2

Building Canada

for the 21st Century --

Economic Developments and Prospects:

The Policy Payoff

Highlights

▪	Strong growth created 372,000 net new jobs in 1997. All are full-time, private sector positions. This brings the number of jobs created in the Canadian economy over the last four years to more than one million.

▪	All regions have benefited from the strengthening of growth and employment over the last 18 months.

▪	Strong household and business confidence have fuelled robust consumer and investment spending.

▪	Major international organizations expect that Canada will lead the G-7 in GDP growth in 1998, making 1997 and 1998 the best back-to-back years for GDP growth in a decade.

▪	Continued strong growth will pay off in continued strong job creation.

Introduction

The sound economic policies that have been implemented in Canada for the past four years are generating demonstrable benefits. Starting in the third quarter of 1996, the economy has experienced six quarters of strong growth that has generated almost one-half million jobs. In 1997 alone, 372,000 new jobs were created -- all of them full-time, private sector positions. And robust growth has restored household and business confidence, with the result that consumer spending and business investment have increased substantially over the past year.

Job creation through strong and steady growth has been a key objective of the government's efforts to build a strong economy and a secure society. Creating good jobs for all those who want to work cannot be achieved without a strong economy, nor can economic growth endure without the household income that good jobs provide. But it is more than that: healthy job creation is a key condition for building a secure society.

This objective could not have been achieved without the difficult, but necessary, first step of restoring fiscal health. Indeed, the lower interest rates that have fuelled consumer spending and business investment would not have been possible without the determined efforts of federal and provincial governments to restore sound public finances. Canadians are now reaping the benefits of sound economic and fiscal policies working hand in hand.

The 1997 budget noted that lower interest rates would lead to a recovery in interest-sensitive expenditures sufficient to fuel a marked strengthening of growth. The outcome was even better than expected. And private sector economists expect that the improved economic environment will continue to fuel sustained healthy growth in 1998 and beyond.

Of course, the favourable outlook shared by most private sector economists is not without risk and budget planning must remain anchored to prudent economic assumptions. For instance, recent developments in Asia have focused attention on the uncertainties faced by Canada's export sector as well as on the risks of increased global financial market volatility.

This chapter briefly reviews recent economic developments and discusses the factors underlying the robust growth in 1997 and the favourable near-term outlook. It outlines the results of the latest survey of private sector forecasters, discusses the major uncertainties in the outlook, and closes with a discussion of the prudence factors used in developing the economic assumptions used for budget planning.

Recent Economic Developments

The strengthening of growth over the past year-and-a-half and the optimistic outlook held by private sector forecasters demonstrate the payoffs from the government's economic policy framework.

The objective has always been to create the conditions conducive to private sector job creation and strong economic growth. Upon taking office in 1993, the government recognized that this goal would be impossible to achieve if public finances were allowed to continue to deteriorate and keep interest rates higher than they could be. By late 1996, the credibility of governments' commitments to eliminate their fiscal imbalances allowed monetary conditions to become highly supportive of growth, with short-term interest rates falling to their lowest levels in over 30 years (Chart 2.1).

Chart 2.1 (See BP2-1E.WMF or .WPG

Low interest rate risk premiums attached to Canadian debt instruments are evident in the negative spreads between comparable Canadian and U.S. interest rates (Chart 2.2). Canadian short-term interest rates have been below comparable U.S. rates for the past two years -- the longest such period since the early 1970s. And longer-term Canadian interest rates have also remained below comparable U.S. rates. During the 1990s, Canadian 10-year bond rates have averaged about 120 basis points above those in the U.S. But for more than a year now, the 10-year bond rate has generally been below that in the U.S. The 30-year bond rate has remained at or slightly below that in the U.S. since the middle of last year. This is an historic achievement for Canada.

Chart 2.2 (See BP2.2E.WMF or .WPG

At the time of the last budget, interest rates were widely expected to begin moving higher through 1997 as the pace of economic activity accelerated. Private sector forecasters expected short-term interest rates to average 3.2 per cent for the year as a whole; 10-year government bond yields were expected to average just over 6 1/2 per cent.

Despite strong growth, the actual outcome was better than expected. While short-term rates averaged just over 3 per cent, much as expected, 10-year rates averaged 6.1 per cent, well below the levels forecast one year ago.

