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2015 Canadian Federal Budget
April 21, 2015
Smaller Steps Today, Bigger Dreams Deferred
Economics
Avery Shenfeld
(416) 594-7356
[email protected]
Benjamin Tal
(416) 956-3698
[email protected]
Andrew Grantham
(416) 956-3219
[email protected]
Nick Exarhos
(416) 956-6527
[email protected]
Maria Berlettano
(416) 594-8041
[email protected]
(Macro Strategy)
by Avery Shenfeld and Maria Berlettano
Landing on a balanced budget required
only one small step for a Canadian
finance minister, at least in today’s budget
document. After several years of revenue
gains tied to economic growth and restraint
on program spending, the status quo
outlook going into today’s federal budget
was for a small surplus. But that included
major announcements for family tax relief
that were unveiled in the fall fiscal update.
After adding up the pluses and minuses from
initiatives announced today, it remained little
changed, still pointing to a $1.4 bn surplus,
with plans for essentially more of the same
down the road (Chart 1). That puts Canada’s
federal government in an envied position
among major economies, supporting its top
credit rating. Canada still has some tougher
fiscal adjustments ahead, but these are at
the provincial level.
For Ottawa, fiscal belt tightening was already
largely in the rear-view mirror. Spending
restraints being phased in from prior budgets
will still be kicking in, but total spending has
already fallen to its pre-recession share of
GDP, and will now be on a flat trajectory as
a share of GDP.
There’s a long laundry list of new tax and
spending items that are initially small in
dollar terms, with their fiscal cost roughly
offset by revenue from asset sales and
trimming the contingency reserve. Some will
become more costly pledges in the further
out years, with the revenue room to do so
dependent on a return to healthier nominal
GDP growth.
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A Softer Backdrop
The economic shock from a sharp drop in
oil prices came late enough in 2014 to be
covered off by the $3 bn in contingency
reserves and roughly $1 bn from asset sales,
allowing Ottawa to register a $2 bn deficit
that bested its original budget target by
almost $1 bn. Revenues were actually $3
bn stronger than assumed in the February
2014 budget, largely because the base set
in the final tally for the prior year also came
in ahead of the estimates available when last
year’s budget was drawn up.
But the 2015 economic landscape will be
less forgiving. The consensus outlook for
real GDP was trimmed by a bit more than
a half-point since the fall update to 2.0%.
And nominal GDP, which has closer ties to
revenues, is projected to crawl at a 1.6%
pace this year, close to CIBC’s own forecast,
but down from a fall consensus for 4.3%.
That swing meant that the status quo
revenue outlook was now $6 bn lighter than
expected in last fall’s update.
Chart 1
In the Black, But With Smaller Surpluses
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Federal Budget Balance, $ bn
10
5
1.4
1.7
2.6
2.6
0
-5
-10
-2.0
-5.2
-15
-20
13/14 14/15 15/16 16/17 17/18 18/19
2014 Budget
2014 Mid-Year
2015 Budget
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C I B C W o r l d M a r k e t s C o r p • 3 0 0 M a d i s o n A v e n u e , N e w Yo r k , N Y 1 0 0 1 7 • ( 2 1 2 ) 8 5 6 - 4 0 0 0 , ( 8 0 0 ) 9 9 9 - 6 7 2 6
CIBC World Markets Inc.
2015 Canadian Federal Budget—April 21, 2015
Some might quibble that, given the uncertainties facing
both the oil sector and its economic implications,
the Finance Minister was imprudent in reducing
contingencies, or counting one-time asset sale proceeds.
We argued (in “Don’t Assume the Worst”, Economic
Insights dated March 25, 2015) that “spending” some
of the $3 bn contingency for 2015/16 that was there in
the mid-year update projections is justified if one sees the
oil shock as just the sort of contingency that it’s designed
to cover. Making more adverse assumptions, or not
cashing in the GM shares in a year in which the political
imperative was to deliver a balanced set of books, would
have required billions in tax hikes or spending cuts that
would themselves be imprudent given the weaker nearterm economic backdrop.
Table 1
Average Private Sector Forecasts
2014
2015
2016
2017-19 (1)
Economic Assumptions
Real GDP
Budget 2014
2.5
2.3
2.0
2.5
2.2
2.5
2.2
2.3
Nominal GDP(2)
Budget 2014
4.4
3.9
1.6
4.5
4.9
4.5
4.4
4.3
Jobless Rate (%)
CPI
US Real GDP
6.9
1.9
2.4
6.7
0.9
3.1
6.6
2.2
2.9
6.2
2.0
2.5
93
0.9
2.2
90.5
54
0.6
1.7
79.2
67
1.0
2.5
80.8
77
2.6
3.6
85.2
Y/Y % Chg
Financial Assumptions
WTI (US$/bbl)
3-month T-Bills (%)
10-year GoC Bonds (%)
Exchange Rate (US¢/C$)
(1) "Budget 2014" figures for real/nominal GDP based on 2017-18 average
(2) Revenue assumptions based on lower nominal GDP level than private sector
forecasts to adjust for potential risks
Because the fall update already included measures
designed to help families and small business to the tune
of some $5 bn, there was little left in terms of booking
costs for new announcements for this fiscal year. The
actual budget measures only entail a net cost of $0.5 bn
in the current fiscal year, but grow to nearly ten times
that sum by 2019/20. Those future commitments will
form the essence of a platform for an election expected
for October, laying out the Conservative vision of how
the fiscal rewards of an improving economy would be
allocated to tax cuts or new spending.
