL ECONOMICS
| FISCAL PULSE March 22, 2017
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6