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Canada's Economic and Fiscal Situation and Medium-Term Challenges

Canada's Economic and Fiscal Situation and Medium-Term Challenges. Pre-Budget Consultations Burlington, Ontario December 19, 2012. Overview of Presentation. Economic Performance Economic Outlook and Risks Fiscal Plan Medium-Term Challenges Conclusions. Economic Performance.

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Canada's Economic and Fiscal Situation and Medium-Term Challenges

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  1. Canada's Economic and Fiscal Situation and Medium-Term Challenges Pre-Budget Consultations Burlington, Ontario December 19, 2012

  2. Overview of Presentation • Economic Performance • Economic Outlook and Risks • Fiscal Plan • Medium-Term Challenges • Conclusions

  3. Economic Performance

  4. Economic Performance Canada has performed better than most of its peers, during the recession and in the recovery Change in Real GDP Since Pre-Recession Peak Canada's performance since the pre-recession peak has been among the strongest in advanced economies, and the strongest in the G-7 Canada has recouped and exceeded the output lost during the recession Growth over the recovery has been driven by strength in consumer spending and, increasingly, business investment As a result, Canada is the only country among the G-7 to have recovered its pre-recession level of business investment Per cent change from pre-recession real GDP peak to 2012Q2 Canada Average Sources: OECD Quarterly National Accounts; Department of Finance calculations.

  5. Economic Performance Strong economic growth has translated into robust employment growth Improvement in Employment Over the Recovery Canada has also outperformed most other advanced economies in job creation over the recovery These employment gains have been in higher-quality jobs, with over 90 per cent of all jobs created being full-time positions and about two-thirds in high wage industries As important, the private sector has been the main source of job growth during the recovery Per cent change from recession employment trough to 2012Q2 Canada Average Sources: OECD Labour Force Statistics (Main Economic Indicators); Haver (for G7 and Switzerland); and Department of Finance calculations.

  6. Economic Performance Canada's employment performance contrasts sharply with that of the United States… Total Employment Unemployment Rate index, January 2006 = 100 per cent Note: Last data point is November 2012.Sources: Statistics Canada; U.S. Bureau of Labor Statistics

  7. Economic Performance … particularly in light of differences in labour force participation Long-Term Unemployment Rate Labour Force Participation Rate per cent per cent Note: the long-term unemployment rate is the ratio of the number of people unemployed for a period of at least 27 weeks to the labour force. Sources: Statistics Canada; U.S. Bureau of Labor Statistics Notes: The participation rate is the share of the working-aged population who are either working or actively seeking work. Last data point is November 2012.

  8. Economic Performance Canada’s strong performance reflects solid economic, financial and fiscal policy fundamentals • Credible monetary policy has paid dividends • Effective regulation and supervision, along with a culture of prudence in the sector, have yielded a strong and stable banking sector • Sound fiscal position allowed the Government to implement an effective stimulus package (chart) • In Canada, provincial fiscal action enhanced federal stimulus • U.S. state fiscal actions offset stimulus by 2.0 per cent of GDP Fiscal Stimulus Flowing in 2009 and 2010 per cent of GDP Note: IMF estimates exclude loans, including those to the auto sector, for all countries. Figure for Canada includes provincial-territorial stimulus in addition to that assumed in the Economic Action Plan. Source: IMF Fiscal Monitor (May 2010), Finance Canada.

  9. Economic Outlook and Risks

  10. Economic Outlook and Risks The ongoing sovereign debt and banking crisis has pushed the euro area economy back into recession Euro Area Real GDP Growth • The euro area sovereign debt and banking crisis continues to weigh on economic activity in the region • Real GDP has now contracted for four consecutive quarters and the region is officially back into recession • While important steps have been taken so far to contain the crisis, there is more to do in implementing necessary structural reforms per cent, period to period at annual rates Last data point is 2012Q3 Sources: Eurostat.

  11. Economic Outlook and Risks In the U.S., the weak economic recovery is expected to continue U.S. Real GDP in Previous Recessions • Weakest U.S. recovery since WWII, but typical of financial crises • Economy continues to be restrained by headwinds from the housing crisis and a weak labour market • U.S. needs to coordinate fiscal policy to avoid the 2013 "fiscal cliff", while implementing a credible medium-term plan to reduce government debt index, real GDP peak = 100 2012Q3 Quarters since GDP Peak Sources: U.S. Bureau of Economic Analysis; U.S. National Bureau of Economic Research; Department of Finance calculations.

