Budget 2023: Issues for Parliamentarians

Summary

To assist parliamentarians in their budgetary deliberations, this report highlights key issues arising from Budget 2023.

Economic outlook

On balance, the outlook for real GDP growth over 2023 to 2027 presented in Budget 2023 is slightly weaker compared to PBO’s March outlook, with annual growth averaging, respectively, 1.6 and 1.7 per cent.  This slight difference reflects a weaker near-term outlook that includes a “shallow recession” in 2023, whereas PBO’s March outlook projected the economy to stagnate over the course of the year.

The private sector forecast of nominal GDP—the broadest measure of the Government’s tax base—is $29 billion (0.9 per cent) lower per year, on average, over 2023 to 2027 compared to PBO’s March outlook.  This difference primarily reflects a weaker near-term outlook for GDP inflation and real GDP growth in 2023 forecasted by private sector economists in Finance Canada’s February survey.

Fiscal outlook

Relative to the 2022 Fall Economic Statement (FES), Budget 2023 included $42.9 billion in net new measures over 2022-23 to 2027-28.  This represents an increase in (net) new spending of $22.0 billion relative to PBO’s March outlook, which had included $20.4 billion in new healthcare funding that was re-announced in Budget 2023.

When put on a comparable basis (that is, our March projection adjusted for new measures), PBO’s projected budgetary deficits are, on balance, in line with the outlook presented in Budget 2023.

New measures

Revisions to the private sector economic outlook and fiscal developments in Budget 2023 lower the outlook for the budgetary balance by $26.1 billion (or $4.4 billion per year, on average) over 2022-23 to 2027-28 relative to the 2022 FES.  This was the first time since Budget 2021 that the Government revised its outlook for the budgetary balance—prior to including new measures—downward.

In addition, the Government announced $69.7 billion in new spending (measured on a gross basis) that was partially offset by $14.0 billion in revenue-raising measures and by $12.8 billion in spending restraint measures.  On a net basis, new measures further reduce the budgetary balance by $42.9 billion (or $7.2 billion per year, on average) over 2022-23 to 2027-28.

Spending reviews

Budget 2023 does not provide an assessment of program effectiveness that the Government launched in Budget 2022 under Stream 1 of its comprehensive Strategic Policy Review.  That said, Budget 2023 did announce the introduction of “cross-government program effectiveness reviews,” with the first review examining “skills training and youth programming” to determine “whether improvements can be made”.

Aside from proposing to reduce spending on consulting, other professional services and travel (by “roughly 15 per cent”), Budget 2023 does not identify opportunities to save and reallocate resources “to adapt government programs and operations to a new post-pandemic reality” under Stream 2 of the comprehensive Strategic Policy Review launched in Budget 2022.

Fiscal anchor

Budget 2023 reaffirmed the Government’s commitment to its fiscal anchor of reducing the federal debt as a share of the economy over the medium term.  Based on the outlook in Budget 2023, the federal debt-to-GDP ratio is projected to increase temporarily, remaining above its 2022-23 level for two years, before gradually declining over the medium term.

On a status quo basis—that is, without additional measures and given possible economic outcomes surrounding the private sector outlook—we estimate that there is a 70 per cent chance that the federal debt-to-GDP ratio in 2027-28 would be below its 2022-23 baseline level of 42.4 per cent.

Fiscal transparency

Measures without specific details

In Budget 2023, the Government identified $798 million—on a net basis—in new “non-announced” measures over 2022-23 to 2027-28.  In absolute terms, this represents over $12 billion in either revenue or spending decisions for which there are no specific details.

This lack of transparency presents challenges for parliamentarians and the public in scrutinizing the Government’s spending plans, as well as reconciling between previously provisioned amounts and their announcement.

Alignment of financial reporting

Budget 2023 was tabled a month after the Government’s Expenditure Plan and Main Estimates for 2023-24, meaning the latter did not contain any of the $9.8 billion in additional spending for budget measures.

Consistent with the Parliamentary Budget Officer’s mandate to “promote fiscal transparency”, it is recommended that Parliament consider adopting a new legislative or administrative framework to improve transparency and comprehensibility for parliamentarians and the public.  In this case, a fixed budget date earlier in the year could enforce better alignment among the Government’s various financial reports.