Canada's commitment to low inflation -- clearly demonstrated by the 1- to 3-per-cent target inflation range established jointly by the government and the Bank of Canada in 1993 -- has also been important in supporting this improved economic and financial environment. The target range assures all investors that the government and the Bank of Canada are committed to containing cost and price pressures as the expansion continues. Indeed, consumer price inflation, excluding the effects of changes in food and energy prices, has remained at or below the mid-point of the range for the past 24 consecutive months (Chart 2.3).

Chart 2.3 (See BP2.3E.WMF or .WPG

The Payoff in Growth and Jobs

At the time of the last budget, private sector economists expected growth to increase to 3.3 per cent in 1997, up from about 112 per cent in 1996. The outcome appears to have been better than expected: final 1997 gross domestic product (GDP) data available in early March will likely show that growth averaged more than 3 1/2 per cent. The robust growth of the past six quarters compares very favourably with the weak growth in 1995 and the first half of 1996 (Chart 2.4).

Chart 2.4 (See BP2.4E.WMF or .WPG

Most important, the growing economy is creating economic opportunities for Canadians across the country. Employment growth began to strengthen in the second half of 1996, when nearly 120,000 jobs were created. The pace of job creation quickened in 1997, with the addition of 372,000 new jobs, all of them full time and in the private sector. By December 1997, strong employment growth brought the unemployment rate down to 8.6 per cent, its lowest level since September 1990 (Chart 2.5). Although the severe ice storm that affected parts of eastern Ontario and Quebec disrupted production in January, and led to a temporary rise in the national unemployment rate, private sector forecasters expect that the trend toward strong job creation will continue in 1998.

Chart 2.5 (See BP2.5E.WMF or .WPG

Especially encouraging is the evidence that the benefits of stronger employment are being enjoyed across the country: employment has risen in all regions of the country over the past 18 months (Chart 2.6).

Chart 2.6 (See BP2.6E.WMF or .WPG

Moreover, in 1997, the unemployment rate fell the most in those regions where the level of unemployment has been the highest. Clearly, however, the economy of British Columbia is being adversely affected to a greater degree than other provinces by the weakness of many Asian economies.

Strong employment growth over the past 18 months has now created a "virtuous circle" in which employment gains generate higher household incomes that lead to stronger consumer spending, increased investment, and the higher economic growth that in turn fuels continued job creation. Especially important are the recent strong gains in full-time employment -- over 140,000 new jobs created in the three months since October 1997 alone. The potential impact of this effect cannot be dismissed: the wages and salaries of all Canadians who found employment over the past year represent a significant stimulus to the economy, totalling almost 1 1/2 per cent of GDP.

Supporting the virtuous circle is the fact that the elimination of the deficit, low interest rates and strong employment growth have restored household and business confidence. Consumer confidence, as measured by the Conference Board of Canada, remains near its highest level in almost nine years and above its average level for the last 30 years, despite a modest decline in the fourth quarter of 1997. And business confidence, driven by high levels of capacity utilization, has set record highs.

It is not surprising, therefore, that the economy grew at an average annual rate of about 3 3/4 per cent over the six quarters to end-1997, nor that this growth reflects robust gains in two key interest-sensitive components of domestic demand -- household consumption and business investment. Since mid-1996, sales of durable consumer goods such as cars and appliances have been strong, rising by 14 per cent. Capacity utilization rates have increased steadily with the recovery of domestic demand. And real business investment in machinery and equipment has soared, up by 32 per cent since the second quarter of 1996. Investment in non-residential construction has also increased, up by 15 per cent over the same period.

The recent strength of these components of domestic demand stands in marked contrast to the situation in 1995 and the first half of 1996 (Chart 2.7). This broadening of the sources of growth from the trade sector to domestic demand makes expansion much less dependent on external demand, which could not realistically have been expected to continue growing indefinitely at the very robust pace witnessed in 1995. This rebalancing of demand thus bodes well for the country's future economic prospects.

Chart 2.7a (See BP2.7aE.WMF or .WPG

Chart 2.7b (See BP2.7bE.WMF or .WPG

Exports remain a major source of growth and job creation in the Canadian economy. Canada's exports of goods and services have risen more than 50 per cent in the last four years. The share of exports in Canada's GDP now stands at about 40 per cent -- the highest in the Group of Seven (G-7) and up from about 25 per cent at the beginning of the 1990s.