  12. Economic Outlook and Risks Chinese growth has firmed recently, despite weak external demand • Chinese growth slowed to its weakest pace since the last global recession earlier this year • Reflected policy tightening to cool the economy, and weaker overseas growth • In response, China eased monetary policy and introduced small fiscal stimulus • Has since helped support growth, reducing the risk of a “hard landing” China Real GDP Growth per cent, period to period at annual rates Last data point is 2012Q3 Sources: China National Bureau of Statistics; Haver Analytics. Bottom Line: global growth is expected to remain moderate going forward with key risks tilted to the downside

  13. Economic Outlook and Risks Key Domestic Risk: household indebtedness Household Indebtedness Per cent Per cent • Debt-to-personal disposable income ratio has risen steadily over the last 20 years – though only to about the OECD average • However, household debt-to-net worth (i.e. leverage) – a more appropriate ‘stock to stock’ measure – remains relatively low and more stable • The Government has implemented a series of measures since 2008 to help prevent households from becoming over-extended • Main risk is that a large external shock would require more deleveraging than otherwise Debt to income(left scale) Debt to net worth(right scale) Sources: Statistics Canada National Balance Sheet and National Income and Expenditure Accounts. Last observation 2012 Q3 Notes: The depicted measures represent Statistics Canada’s reported credit market debt-to-disposable income ratio and credit market debt-to-net worth ratio for the household sector.

  14. Economic Outlook and Risks The average outlook for real GDP growth over the next five years is unchanged since Budget 2012 • The Canadian economy has remained resilient in the face of external economic weakness • Growth is expected to remain positive, albeit modest, over the forecast horizon, with forecast growth in the 2-per-cent range on average, unchanged from the Budget 2012 outlook • This outlook is consistent with continued modest global growth, meaning: • Gradual resolution of the euro area sovereign debt and bank crisis • Positive resolution of U.S. fiscal challenges Real GDP Growth per cent Source: Department of Finance March 2012 and October 2012 surveys of private sector economists.

  15. Economic Outlook and Risks However, uncertainty and weaker global growth have weighed on commodity prices since Budget 2012… Commodity Prices Global economic uncertainty has been keenly felt in commodity markets Overall commodity prices declined by 7 per cent between Budget 2012 and Update 2012 Commodity prices are projected to remain below levels expected in Budget 2012 over the medium term index, 2002=100 March2012 Budget 2012 Update 2012 Note: Solid line shows historical spot prices. Dotted series are projections of commodity prices consistent with the March and October 2012 surveys of private sector economists. Last data point is December 2016.Sources: Commodity Research Bureau; Department of Finance March and October 2012 surveys of private sector economists; Department of Finance calculations.

  16. Economic Outlook and Risks … which has translated into lower expected nominal GDP and government revenues over the medium term Weak commodity prices over the first half of 2012 and over the next five years have reduced the outlook for GDP inflation This has lowered the projected level of nominal GDP -- the broadest single indicator of the tax base -- by an average of $25 billion between 2012 and 2016. This, in turn, has resulted in a reduction in the outlook of budgetary revenues of $7.3 billion annually, on average, over the medium term. Change in Projected Budgetary Revenues from the 2012 Budget to the 2012 Update billions of dollars Average: $7.3 B

  17. Fiscal Plan

  18. Fiscal Plan Despite lower projected revenues, the Government remains on track to return to balanced budgets over the medium term Budgetary Balance The budgetary balance is expected to continue to improve over the medium term, resulting in a projected surplus in 2016-17 of $1.7 billion. This includes a downward adjustment for risk to projected revenues of $3.0 billion annually. Excluding the adjustment for risk, the budgetary balance would be projected to reach a surplus of $1.2 billion in 2015-16. billions of dollars

