Economic and Fiscal Outlook — March 2024

Summary

This report provides a baseline projection to help parliamentarians gauge potential economic and fiscal outcomes under current policy settings. Our outlook incorporates economic data up to and including February 20. It also includes new measures announced by the Government in the 2023 Fall Economic Statement and through February 1. The following provides a condensed overview of PBO’s Economic and Fiscal Outlook (EFO). Projection details are provided in Appendices A to I. An accessible version of the appendices is available on the PBO website.

Economic outlook

Recent data[^1] suggest that the Canadian economy stagnated in the second half of last year, leaving real GDP in the fourth quarter essentially unchanged from its level in the second quarter. In terms of annual growth, we estimate that real GDP advanced by 1.1 per cent in 2023.

We project growth in the Canadian economy to remain sluggish through 2024, with quarterly real GDP growth hovering around 1 per cent (at annual rates). Restrictive monetary policy is expected to restrain growth in consumer spending in the first half of the year and to dampen residential investment over the course of the year. We project export growth to moderate in response to a slowing U.S. economy and inventory investment to subtract from growth as businesses pullback on their stock building.

We project annual real GDP growth in 2025 to rebound to 2.4 per cent as consumer spending surges and the drag from inventory investment dissipates (Table 1). Over 2026 to 2028, we project real GDP growth to average 2.1 per cent which is higher than our estimated growth in potential output (1.9 per cent) over the same period.

Despite further declines in the labour force participation rate, the unemployment rate remains elevated, reaching 5.7 per cent in January as moderate job gains have continued to fall short of robust population growth.

Consistent with sluggish economic growth, we project the unemployment rate to edge higher, rising to 5.9 per cent in the second half of this year. We project the unemployment rate to average 5.9 per cent through the first half of 2025 before gradually declining to 5.5 per cent as growth in real GDP outpaces growth in potential output over the medium term.

As excess supply in the economy increases and commodity prices continue to weaken, we project consumer price inflation[^2] to return to its 2 per cent target by the end of 2024 (on a quarterly basis), and then to average 1.9 per cent over 2025 to 2027 as the economy gradually returns to its potential output and excess supply diminishes.

With CPI inflation on track to return to its 2 per cent target, we expect the Bank of Canada to start lowering its policy rate in April of this year.[^3] We assume that the policy rate will be reduced by 25 basis points at each fixed announcement date, returning the rate to its estimated neutral level of 2.5 per cent in the second quarter of 2025.

Overall, our outlook for nominal GDP—the broadest measure of the government’s tax base—is lower compared to our October EFO largely due to downward revisions to GDP inflation.[^4] Adjusted for historical revisions[^5] the level of nominal GDP is projected to be $23.4 billion lower annually, on average, over 2023 to 2028 compared to our October outlook.

Fiscal outlook

Recall that PBO prepared its October outlook prior to the tabling of the 2022-23 Public Accounts.[^6] The results for fiscal year 2022-23 recorded a budgetary deficit of $35.3 billion (1.3 per cent of GDP)—slightly lower than our estimate of $38.7 billion (1.4 per cent of GDP) in October.

Our status quo outlook includes new measures announced in the 2023 Fall Economic Statement and through February 1. Combined, new measures amount to $8.1 billion in (net) new spending over 2023-24 to 2028-29.[^7]

For the current fiscal year, 2023-24, we expect the deficit to rise to $46.8 billion (1.6 per cent of GDP) due to slower revenue growth and higher expenses (Table 2).

In 2024-25, assuming no new measures are introduced, and existing temporary measures sunset as scheduled, the budgetary deficit is projected to resume its downward trajectory, reaching $16.9 billion (0.5 per cent of GDP) in 2028-29, as growth in tax revenue tracks gains in nominal GDP and growth in program spending remains relatively constrained.

With the increase in interest rates, we project the debt service ratio (that is, public debt charges relative to total revenues) to rise from 7.8 per cent in 2022-23 to 10.2 cent in 2023-24 (Figure 1). As the effective interest rate on debt edges higher in 2024-25, we project the debt service ratio to increase further and average 10.7 per cent through 2028-29—well above its pre-pandemic record low of 7.0 per cent in 2018-19.

In 2023-24, due to slower nominal GDP growth and an increase in the deficit, we expect the federal debt-to-GDP ratio to rise to 42.4 per cent. We then project the federal debt ratio to tick higher to 42.5 per cent in 2024‑25 before gradually declining to 39.2 per cent by 2028-29, remaining well above its pre-pandemic level of 31.2 per cent of GDP in 2019-20. The federal debt ratio is projected to be 0.7 percentage points higher, on average, over 2023-24 to 2028-29 compared to our October outlook.

Finance Canada, Statistics Canada and Office of the Parliamentary Budget Officer.

Finance Canada, Statistics Canada and Office of the Parliamentary Budget Officer.

Data are in fiscal years (2023 corresponds to fiscal year 2023-24). The projection period covers fiscal years 2023-2024 to 2028-2029.

Compared to our October outlook, we are projecting budgetary deficits that are $7.9 billion higher, on average, over 2023-24 to 2028-29. This increase is largely due to upward revisions to our projection of direct program expenses (including new measures) and major transfers to persons (Table 3).

We have revised up our outlook for other revenues by $7.0 billion per year, on average, to reflect larger projected interest revenues and net profits (from loans, investments, and advances to enterprise Crown corporations), as well as higher interest and penalty revenues on tax debt. That said, most of this upward revision is offset by higher public debt charges related to increased borrowing requirements for non-budgetary transactions.[^9]

Excluding new measures and the upward revision to other revenues, our revenue outlook is $1.0 billion lower per year, on average, over 2023-24 to 2028-29 compared to our October projection. This is due to downward revisions to corporate income tax revenues, as well as to custom imports and duties, that are partially offset by upward revisions to personal income tax revenues.