But the rebound in spending on durable goods and investment expenditures over the past 18 months has led to a decline in Canada's external balances. While export growth held up well through 1997, stronger domestic demand -- especially higher spending on machinery and equipment investment (largely purchased abroad) -- boosted imports (Chart 2.8) and cut into the trade surplus. And the current account, which in 1996 moved from a chronic deficit into a surplus position, returned to deficit in 1997 (Chart 2.9).

Chart 2.8 (See BP2.8E.WMF or .WPG

This decline in the current account balance should be put in perspective. It is especially noteworthy that, while the deficit in the current account increased significantly in the third quarter of 1997, it remains well below past levels. Although final data are not yet available, the 1997 current account deficit as a percentage of GDP was modest compared to the experience in the early 1990s.

Chart 2.9 (See BP2.9E.WMF or .WPG

The factors accounting for the re-emergence of a current account deficit also differ significantly from earlier experience. Most important, the steep increase in imports has been driven by a surge in investment spending, particularly investment in machinery and equipment. Indeed, imports of machinery and equipment rose 33 per cent between mid-1996 and the third quarter of 1997. Although this import boom helps explain the re-emergence of a current account deficit, it is also boosting the economy's long-run growth and export potential. This is in contrast to the external imbalances earlier in the decade, which largely reflected high government borrowing (Chart 2.10).

Moreover, the prospects for the current account are reasonably favourable. This is because current accounts ultimately reflect national savings and investment imbalances and domestic savings can be expected to rise over the medium term. Several factors are at work here. The decline in interest rates has induced consumers to greatly increase their spending on durable goods, spending that for many households had been delayed by prolonged economic uncertainty. This has lowered the personal saving rate. Improved employment prospects and enhanced consumer confidence has unleashed a 'catch-up' on consumption. But stronger disposable income growth, and a desire by households to restore savings to more normal levels, will likely lead to a gradual increase in house-hold savings.

Chart 2.10 (See BP2.10E.WMF or .WPG

More fundamental, however, is the restoration of sound public finances through the actions of federal and provincial governments, which have shifted from being net users to being a net source of savings (Chart 2.10). The reform of the Canada and Quebec Pension Plans, which will lead to a greater degree of funding of these plans, will further increase public sector saving.

One potential risk to this generally encouraging outlook for the current account relates to the prospects for commodity prices and hence Canada's terms of trade (i.e. the prices that Canada earns on its exports compared to those it pays on its imports -- a key determinant of the current account and national income). In late 1996 and early 1997, well before the situation in Asia began to negatively influence commodity markets, Canada's terms of trade had begun to weaken following several quarters of improvement. To the extent that the Asian crisis leads to a sustained downward revision to growth prospects for the region, it may exert a more prolonged negative impact on commodity prices and thus on Canada's terms of trade and current account.

Issues and Prospects for the Outlook

Sustaining growth through a virtuous circle

The broadening of growth to key components of domestic demand and the creation of a virtuous circle should sustain the expansion by making it less dependent on external sources. And while short-term interest rates moved higher late in 1997 and early in 1998 as the dollar weakened, most households will continue to benefit from interest rates that remain near historic lows. The reason is simple: thousands of Canadians have renewed their mortgages or refinanced their homes at significantly lower rates. For example, a homeowner who takes out a five-year term on a $100,000 mortgage will save more than $3,000 per year on mortgage payments compared to three years ago.

At the same time, the overall mix of macroeconomic policies remains conducive to sustained growth. With the difficult stage of deficit reduction largely completed across the country, and the direct impact of public sector job cuts now largely behind us, the underlying momentum of the private sector should become more evident. Moreover, although short-term interest rates have increased in recent months, the impact of higher interest rates on growth has been largely offset by the stimulative impact of a lower Canadian dollar. Indeed, overall monetary conditions, which measure the combined effect on growth of interest rates and the exchange rate are now roughly as expansionary as they were at the time of the last budget and the fall Economic and Fiscal Update. As a result, there are sound reasons to believe that growth in 1998 and beyond will remain strong. The private sector consensus outlook reflects this assessment.

Uncertainties in the outlook

As always, however, uncertainties remain. In particular, financial market volatility following developments in Asia underscores the importance of the external environment in an open global economy linked by large trade and capital flows. Indeed, the International Monetary Fund (IMF) has already marked down its forecast of global growth in 1998 by about three-quarters of 1 percentage point in view of these developments, while the OECD has indicated that global growth in 1998 could be a full percentage point lower than previously estimated. In both cases, however, the estimated impacts on Canada and the United States are far smaller.