That said, the consensus looks ahead to improvements in
both real and nominal GDP further out, backed by a rise
in oil prices from an assumed $54/bbl average this year
to $75/bbl by 2017. That helps lift nominal GDP by nearly
5% next year, restoring revenue growth and leaving room
for the announcements made in today’s budget.
Getting to Balance
Sticking to its balanced budget pledge for 2015/16,
given the revenue squeeze, required a bit of budgetary
artwork. In part, Ottawa used the revenue from its sale
of GM shares, and spectrum auctions to lift revenues
for this fiscal year by $2.2 bn, (of which $1.2 bn was
recognized in the projections made in the fall update).
The contingency reserve was also trimmed to $1 bn from
the usual $3 bn set aside for economic hits.
On the spending side, programs will get a moderate
3.4% increase, but that still represents a one-percentagepoint acceleration from the prior year. The growth largely
reflects trend increases in transfers to individuals and
health, social and equalization transfers to provinces. The
budget announced some spending initiatives in support
of infrastructure, defense, counter-terrorism, advanced
research, public transit and other targets, but many of
these start small or don’t kick in this year.
Table 2
Fiscal Outlook
2013/14
Actual
14 Budget
2014/15
15 Budget
Change
2015/16
15 Budget
2016/17
15 Budget
2017/18
15 Budget
2018/19
15 Budget
2019/20
15 Budget
271.7
276.3
279.3
3.0
290.3
302.4
313.3
326.1
339.6
5.9
1.7
2.8
1.1
3.9
4.2
3.6
4.1
4.1
248.6
250.2
254.6
4.4
263.2
274.3
282.7
293.0
302.6
1.0
0.6
2.4
1.8
3.4
4.2
3.1
3.6
3.3
Public Debt Charges
28.2
29.0
26.7
-2.3
25.7
26.4
28.0
30.5
32.1
Budgetary Balance
-5.2
-2.9
-2.0
0.9
1.4
1.7
2.6
2.6
4.8
-
-3.0
-
3.0
-1.0
-1.0
-1.0
-2.0
-3.0
611.9
618.9
616.0
-2.9
617.0
615.3
612.6
610.1
605.2
32.3
32.0
31.2
-0.9
30.8
29.3
27.9
26.7
25.5
$Billions
Budgetary Revenues
% change
Program Spending
% change
Note: Adjustment for Risk (1)
Federal Debt
% of Nominal GDP
(1) Adjustment for risk to revenues; negative numbers imply a deterioration in the budgetary balance
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CIBC World Markets Inc.
2015 Canadian Federal Budget—April 21, 2015
Despite an expected drop in corporate income taxes
attributable to the oil shock, revenues are still expected
to climb by 3.9%, supported by a 6.9% rise in personal
income taxes. The budget argues that the PIT growth rate
can be well above nominal GDP’s pace due to the impact
of progressive tax brackets as income rises. Note that the
hit to the yearly growth rate in PIT from the new Family
Tax Cut was taken in the prior fiscal year.
Net Domestic Bond Stock to Increase $20 billion
The Federal government is expected to issue net domestic
bonds of $90 bn in 2015/16 (net of buybacks), a decrease
of $8 bn over the previous fiscal year. With fewer
maturities, the domestic bond stock will grow by $20 bn.
Whereas a positive Budgetary Surplus more than offset
the increase in Other Non-Budgetary Transactions, the
end of the Insured Mortgage Purchase Program (IMPP)
eliminated an important source of funding. Last year,
the IMPP contributed $9.9 bn to funding. The IMPP
was introduced by the Federal Government through
its crown corporation, Canada Mortgage and Housing
Corporation, as a temporary emergency liquidity facility
during the 2008-2009 financial crisis. CMHC was
authorized to purchase up to $125 bn in NHA-Insured
Mortgage-Backed Securities (NHA MBS) from Canadian
financial institutions to support their funding operations.
The facility closed March 2010. CMHC had purchased a
total of $69 bn in NHA MBS. The last of these securities
matured in March 2015.
The room for tax cuts has in part been created by opting
to collect some $3-4 bn more annually in EI premiums
than is paid out in benefits through 2016/17 rather than
opt for a more immediate reduction in premium rates.