Economic outlook

The economic outlook presented in Budget 2023 was based on Finance Canada’s February 2023 survey of private sector economists.  Table 1 provides a high-level comparison of the average private sector forecast in Budget 2023 and PBO’s Economic and Fiscal Outlook (EFO) published on March 2, which incorporated data up to and including February 21.[^1]

Finance Canada

Office of the Parliamentary Budget Officer

Finance Canada

Office of the Parliamentary Budget Officer

\* Adjusted to reflect the actual results of the National Accounts for the fourth quarter of 2022 and historical revisions.  Numbers may not add due to rounding.

On balance, the outlook for real GDP growth over 2023 to 2027 presented in Budget 2023 is slightly weaker compared to PBO’s March outlook, with annual growth averaging, respectively, 1.6 and 1.7 per cent.[^2]  This slight difference reflects a weaker near-term outlook that includes a “shallow recession” in 2023, whereas PBO’s March outlook projected the economy to stagnate over the course of the year.[^3]

The private sector forecast of nominal GDP—the broadest measure of the Government’s tax base—is $29 billion (0.9 per cent) lower per year, on average, over 2023 to 2027 compared to PBO’s March outlook.  This difference primarily reflects a weaker near-term outlook for GDP inflation and real GDP growth in 2023 forecasted by private sector economists in Finance Canada’s February survey.

In Budget 2023, the private sector outlook for the unemployment rate is consistently higher than PBO’s projection (0.2 percentage points, on average).  That said, on balance, private sector economists forecast faster employment growth over the medium term.  Consequently, the higher unemployment rate in Budget 2023 reflects higher labour force participation underlying the private sector forecast.

The outlook for 3-month treasury rates over 2023 to 2027 presented in Budget 2023 (3.0 per cent, on average) is in line with PBO’s March EFO, which suggests similar views about the future path of the Bank of Canada’s policy rate.  That said, the private sector outlook for the 10-year government bond rate in Budget 2023 is consistently lower than PBO’s projection (3.0 per cent versus 3.3 per cent, on average).

Fiscal outlook

Relative to the 2022 Fall Economic Statement (FES), Budget 2023 included $42.9 billion in net new measures over 2022-23 to 2027-28.  This represents an increase in (net) new spending of $22.0 billion[^4] relative to PBO’s March outlook, which had included $20.4 billion in new healthcare funding that was re-announced in Budget 2023.

When put on a comparable basis (that is, our March projection adjusted for new measures), PBO’s projected budgetary deficits are, on balance, in line with the outlook presented in Budget 2023 (Table 2).

Finance Canada

Office of the Parliamentary Budget Officer

Finance Canada

Office of the Parliamentary Budget Officer

\* Adjusted for measures already included in PBO’s March outlook. Totals may not add due to rounding.

That said, while the outlooks for the budgetary balance are, on average, quite similar, there are some notable differences.

In 2022-23, PBO’s adjusted budgetary balance shows a higher deficit primarily due to the inclusion of $9.0 billion in spending reductions in Budget 2023 which were not anticipated at the time of our outlook.  These spending reductions are largely offset by our higher in-year estimate for tax revenues.[^5]

Over the remainder of the projection horizon, on average, PBO’s adjusted budgetary balance outlook shows marginally smaller deficits compared to Budget 2023 both due to somewhat higher projected revenues and lower expenses.

New measures

Revisions to the private sector economic outlook and fiscal developments in Budget 2023 lower the outlook for the budgetary balance by $26.1 billion (or $4.4 billion per year, on average) over 2022-23 to 2027-28 relative to the 2022 FES.[^6]  This was the first time since Budget 2021 that the Government revised its outlook for the budgetary balance—prior to including new measures—downward.

In addition, the Government announced $69.7 billion in new spending (measured on a gross basis) that was partially offset by $14.0 billion in revenue-raising measures and by $12.8 billion in spending restraint measures.  On a net basis, new measures further reduce the budgetary balance by $42.9 billion (or $7.2 billion per year, on average) over 2022-23 to 2027-28 (Table 3).

Finance Canada

Office of the Parliamentary Budget Officer

Finance Canada

Office of the Parliamentary Budget Officer

The gross amount of new measures includes the net fiscal impact of non-announced measures (undisclosed measures due to confidentiality).  These amounts include either measures that reduce spending or increase revenues.  Totals may not add due to rounding.