Spillovers from the Asian crisis

Recent developments in Asia clearly increase the uncertainty attached to the economic outlook.

The overall impact of the Asian crisis will depend on the potential spillover effects through which the turmoil in Asia may be transmitted abroad and the scope that exists to mitigate these effects. There are a number of possible transmission channels.

▪	The direct trade effects are most certain. Exports to the region will decline as a result of slower growth there and a major depreciation of local currencies. But the small share of our exports absorbed by the region (about 8 per cent of total exports or about 3 per cent of GDP) limits the size of this effect, although there could also be an indirect impact on Canada if U.S. growth were to be affected.

▪	Commodity prices have already fallen and may remain weak, especially for such products as lumber, as a result of weaker demand in Asia. This represents a deterioration in Canada's terms of trade that may only be partly offset by lower import prices. But while weaker commodity prices will exert a dampening effect on the economy, this effect should not be overestimated. The share of commodities in Canada's merchandise exports has fallen from around 60 per cent in 1980 to around 40 per cent in 1996.

▪	Consumer confidence may be eroded as a result of increased uncertainty about future economic and financial prospects, and this may lead to a retrenchment in consumer spending. This is less likely, but nevertheless remains a possibility.

The IMF estimates the impact on growth in Canada and the U.S. to be limited -- on the order of one-quarter of 1 percentage point of GDP.

These conclusions should be regarded as both preliminary and tentative given the evolving nature of the situation. The spread of financial turmoil to other countries in the region and beyond would represent a greater risk to the global economy. The IMF is acting in concert with the international community to stabilize and contain the situation in Asia. Recent developments in this regard are encouraging, although these economies still face substantial economic restructuring ahead.

The recent volatility in financial markets caused by the Asian crisis provides a clear reminder of how Canada can be affected by international economic events, even in regions of the world that seemingly have little to do with the domestic economy. Withstanding them requires the government to continue to be prepared for unforeseen and adverse economic developments.

Canada must therefore be prepared to act with other nations to ensure stable international financial markets. The government will soon be introducing legislative amendments to increase the International Monetary Fund's capacity to maintain a stable international financial system. The government will be giving itself additional means to participate in international co-operative financing arrangements in support of IMF programs. In addition, legislation will be introduced to amend the International Development (Financial Institutions) Assistance Act to formalize the process of consultation between the Finance Minister and the Foreign Affairs Minister with respect to multilateral development bank replenishments. This will improve budgetary control over the growth in contingent liabilities to these institutions. Fundamentally, however, the ability of Canada to withstand global economic shocks will depend on the underlying health of its economy and its finances, and its continued success as an exporter.

Indeed, with a relatively small domestic market and with exports accounting for about 40 per cent of GDP, Canada's future prosperity depends on sustaining success as an exporter. Accordingly, the government will continue to make a priority of assisting Canada's exporters, particularly small and medium-sized enterprises, to achieve international success through initiatives including Team Canada trade missions; promoting Canada as the location of choice for investment in North America; improving access to international markets through further global trade liberalization; and enhancing our international competitiveness through the fostering of research and development.

Continued financial market volatility

The Canadian dollar began to weaken late in 1997, with this weakness extending into early 1998. In the view of many private sector forecasters, the weakness of the dollar reflects a number of factors. First, there has been a general movement of international funds into U.S. dollar-denominated instruments, which is common in times of global financial market turbulence since these are regarded as particularly safe investments. One by-product of this has been downward pressure on other currencies, including the Canadian dollar. Second, in this environment of generally unsettled financial markets, the deterioration in the trade balance and the current account associated with strong investment spending, together with lower commodity prices resulting from the economic and financial crisis in Asia, has added to the downward pressure on the exchange rate.

But the factors that led private sector forecasters to expect an appreciation of the dollar over time -- a return to sound public finances, a sound competitive position, and low inflation -- remain in place. And while interest rates increased late in 1997 and early in 1998, Canadian short-term interest rates remain low and below comparable U.S. rates.

Here the contrast between the financial market response in late 1997 and that in the wake of the Mexican peso crisis in early 1995 is quite striking, and is clearly linked to Canada's much improved fiscal and economic situation. For example, in the month following the devaluation of the Mexican peso in December 1994, Canadian long-term interest rates rose nearly 50 basis points. In contrast, since August 1997, the period during which the Asian financial crisis became more acute, Canadian long-term rates have fallen by more than 60 basis points. The commitment to fiscal balance is also very important in terms of the long-term outlook for the current account. Indeed, the private sector consensus remains one of declining current account deficits over the medium term.

