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Annex 1
Fiscal Performance of Canada's Federal-Provincial-Territorial Government Sector

Introduction

• This annex presents the fiscal situation of the aggregate federal-provincial-territorial government sector based on Public Accounts data, as published by the individual governments.^[1]

• The federal-provincial-territorial governments combined are expected to record a $6-billion surplus in 2004–05 compared to a $5.3-billion surplus in 2003–04. This would be the seventh consecutive annual surplus. At the federal level, a surplus of $3 billion is estimated, down from $9.1 billion in 2003–04. The provincial-territorial sector is also expected to be in an aggregate surplus position of $3 billion^[2] in 2004–05, the first surplus in three years.

• The federal revenue-to-GDP (gross domestic product) ratio should continue to decline in 2004–05, partly reflecting tax cuts announced in past budgets. In contrast, the provincial-territorial revenue-to-GDP ratio, which includes federal cash transfers, is expected to grow by 0.7 percentage points, in large part due to a rebound in provincial-territorial own-source revenues.

• In 2004–05 provincial-territorial program spending as a share of GDP should remain relatively unchanged from 2003–04, reflecting the fact that ongoing expenditure reviews and spending controls in many jurisdictions will offset spending increases in specific areas, especially health care. At the federal level, program spending as a share of GDP is expected to increase by 0.6 percentage points, due mainly to increased spending for health care, Equalization and Territorial Formula Financing.

• The provincial-territorial debt-to-GDP ratio is estimated to have fallen by 6.5 percentage points to 22.3 per cent in 2004–05 relative to its peak in 1999–2000. The federal debt-to-GDP ratio is estimated to have declined by 29.8 percentage points from its peak of 68.4 per cent in 1995–96. The higher federal debt burden means that the federal government continues to face much higher debt charges than the provincial-territorial sector. Nonetheless, the recent drop in the federal debt burden has contributed to maintaining lower interest rates, which benefits consumers, businesses and provincial-territorial governments.

In 2004–05 the aggregate federal-provincial-territorial government sector is expected to be in surplus for the seventh consecutive year

• Both the federal and provincial-territorial governments have contributed to the significant turnaround in Canada’s fiscal situation over the last 10 years.

• The aggregate federal-provincial-territorial surplus is estimated at $5.3 billion for 2003–04, which represents a significant improvement from 1993–94, when the sector posted a $58.9-billion deficit.

• The commitment to balanced budgets or better at the federal level, combined with a significant improvement in the provincial-territorial fiscal outlook, particularly in light of recent increases in federal transfers, suggests that the federal-provincial-territorial sector will remain in a strong fiscal position in 2004–05, with an expected aggregate surplus of $6 billion.

The combined provincial-territorial sector budgetary balance is also expected to be in surplus in 2004–05

Provincial-Territorial Budgetary Balances
(Public Accounts Basis)

• Like the federal government, most provinces and territories introduced measures to eliminate the deficits recorded in the mid-1990s. As a result, the aggregate deficit at the provincial-territorial level was eliminated in 1999–2000 and aggregate surpluses were recorded to 2001–02.

• After having recorded small deficits in 2002–03 and 2003–04, the fiscal situation of the provinces and territories is expected to improve significantly in 2004–05 to an aggregate surplus of $3 billion, an improvement of $6.7 billion over 2003–04 and the first surplus in three years. More than half of the jurisdictions are expected to be in balance or better this year.

Provincial revenues continue to exceed federal revenues

• Provincial-territorial revenues (including federal transfers such as equalization and the Canada Health Transfer) continue to exceed federal revenues.

• Between 2000–01 and 2003–04 federal revenues as a share of GDP declined by 1.7 percentage points to an estimated 15.3 per cent, mainly reflecting cuts in personal and corporate income taxes and employment insurance premiums, as well as the cyclical downturn in corporate profits and capital gains in 2001. Provincial-territorial revenues as a share of GDP declined by 1.6 percentage points to 17.1 per cent over this period, partly reflecting tax cuts introduced in the 2000 and 2001 provincial-territorial budgets.

• In 2004–05 provincial-territorial revenues as a percentage of GDP are expected to rebound sharply to 17.7 per cent, owing mainly to increases in own-source revenues but also to increases in federal transfers. In contrast, federal revenues are expected to continue to decline to 15.1 per cent.

Federal program spending is expected to increase in 2004–05 due mainly to increased health care spending

• As a share of GDP, program spending at both levels of government has fallen sharply over the last decade as part of fiscal restructuring to eliminate deficits.

• From 1993–94 to 2003–04, federal program spending as a share of GDP is estimated to have fallen by 4.1 percentage points to 11.6 per cent. Over the same period, provinces and territories have reduced their program spending from 19.1 per cent to 15.6 per cent of GDP.

• In 2004–05 federal program spending as a percentage of GDP is projected to increase by 0.6 percentage points to 12.2 per cent, mainly as a result of increased spending for health care, Equalization and Territorial Formula Financing. In contrast, provincial-territorial program spending as a share of GDP should remain relatively unchanged from 2003–04, reflecting the fact that spending controls and ongoing expenditure reviews in most jurisdictions should offset spending increases in other areas, especially health care.

Federal and provincial-territorial debt-to-GDP ratios continue to decline …

• The provincial-territorial debt-to-GDP ratio is expected to fall to 22.3 per cent in 2004–05, a decline of 6.5 percentage points from its peak of 28.7 per cent in 1999–2000.

• The federal debt burden is estimated at 38.6 per cent of GDP in 2004–05 (assuming that the Contingency Reserve is not needed to deal with unforeseen circumstances). Albeit significantly lower than its peak of 68.4 per cent in 1995–96, it remains much higher than the combined provincial-territorial debt burden.

… resulting in a decline in debt-servicing charges as a share of total revenues

• The reduction in the federal debt since 1996–97 has resulted in ongoing savings in public debt charges of more than $3 billion annually.

• In 1995–96, 37.6 cents of each federal revenue dollar went to service the federal debt. Due to the reduction in the federal debt burden as well as the decline in interest rates, this ratio has fallen to below 18 cents, the lowest level since the late 1970s.

• Despite the significant reduction in the federal debt burden, provincial-territorial governments continue to face much lower debt charges than the federal government. In 2004–05 they are expected to spend 9.6 cents of each revenue dollar for debt servicing, the lowest ratio in 20 years.

¹ Does not include the financial activities of municipalities or the Canada Pension Plan (CPP) and the Quebec Pension Plan (QPP). A more comprehensive picture of the total government sector, which includes both the local government sector and the CPP/QPP, is presented in Annex 2.[Return]

² Based on data available up to February 16, 2005.[Return]

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