  19. Fiscal Plan The return to balanced budgets will be achieved through the Government's ongoing commitment to control the growth of program spending • Program spending as a share of GDP is expected to return to pre-crisis levels through: • Temporary stimulus measures ending as scheduled • Targeted actions to restrain growth in direct program spending, including a review of departmental spending that will result in operational savings of $5.2 billion in 2014-2015 • Bringing federal public service compensation in line with that of other public and private-sector employees Program Expenses-to-GDP Ratio per cent of GDP Actual Projection Source: Public Accounts of Canada; Department of Finance; Statistics Canada. The Government will not reduce transfers to persons or other levels of government in support of health care and social services

  20. Fiscal Plan The federal debt-to-GDP ratio is expected to return to pre-recession levels Federal Debt-to-GDP Ratio • The federal debt is projected to resume its trend decline • This, combined with the fiscal actions being undertaken by provinces and territories, is expected to result in Canada maintaining its significant fiscal advantage over most other OECD countries • The IMF projects that Canada will have a net debt-to-GDP ratio of about 36 per cent in 2017 – about a third of the G7 average and less than two-thirds of the next closest G7 country (Germany) per cent of GDP Actual Projection Source: Public Accounts of Canada, Department of Finance; Statistics Canada.

  21. Medium-Term Challenges

  22. Canada has had the highest growth in real income per capita among the G-7 since 2000 Medium-Term Challenges • Canada outpaced all other G-7 countries in real income gains over the past decade • This marked a sharp turnaround from the 1990s, when Canada had the poorest performance in the G-7 • Higher income can come from gains in employment and hours worked, terms of trade, or productivity Annual Growth in Real Income Per Capita for G-7 Countries, 2000-2011 per cent Canada ranks 6th among 22 OECD countries Note: Income refers to real Gross Domestic Income (GDI). Real GDI is obtained by deflating nominal GDP by the final domestic demand price index.Sources: OECD, Haver.

  23. Medium-Term Challenges Higher employment has been important in increasing Canadians’ incomes over the last decade Employment Rate, G-7 countries, 2011 • This good performance was primarily due to strong employment gains • Canada now has the highest employment rate in the G-7 • Canada’s terms of trade also improved sharply with the rapid rise in commodity prices • However, we can't count on either factor going forward per cent Canada ranks 6th among 22 OECD countries Note: Share of total population that is employed. Source: OECD.

  24. But the key to maintaining future income growth lies in improving our productivity performance Medium-Term Challenges Labour Productivity Growth, G-7 Countries 2000-2011 • Canadians’ income gains were achieved despite a poor productivity performance • Canada’s productivity has not improved over the last decade and continues to lag its G7 peers, particularly the U.S. • Improving productivity will become even more important over time as an aging population will make it difficult to raise income through employment growth alone OECD average per cent Canada ranks 28th among 34 OECD countries Source: OECD

  25. Medium-Term Challenges Strengthening income growth will require improvements in Canada’s performance in key areas The building blocks of income growth Income Growth Labour Force Participation Productivity Growth Education and Skills Business Investment Innovation Policy Framework • Education and Skills – a skilled, educated, adaptable and mobile workforce • Business Investment – advanced and efficient technologies, and a modern productive infrastructure • Innovation – effective R&D, knowledge transfer and technology adoption • The policy framework must encourage Canadian business and individuals to invest in these drivers of income growth

  26. Canada leads in education attainment…. Medium-Term Challenges Percentage of 25-64 Year Olds With a Post-Secondary Education, 2010 • Canadians are among the most educated in the world, and perform well on international tests • Canada also compares well with regards to job-related training • There are, however, some areas for improvements: • Integrating new immigrants and Canadian aboriginals into the labour market • Improving the educational outcomes of Aboriginals • Ensuring the supply of graduate students matches business needs, including the need for well-educated managers OECD average per cent Canada ranks 1st among 34 OECD Source: OECD Education at a Glance 2012

  27. …and compares well internationally in labour force participation rate Medium-Term Challenges Labour Force Participation Rate, 2011 • By international standards, the rate at which Canadians participate in the workforce is high • Canada needs to maintain and build on this strength • Indeed, more can be done to increase workforce participation by a number of groups in Canada OECD average per cent Canada ranks 6th among 34 OECD Source: OECD. Population aged 15+.

