PBO Economic and Fiscal Outlook - June 2011
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Transcript of 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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PBOEconomicandFiscalOutlook
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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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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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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
Source: OfficeofthePBO;StatisticsCanada;FinanceCanada Slide7
1,200
1,300
1,200
1,300
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
PBOMay2011projection(balancedrisks)
3MonthTreasuryBillRateForecasts
percent
77
2
3
4
5
6
2
3
4
5
6
70percentconfidence
50percentconfidence
March2011privatesectorsurvey
Source: OfficeofthePBO;StatisticsCanada;FinanceCanada Slide8
1
0
1
1
0
1
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
PBOMay2011projection(balancedrisks)
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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
billionsofdollars,excludingMarch2011budgetmeasures
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
billionsofdollars,excludingMarch2011budgetmeasures
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
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
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
Publicdebtcharges 1.9 1.9 1.9 2.0 1.9 1.9
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
PBOMay2011projection(balancedrisks)
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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
Source: OfficeofthePBO Slide13
StructuralBalance
percentofpotentialincome
22
4
2
0
4
2
0
200910
Source: OfficeofthePBO Slide14
8
6
8
6
197677 198283 198889 199495 200001 200607 201213