Annex 3

Improved Fiscal Outlook for the Canadian Government Sector

Introduction and Overview

This annex provides an overview of the fiscal performance of the federal and provincial-territorial governments.

The financial situation of the Canadian government sector (federal and provincial-territorial), on a public accounts basis, has improved substantially in recent years. This progress can be assessed by the evolution of budget balances, debt-to-GDP ratios, debt servicing costs, program spending and operating balances. Based on current budget plans, further progress is expected in the coming years.

Deficit Elimination in Sight

In recent years, governments across Canada have made great progress towards the restoration of their fiscal health. The implementation of restraint measures has led to a sizeable reduction of deficits at the federal and provincial-territorial levels. In 1996-97, the federal deficit stood at 1.1 per cent of gross domestic product (GDP), down from 5.9 per cent in 1992-93. Over the same period, the total provincial-territorial deficit fell from 3.6 per cent of GDP to 0.9 per cent (Chart A3.1).

Chart A3.1 (See BPA3-1E.WMF or .WPG)

In 1997-98, the federal government will post its first balanced budget since 1969-70. Six other jurisdictions (Nova Scotia, New Brunswick, Manitoba, Saskatchewan, Alberta and the Northwest Territories) are expected to record balanced budgets or surpluses in 1997-98 (Chart A3.2). The total government deficit will then be reduced to 0.6 per cent of GDP from 9.4 per cent in 1992-93.

The federal government is committed to balanced budget targets for 1998-99 and 1999-2000, the first time since 1951-52 that the budget will be in balance for three consecutive years. By the turn of the century, all jurisdictions in Canada should have balanced their books. Moreover, several jurisdictions have announced or legislated schedules for the repayment of public debt or have implemented personal income tax reductions.

Chart A3.2 (See BPA3-2E.WMF or .WPG

Net Debt Burden on a Downward Track

As a result of the reduction in the deficit, the pace of debt accumulation has slowed over the last few years. This has led to a notable reduction in debt-to-GDP ratios for all levels of government. In 1996-97, the federal net debt fell to 71.1 per cent of GDP, down from 71.9 per cent in 1995-96 (Chart A3.3). This constitutes the first significant decline in 25 years. With sustained economic growth and The Debt Repayment Plan, which will reduce the absolute amount of the debt, the federal net debt-to-GDP ratio will be put on a permanent downward track.

Chart A3.3 (See BPA3-3E.WMF or .WPG)

The provincial-territorial debt burden is also falling. The total net debt of the provinces and territories fell to 26.9 per cent of GDP in 1996-97, down 0.7 percentage points from the previous year. By 1999-2000, provincial-territorial net debt should represent some 25 per cent of GDP. Consequently, the total government net debt-to-GDP ratio is expected to decline substantially between 1996-97 and 1999-2000.

Interest Charges Declining

as a Share of Revenues

As a result of the slowing in the pace of debt accumulation and the reduction in interest rates in recent years, debt charges are absorbing a smaller portion of government revenues. Federal debt charges totalled 31.9 per cent of federal revenues in 1996-97, down from their peak of 36 per cent the year before. Provincial-territorial debt servicing costs fell to 13.4 per cent of revenues in 1996-97, down from 14 per cent in 1994-95 (Chart A3.4). In 1997-98, the ratio of federal debt charges to total revenues will decline further to 28.1 per cent. At the provincial-territorial level, the burden of servicing the debt is expected to remain stable.

Chart A3.4 (See BPA3-4E.WMF or WPG)

Program Spending will Continue to Decline Relative to the Size of the Economy

The turnaround in Canada's fiscal health was mainly the result of the decline in program spending. Between 1992-93 and 1996-97, federal program spending fell from 17.5 per cent to 12.8 per cent of GDP. Over the same period, provincial-territorial program spending dropped from 20.0 per cent to 16.7 per cent of GDP.

In 1997-98, federal program spending as a percentage of GDP will decline further to 12.4 per cent. Provincial-territorial program spending will also fall in 1997-98, to 16 per cent of GDP (Chart A3.5). By 1999-2000, federal program spending will have declined to 11.6 per cent of GDP, its lowest level in 50 years.

Chart A3.5 (See BPA3-5E.WMF or .WPG)

Operating Balances in Large Surplus Position

The reduction of program spending in recent years, combined with revenue growth, pushed operating balances, defined as the difference between total budgetary revenues and program spending, into a significant surplus position. From 1992-93 to 1996-97, the federal operating balance as a percentage of GDP moved from a deficit of 0.3 per cent to a surplus of 4.4 per cent. At the same time, the provincial-territorial operating balance improved from a deficit of 1.4 per cent to a surplus of 1.6 per cent. In 1997-98, operating surpluses are expected to grow further at both levels of government (Chart A3.6).

Chart A3.6 (See BPA3-6E.WMF or .WPG)