  28. Medium-Term Challenges But there is room for improvement among older Canadians and other under-represented groups • Canada lags a number of OECD countries when it comes to workforce participation of those aged 55 and over • Participation in the workforce is also a challenge for a number of Canadians, including recent immigrants, Aboriginal Canadians, persons with disabilities, and less-skilled individuals • Bringing workforce participation rates of under-represented groups more in line with those of other Canadians has the potential to boost Canada’s labour force growth and help minimize labour shortages in years to come Labour force participation rates for selected groups of Canadians, 2011 per cent Source: Statistics Canada. Note: Participation rates for 2011, except for Aboriginal Canadians (2010) and Canadians with Disabilities (2006). *Population aged 25-54 with high school graduation or less. **Population aged 25-54 who came to Canada in the last ten years. ***Aboriginal population aged 25-54, excluding people living on reserves and in the territories. ****Population aged 25-54 with disability.

  29. Medium-Term Challenges The process of matching workers with jobs and jobs with workers needs to be improved • Large imbalances persist between the number of unemployed and vacant jobs across Canada’s regions and occupation groups • This suggest that some Canadians remain unemployed either because they do not have the right skills or they are unwilling to move or accept the available jobs in high demand regions and sectors • Greater labour mobility and skills upgrading might help address labour shortages by inducing Canadians to move from low to high demand regions and occupations Unemployment-to-job vacancies ratio, by regions and skills requirements of the jobs, August 2012 ratio By Region: By Skills Requirements: National average: 1.8 Note: The unemployment-to-job vacancies ratio reflects how many unemployed individuals are available for each online job posting. Sources: Statistics Canada, Wanted Technologies, Finance Canada calculations. Data are seasonally adjusted.

  30. Canada’s businesses do not invest enough in new technology Medium-Term Challenges Capital-to-Output Ratio in Canada as a Percentage of U.S. Level, 2003 • Canadian businesses use relatively more capital than U.S. businesses • This is because they invest more in structures (e.g. buildings, pipelines, engineering work) • However, they invest less in machinery and equipment, and particularly in the information and communication equipment that tend to embody new technologies • Likely a symptom of a lack of innovation per cent U.S. = 100 Source: “Capital Intensity in Canada and the U.S., 1987-2003” by Baldwin et al. (2008).

  31. Canadian businesses innovate less than in other countries Medium-Term Challenges Business Expenditure on R&D as a Share of GDP, 2009 • One aspect of innovation is R&D • Canada is a world leader in supporting public R&D • We also provide generous support to private R&D • However, there is a low return to this investment, as Canadian businesses invest less in R&D than in other countries and seem to rely more on imitation than on innovation per cent Canada ranks 19th among 34 OECD countries Source: OECD Science, Technology and Industry Scoreboard 2011 (2011) Note: Data for 2009, or latest available year.

  32. Medium-Term Challenges Canada has put in place an improved economic policy framework • Strong progress in implementing job and growth agenda • Competitive business tax system • Expanding trade and tariff-free zone for manufacturers • Modernizing the regulatory system for major economic project reviews • Investment in and a new approach to supporting science and innovation • Large investment in major public infrastructure • Improved incentives to save and work (TFSA, WITB) • Faster and more flexible economic immigration system Marginal Effective Tax Rate¹ on New Business Investment, 2014 per cent Impact of federal and provincial commitments since Budget 2006 33.0 2 Source: Department of Finance. 1. The Marginal Effective Tax Rate (METR) includes measures announced as of January 1, 2012. It excludes the resource and financial sectors and tax provisions related to research and development. 2. OECD average excludes Canada.

  33. Questions • How can the federal government help middle-class families with the costs of living and raising a family? • How can the federal government improve business conditions for the private sector to encourage investments in productivity-enhancing capital and the hiring of new employees? • Are there areas in which the federal government could streamline regulation and further reduce costs on businesses? • The current federal infrastructure framework, the Building Canada Plan, is set to expire in 2014. How can the federal government best leverage funding from the private sector and other jurisdictions to maximize impact in the successor program? Which types of public infrastructure should the federal government focus on? • Are there any current policies that discourage Canadians from obtaining the skills and knowledge necessary for the jobs of tomorrow? • Are there any areas where the federal government can find additional savings and better respect taxpayers’ dollars?

  34. Canada's Economic and Fiscal Situation and Medium-Term Challenges Pre-Budget Consultations Burlington, Ontario December 19, 2012

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