Again, as on the spending side, there are some significant
revenue-related announcements that will kick in down
the road. Manufacturers will save $0.3 bn next year due
to the extension of accelerated capital cost allowances
that were set to expire. Small business will get a tax cut
that will be phased in beginning in 2016, at a cost that
will grow to $1.2 bn by 2019/20 as the rate drops from
today’s 11% to 9%.
Seniors will be able to take money out of RRIFs at a
slower pace, at a cost of $140 mn this year, while TaxFree Savings Account limits are hiked, again with a
revenue hit that will largely be off in the future. The only
revenue-raising measure was one aimed at “synthetic
equity arrangements” related to the treatment of some
inter-company dividends.
On balance, the net Financing Requirements will climb
from $6.7 bn last year to $14.4 bn in the current fiscal
year, before easing off to $12.8 bn next year.
Budgets are, of course, subject to uncertainty, but what’s
clear is that Canada’s credit rating remains well protected.
Whatever the wobbles might be in terms of the final set
of numbers for the current year, both Ottawa, and the
total government sector, still look to be the envy of other
major economies in terms of government debt and its
trajectory. Federal debt-to-GDP has been edging lower
again in the past two years, and is projected to reach
30.8% by the end of this fiscal year, en route to roughly
25% by the end of the decade.
$Billions
Borrowing Requirements
Budgetary Surplus/(Deficit)
Insured Mortgage Purchase Program
(1)
Other Non-Budgetary Transactions
Financial Source/(Requirement)
Table 3
Net Domestic Bond Stock to Increase $20 bn
Including the provinces, financial assets, and the assets
of the CPP/QPP, the IMF already measures Canada’s
aggregate net debt-to-GDP ratio, at under 40% of GDP,
as the lowest in the G-7. But the budget notes that
Canada’s edge over other jurisdictions looms much larger
if one includes the unfunded liabilities of public sector
pension plan, which are recognized in the Canadian
and US figures but excluded from those being used for
European jurisdictions.
2014/15F
2015/16E
-2.0
9.9
-14.6
-6.7
1.4
0.0
-15.8
-14.4
Domestic Maturities & Buybacks (2)
84.0
70.0
Total
90.7
84.4
Sources of Funding
Cash & Other
Treasury Bills (Net)
Domestic Canadas (incl. RRBs)
Retail (Net)
Foreign Currency Debt (Net)
5.7
-17.0
98.0
0.0
4.0
-5.6
-7.0
90.0
0.0
7.0
Total
90.7
84.4
Net New Issues
of Domestic Canada Bonds
14.0
20.0
(1) Non-budgetary transactions comprise loans/advances
to Enterprise Crown Corporations, pension costs & other
(2) Domestic bonds only; excludes refinancing requirements
for Treasury bills, retail and foreign currency debt
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CIBC World Markets Inc.
2015 Canadian Federal Budget—April 21, 2015
Debt Management Strategy 2015/16
preference. The Government has no plans to issue 7-year
term debt. The Government issued a total of $3.5 bn
in 50-year bonds over the course of 2014 and may
issue additional ultra-long bonds on an opportunistic
basis. Foreign currency borrowing will continue to be
undertaken in order to fund Canada’s foreign exchange
reserves, with foreign currency funding requirements
estimated to be around US$9 bn in 2015/16.
On March 30th, the Government of Canada tabled its
Debt Management Strategy for 2015/16 as required
under the Financial Administration Act to present its
plan in Parliament prior to the start of the April 1st
fiscal year. The Debt Management Strategy sets out
the Government’s objectives, strategy and plans for the
management of its domestic and foreign debt, other
financial liabilities and related assets.
For the upcoming fiscal year, the Government has been
granted an aggregate borrowing limit of $270 bn,
unchanged from fiscal 2014/15. Gross bond issuance
has ranged between $88-$100 bn since 2010/11. For
2015/16, gross bond issuance is expected to be $90 bn,
driven largely by debt refinancing followed by operational
financing requirements. The stock of treasury bills will
decrease from $136 bn at the start of the year to $129
bn by the end of 2015/16. The Government has indicated
that it is comfortable with its long term debt profile and
would like to expand borrowings in the 2- and 5-year
sectors in order to achieve a more even distribution of its
debt maturities.
The Debt Management Strategy will continue to deploy
a variety of instruments to contribute to the objective of
securing stable, low-cost funding in the year ahead. These
instruments will include nominal and real return bonds,
treasury bills and retail debt products across a range of
maturities.
Term debt issuance will be focused in the 2-, 5-, 10- and
30-year areas through the implementation of the regular
auction programs. Issuance of 3-year bonds will cease
in order to allow for the building of larger benchmarks
in the core 2- and 5-year sectors in response to market
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