In the 2022 Fall Economic Statement, the Government provisioned for $8.5 billion in additional spending over 2022-23 to 2027-28 for “anticipated near-term pressures”.  However, the Government did not provide any details on this provision except for tautologically noting in the FES that it was “for pressures that are anticipated to materialize in the near term”.

In Budget 2023, the Government identified $4.8 billion in “off-cycle” measures (that is, measures since the 2022 FES, excluding Budget 2023) that were sourced from the provision for anticipated near-term pressures.  The remainder of the provision ($3.7 billion) was not spent, contributing to lower budgetary deficits over the projection period.[^7]

In the absence of the $42.9 billion in (net) new spending, the budgetary deficit would be $7.2 billion lower each year, on average, over 2022-23 to 2027-28 and the debt-to-GDP ratio would be 1.3 percentage points lower in 2027-28 than projected in the Budget 2023, all else equal.[^8]

Since Budget 2021, the Government has projected a total of $231.5 billion in new fiscal room[^9], of which more than 70 per cent ($168.1 billion) was used to finance new non-COVID‑19 measures over 2022-23 to 2027-28 (Table 4).

Finance Canada

Office of the Parliamentary Budget Officer

Finance Canada

Office of the Parliamentary Budget Officer

Amounts for Budget 2022 and the 2021 Economic and Fiscal Update apply to fiscal years 2021-22 to 2026-27 and 2021-22 to 2025-26, respectively. The 2022 FES and Budget 2023 amounts apply to fiscal years 2022-23 to 2027-28. Negative fiscal room indicates a deterioration in the budgetary balance. Totals may not add due to rounding.

In the absence of new non-COVID-19 measures since Budget 2021[^10], the budgetary deficit over 2022-23 to 2027-28 would be $25.9 billion lower each year, on average, and the debt-to-GDP ratio would be 4.7 percentage points lower in 2027-28 than projected in Budget 2023, all else equal.[^11]

Spending reviews

In Budget 2022, the Government announced the launch of a “comprehensive Strategic Policy Review” that included two streams.  Stream 1 would “assess program effectiveness” and Stream 2 would “identify opportunities to save and reallocate resources”.  Further, the Government committed to providing an update of this review in Budget 2023.  In the 2022 Fall Economic Statement, the Government reiterated the launch of its comprehensive review and committed to providing further details in Budget 2023.

Budget 2023, however, does not reference the Government’s “comprehensive Strategic Policy Review” and instead proposes to achieve savings by “refocusing government spending” through predetermined spending reductions.[^12]

Budget 2023 does not provide an assessment of program effectiveness that the Government launched in Budget 2022 under Stream 1 of its comprehensive review.  That said, Budget 2023 did announce the introduction of “cross-government program effectiveness reviews,” with the first review examining “skills training and youth programming” to determine by Budget 2024 “whether improvements can be made”.

Aside from proposing to reduce spending on consulting, other professional services and travel (by “roughly 15 per cent”), Budget 2023 does not identify opportunities to save and reallocate resources “to adapt government programs and operations to a new post-pandemic reality” under Stream 2 of the comprehensive Strategic Policy Review launched in Budget 2022.[^13]

Recall that the Government did not adhere to the other spending review it announced in Budget 2022 (“Reduced Planned Spending in the Context of a Stronger Economy”).  As PBO noted in its report on the 2022 Fall Economic Statement[^14], this spending review—with $3 billion in savings targeted over 2023-24 to 2026‑27—was “achieved” through $3.8 billion in lower-than-anticipated spending on certain COVID-19 support measures in the previous fiscal year, 2021-22.

Under reviews related to refocusing government spending, Budget 2023 targets $15.4 billion in savings over 2023-24 to 2027-28, of which $6.4 billion is incremental savings relative to the 2022 FES and Budget 2022 (Table 5).

Finance Canada

Office of the Parliamentary Budget Officer

Finance Canada

Office of the Parliamentary Budget Officer

* The $3.8 billion in savings was “achieved” through lower-than-anticipated spending on certain COVID-19 support measures in 2021-22.

In addition to refocusing government spending in Budget 2023, the Government intends to “realign previously announced spending”.  Spending reductions of $6.4 billion (on a cumulative basis over 2022-23 to 2027-28) were targeted, with $3.5 billion in spending no longer required in 2023‑24 alone.[^15]  Parliamentarians may wish to request details about the Government’s planning process that led to the misallocation of this spending and the status or results of the programs impacted (if any).