Excluding new measures and the upward revision to public debt charges, our outlook for expenses is $6.1 billion higher per year, on average, over 2023-24 to 2028-29 compared to our October projection due to increases in direct program expenses and major transfers to persons.[^10]

Risks and uncertainty

Our outlook provides a baseline projection to help parliamentarians gauge potential economic and fiscal outcomes under current policy settings (that is, a “status quo” baseline). Setting aside new measures that are likely to be announced in the Government’s 2024 budget, we judge that the risks to our baseline economic and fiscal projection are roughly balanced.[^11]

In terms of downside risks, we continue to judge that the most important risk is a larger-than-expected impact of the Bank of Canada’s restrictive monetary policy, which would negatively affect the Canadian economy and federal finances.

In terms of upside risks, we judge that the most important risk is higher-than-projected export growth. Robust U.S. real GDP growth may not slow as quickly as anticipated. With weakness in commodity prices putting downward pressure on the Canadian dollar, stronger U.S. growth could drive Canadian exports to outperform our projection.

To illustrate uncertainty surrounding our economic and fiscal outlook, we construct distributions of possible future outcomes that are centred on our baseline projection, which are then used to calculate “confidence” intervals.[^12]

Relative to our baseline real GDP growth projection (1.8 per cent annually, on average, over 2023 to 2028), the 30, 50 and 70 per cent confidence intervals shown in Figure 2 are consistent with average annual growth of ±0.2, ±0.4 and ±0.6 percentage points respectively. The lower bound of the 70 per cent confidence interval in 2024 is consistent with a 0.5 per cent decline in real GDP from its 2023 baseline level.

Statistics Canada and Office of the Parliamentary Budget Officer.

Statistics Canada and Office of the Parliamentary Budget Officer.

The projection period covers 2023 to 2028.

Given the possible economic outcomes surrounding our baseline projection, and on a status quo basis, we estimate that a 70 per cent confidence interval for the federal debt-to-GDP ratio in 2028-29 would range from 34.3 per cent to 44.2 per cent (Figure 3). We estimate there is a 69 per cent chance that the federal debt-to-GDP ratio in 2028-29 would be below its 2022-23 baseline level of 41.7 per cent.

Finance Canada, Statistics Canada and Office of the Parliamentary Budget Officer.

Finance Canada, Statistics Canada and Office of the Parliamentary Budget Officer.

The series are presented on a fiscal-year basis (2023 corresponds to fiscal year 2023-24). The projection period covers 2023‑24 to 2028-29. The red line corresponds to the level of the federal debt-to-GDP ratio in 2022-23.

On a status quo basis, we estimate that a 70 per cent confidence interval for the budgetary balance relative to GDP in 2026-27—the first year of the Government’s 1 per cent of GDP deficit threshold—would range from a deficit of 1.6 per cent to 0.1 per cent (Figure 4). We estimate there is a 38 per cent chance that the deficit would exceed its 1 per cent threshold in 2026-27.

In 2028-29, we estimate that a 70 per cent confidence interval for the budgetary balance would range from a deficit of 1.4 per cent of GDP to a surplus of 0.4 per cent of GDP. We estimate there is a 28 per cent chance that the deficit would exceed its 1 per cent threshold in 2028-29.

Finance Canada, Statistics Canada and Office of the Parliamentary Budget Officer.

Finance Canada, Statistics Canada and Office of the Parliamentary Budget Officer.

The series are presented on a fiscal-year basis (2023 corresponds to fiscal year 2023-24). The projection period covers 2023‑24 to 2028-29. The red line corresponds to the Government’s 1 per cent of GDP deficit threshold (effective in 2026-27 and future years).

Detailed economic outlook

Statistics Canada and Office of the Parliamentary Budget Officer.

Statistics Canada and Office of the Parliamentary Budget Officer.

October 2023 nominal GDP levels have been restated to reflect historical revisions.

Composition of nominal GDP

Statistics Canada and Office of the Parliamentary Budget Officer.

Statistics Canada and Office of the Parliamentary Budget Officer.

Detailed revenue outlook

Finance Canada and Office of the Parliamentary Budget Officer.

Finance Canada and Office of the Parliamentary Budget Officer.

Totals may not add due to rounding.

Detailed expense outlook

Finance Canada and Office of the Parliamentary Budget Officer.

Finance Canada and Office of the Parliamentary Budget Officer.

Totals may not add due to rounding.

Employment Insurance Operating Account

Finance Canada and Office of the Parliamentary Budget Officer.

Finance Canada and Office of the Parliamentary Budget Officer.

Totals may not add due to rounding. The projection period covers 2023 to 2031.

Direct program expenses

Finance Canada and Office of the Parliamentary Budget Officer.

Finance Canada and Office of the Parliamentary Budget Officer.

Totals may not add due to rounding.

Federal debt outlook

Finance Canada and Office of the Parliamentary Budget Officer.

Finance Canada and Office of the Parliamentary Budget Officer.

\* Borrowing requirements under the _Borrowing Authority Act_ pertain to the sum of Government of Canada and agent Crown corporation market debt. Totals may not add due to rounding.

Comparison to October 2023 outlook

Finance Canada and Office of the Parliamentary Budget Officer.

Finance Canada and Office of the Parliamentary Budget Officer.

Totals may not add due to rounding.

Comparison to FES 2023

Finance Canada and Office of the Parliamentary Budget Officer.

Finance Canada and Office of the Parliamentary Budget Officer.

Totals may not add due to rounding.