The external environment

Provided the Asian situation stabilizes, the overall economic environments in both the United States and most major overseas economies are expected to remain conducive to strong job creation and growth.

The United States

Over the past two years, economic developments in the U.S. have been very favourable to growth in Canada. U.S. interest rates have remained stable over this period, while strong growth has provided a growing market for Canadian exports. Developments in the U.S. economy demonstrate that strong and steady growth leads to strong and steady job creation and that low unemployment together with quiescent inflation can be achieved when they are based on sound macroeconomic policies.

On balance, the prevailing consensus on U.S. economic prospects seems to be that a modest slowing of U.S. growth attributable to the Asian crisis might dissipate incipient inflationary pressures. Consequently, most analysts expect short-term interest rates to remain stable for a longer period than was expected only a few months ago.

The consensus view of private sector economists is for the U.S. economy to grow at a moderate pace in 1998 (Table 2.1). Indeed, many economists expected a slowing of growth even before the full extent of the Asian crisis became apparent. This assessment reflected the steep appreciation of the U.S. dollar over the past year, which has led to a significant tightening of overall monetary conditions. Moreover, because interest rates have remained stable, the decline in inflation has resulted in a steady increase in real, or inflation-adjusted, interest rates that should further slow the pace of growth.

Table 2.1

U.S. economic outlook -- private sector consensus

1997 1998 1999 (per cent) Real GDP 3.7 2.5 2.3 CPI 2.4 2.2 2.6 3-month Treasury bill rate 5.3 5.2 5.2 10-year government bond rate 6.4 5.9 6.0

Source: Blue Chip Economic Indicators, January 10, 1998. This is a survey of approximately 50 private sector forecasters of the U.S. economy. The 3-month T-bill rate has been adjusted from a discount basis to a true-yield basis by the Department of Finance.

Major overseas economies

Growth among the major overseas economies diverged somewhat in 1997. Available data suggest that Germany, the U.K. and Italy all grew at a faster pace than was expected at the time of the last budget. In contrast, growth prospects were marked down progressively through the year in Japan.

Growth is generally expected to strengthen modestly in 1998 -- the exception being the United Kingdom. One of the most positive factors shaping the economic situation in these countries is the virtual absence of inflationary pressures. This provides monetary authorities considerable scope to maintain interest rates at their present accommodative levels, a stance that supports growth and deficit reduction.

Table 2.2

Outlook for overseas economic growth

1997 1998 1999 (per cent) Japan 0.5 1.7 2.1 Germany 2.4 3.0 2.9 France 2.3 2.9 2.8 United Kingdom 3.4 2.2 2.1 Italy 1.3 2.1 2.6 Source: OECD Economic Outlook, December 1997.

There are clear risks to this outlook. Most important, concerns remain that economic growth in Japan may be curtailed if domestic demand fails to strengthen. The risk of this outcome would be heightened by a further deterioration of economic prospects in Asia. In Europe, unemployment remains high and uncertainties about prospects for domestic demand and sustained growth remain, along with uncertainties about the effects of the transition to the European Monetary Union.

Private sector assessment of the economic outlook for Canada

Continued strong output growth through the third quarter suggests that real GDP grew by more than 3 1/2 per cent in 1997, in line with the private sector consensus in September, as presented in The Economic and Fiscal Update in October. However, nominal GDP has grown at a slower rate than the 4.7-per-cent pace expected in September owing to lower-than-expected GDP inflation.

Against this background, Canadian private sector economists remain optimistic notwithstanding the effects of the Asian crisis. In September, these forecasters expected growth of 3.7 per cent in 1998 (Table 2.3). And with the favourable outcome last year, the consensus among private sector forecasters surveyed by the Department of Finance is little changed -- for 1998, growth of 3.5 per cent is now expected, well above the 2.9 per cent expected at the time of the 1997 budget. The realization of this outcome would mark the best back-to-back economic performances in 10 years. The extended outlook is similarly encouraging with growth of almost 3 per cent expected in 1999.

This assessment is shared by major international economic organizations -- the IMF and the Organization for Economic Co-operation and Development (OECD). Indeed, both expect Canada to lead the G-7 in output and job growth in 1998.