Fiscal anchor

Budget 2023 reaffirmed the Government’s commitment to its fiscal anchor of reducing the federal debt as a share of the economy over the medium term.  Based on the outlook presented in Budget 2023, the federal debt-to-GDP ratio is projected to increase temporarily, remaining above its 2022-23 level of 42.4 per cent for two years, before gradually declining over the medium term to reach 39.9 per cent in 2027-28.

Given the private sector economic outlook and the Government’s fiscal projection in Budget 2023, using our fiscal sensitivities, we construct distributions of future possible outcomes to calculate confidence intervals.

On a status quo basis—that is, without additional measures and given possible economic outcomes surrounding the private sector outlook—we estimate that a 70 per cent confidence interval for the federal debt-to-GDP ratio in 2027-28 would be approximately ±5 percentage points (Figure 1).

Finance Canada

Statistics Canada

Office of the Parliamentary Budget Officer

Finance Canada

Statistics Canada

Office of the Parliamentary Budget Officer

The series are presented on a fiscal-year basis (2022 corresponds to fiscal year 2022-23).  The projection period covers 2022-23 to 2027-28.  The red line corresponds to the baseline level of the federal debt-to-GDP ratio in 2022-23.

Further, we estimate that there is a 70 per cent chance that the federal debt-to-GDP ratio in 2027-28 would be below its 2022-23 baseline level of 42.4 per cent.

On a status quo basis, we estimate that a 70 per cent confidence interval for the budgetary balance in 2027-28 would range from a deficit of $42.9 billion to a surplus of $14.3 billion, with a 30 per cent chance of a balanced budget or better.

We also construct confidence intervals for the Government’s debt service ratio (that is, public debt charges relative to tax revenues), which provides a more meaningful metric of debt-servicing capacity compared to the debt-to-GDP ratio.[^16]  Based on the outlook in Budget 2023, the debt service ratio is projected to rise from 9.3 per cent in 2022-23 to 11.6 per cent in 2024-25, before stabilizing around 11.2 per cent thereafter.

On a status quo basis, we estimate that a 70 per cent confidence interval for the debt service ratio in 2027-28 would be approximately ±1.5 percentage points (Figure 2).  Further, in a given year, we estimate that there is a very high probability that the debt service ratio well exceeds its pre-pandemic level of 8.7 per cent in 2019-20.

Finance Canada

Office of the Parliamentary Budget Officer

Finance Canada

Office of the Parliamentary Budget Officer

The series are presented on a fiscal-year basis (2022 corresponds to fiscal year 2022-23). The projection period covers 2022-23 to 2027-28.

Fiscal transparency

Measures without specific details

Since the 2016 FES, the Government has been quantifying “non-announced” spending decisions that could relate to either confidential planned spending or provisions for anticipated Cabinet decisions.[^17]  In Budget 2023, the Government identified $798 million—on a net basis—in new “non-announced” measures over 2022-23 to 2027-28 (Table 6).  In absolute terms, this represents over $12 billion in either revenue or spending decisions for which there are no specific details.

Additionally, once (and if) these measures are announced, the publication in which they were originally provisioned for will not likely be identified.[^18]  This lack of transparency presents challenges for parliamentarians and the public in scrutinizing the Government’s spending plans, as well as reconciling between previously provisioned amounts and their announcement.

Parliamentarians may wish to request that provisions for anticipated Cabinet decisions not yet made be presented as a separate item within the category of non-announced measures.  In addition, parliamentarians may wish to request that once these measures are announced, the Government identify the budget or statement in which they were provisioned.

Alignment of financial reporting

Budget 2023 was tabled a month after the Government’s Expenditure Plan and Main Estimates for 2023-24, meaning the latter did not contain any of the $9.8 billion in additional spending for budget measures.

Similarly, the 2023 Departmental Plans, which describe departmental priorities and outline programs and resource requirements for the next three years, were tabled almost three weeks before the budget and do not contain information regarding the $34.4 billion in new budget spending between 2023-24 and 2025-26.

Due to the lack of alignment between these financial reports—and consistent with the Parliamentary Budget Officer’s mandate to “promote fiscal transparency”— it is recommended that Parliament consider adopting a new legislative or administrative framework to improve transparency and comprehensibility for parliamentarians and the public. In this case, a fixed budget date earlier in the year could enforce better alignment among the Government’s various financial reports.