In contrast, GDP inflation in 1997 has to date been much lower than expected at the time of the last budget, or indeed at the time of The Economic and Fiscal Update. The dampening effect of this on nominal GDP growth is magnified in 1998. For example, private sector economists now expect nominal GDP growth of 4.7 per cent in 1998, about 1/2 percentage point below the rate of over 5 per cent expected in September.

Other aspects of the private sector consensus have changed little from the very positive outlook prevailing at the time of The Economic and Fiscal Update. Short-term interest rates are expected to remain very low by historical standards, although private sector forecasters now expect somewhat higher rates in 1998, reflecting developments since late 1997. The higher interest rates expected by private sector forecasters in 1998 also reflect their view that interest rates will gradually rise as the economy moves toward its productive potential. In contrast, long-term interest rates are now expected to be somewhat lower as compared to only a few months ago. This reflects the continued progress on fiscal consolidation and the absence of significant inflationary pressures in the economy. Private sector forecasters also expect strong growth will fuel job creation sufficient to further reduce the unemployment rate, to an average of about 812 per cent in 1998 and just over 8 per cent in 1999.

Table 2.3

Evolution of private sector forecast survey results

1997 1998 1999 Real GDP growth (%) February 1997 3.3 2.9 September 1997 3.7 3.7 February 1998 3.8 3.5 2.9 GDP inflation (%) February 1997 1.6 1.7 September 1997 1.0 1.6 February 1998 0.7 1.2 2.0 Nominal GDP growth (%) February 1997 4.9 4.7 September 1997 4.7 5.2 February 1998 4.5 4.7 4.9 CPI inflation (%) February 1997 1.6 1.8 September 1997 1.8 2.0 February 1998 1.6 1.5 1.7 Unemployment rate (%) February 1997 9.3 8.8 September 1997 9.2 8.6 February 1998 9.2 8.6 8.2 Employment growth (%) February 1997 2.0 2.0 September 1997 2.0 2.4 February 1998 1.9 2.3 2.1 3-month Treasury bill rate (%) February 1997 3.2 3.7 September 1997 3.2 4.1 February 1998 3.2 4.6 4.6 10-year govt. bond yield (%) February 1997 6.6 6.6 September 1997 6.3 6.3 February 1998 6.1 5.9 6.0

The February 1998 survey is based on 18 respondents for 1998 and 1999 who had updated their forecasts since the release of the Canadian Income and Expenditure Accounts for the third quarter of 1997. The February 1998 data for 1997 reflect actual outcomes, with the exception of GDP data, which are private sector estimates.

Prudent Assumptions for Fiscal Planning

The prudence factors applied to projections for budget planning purposes are to set short-term interest rates 80 basis points higher than the private sector average in 1998, and long-term rates 50 basis points higher. This is in line with the prudence used in the 1997 budget. However, given the unusual degree of uncertainty in the outlook resulting from recent developments in Asia and abroad, the prudence factors used for 1999 are both set 100 basis points higher than the private sector consensus.

For prudent budget planning, nominal GDP growth is also reduced relative to the private sector consensus by an amount that is consistent with the economic impact of the higher interest rates used for budget planning and an overall assessment of risk factors. Taking these into account, the rate of nominal GDP growth used for budget planning purposes is about 1/2 percentage point lower than the private sector consensus in 1998 and 1 percentage point lower in 1999.

Table 2.4

Prudent planning assumptions1

1997 1998 1999 Real GDP growth (%) 1997 budget 3.2 2.6 1998 budget 3.8 3.0 2.5 Nominal GDP growth (%) 1997 budget 4.7 4.1 1998 budget 4.5 4.1 3.9 Nominal GDP ($ bn) 1997 budget 835 870 1998 budget2 857 892 927 3-month Treasury bill rate (%) 1997 budget 4.0 4.5 1998 budget 3.2 5.4 5.6 10-year govt. bond yield (%) 1997 budget 7.1 7.1 1998 budget 6.1 6.4 7.0

1	The 1998 budget planning assumptions for real and nominal GDP in 1997 are estimates of the outcome. Assumptions for the 3-month Treasury bill rate and the 10-year government bond yield are actual outcomes.

2	Canada's National Income and Expenditure Accounts, from which GDP data are obtained, were revised in December 1997. As a result, the historical level and growth rate of nominal GDP has changed. The planning assumptions for nominal GDP used in the 1997 budget are based on nominal GDP data before these revisions were made, while those used in the 1998 budget include the revisions.