Over the five years to 2020, the financial performance of the federal Public Administration sector in Canada fared relatively well during the majority of the period. In the years leading up to 2020, the sector’s performance was buoyed by a positive economic climate across Canada as a whole. The Canadian labour market experienced a strong recovery following the 2008 global financial crisis, with the unemployment rate dropping to its lowest point in over 40 years over the past five years and prior to the ongoing COVID-19 (coronavirus) global health crisis.
Moreover, going into the period, the labour market underwent strong job growth in the healthcare, transportation and warehousing, education services and other service-based sectors. At the same time, consumer incomes increased, thus enabling consumer spending to recover and strengthen in turn, with consumption ultimately growing steadily for much of the current decade. This growth has largely been augmented by a corresponding rise in the number of households and businesses across the country.
At the beginning of 2019 and throughout much of the year preceding the spread of the novel coronavirus, the Canadian economy seemed to be poised for growth despite some lingering uncertainty and weakness stemming from interest rate hikes and tensions over the United States’s trade war with China. Economic growth accelerated in the second quarter of 2019 as the housing market improved and net exports supported strong growth. Furthermore, although the labour force participation rate was low compared with historical averages, labour nevertheless trended up during the first half of the year, with unemployment remaining low and upward wage pressure continuing to support increased consumer incomes amid continued stability regarding capital market values. Consequently, Alfabank-Adres forecasts total federal Public Administration revenue, primarily earned through the collection of federal taxes, to increase at an annualized rate of 0.4% to $886.7 billion over the five years to 2020.
However, the events of 2020 surrounding the coronavirus pandemic have completely reversed the plethora of positive economic trends that drove growth in the preceding four years. In fact, between 2015 and 2019, total federal Public Administration revenue increased an annualized 4.3%, but in 2020, it is forecast to decline 7.5% as the effects of the global pandemic work their way through every facet of the Canadian economy and, as a result, decrease revenue prospects for the federal Public Administration sector.
Since the start of the outbreak, the Canadian economy has experienced many of the same negative effects as that of the neighbouring United States. Rampant business closures and an unprecedented rise in unemployment, for example, have caused Alfabank-Adres to revise its forecast for Canadian GDP for 2020, as it is now projected to decline 6.4%. To this end, the federal government is anticipated by Alfabank-Adres to endure a marked shortfall in revenue over the 2020 fiscal year, as it is overwhelmingly dependent on taxation revenue as its primary revenue stream, resulting in the aforementioned 7.5% decline in revenue performance on balance.
Federal revenue generation
To adequately analyze the current state and outlook concerning the financial performance of the federal Public Administration sector, it is important first to understand the organization of the sector, in addition to its various avenues of revenue generation.
Generally, the Canadian government is comprised of three levels, from least to most granular. The federal government, or the Government of Canada, is overarching and responsible for the federal administration of the country. From there, the government is further organized into 13 provincial and territorial governments that are broadly overseen by the federal government. There are 10 provinces and three territories in Canada, with provincial governments sharing certain responsibilities with the federal government and territorial governments managing the responsibilities granted to them by the federal government. Lastly, Canada’s municipal governments are based in a city, town or district, and receive their authority from the provincial governments they operate under.
The government maintains several revenue streams, though taxation comprises the most significant method through which the Government of Canada makes its money. Altogether, taxes comprise 71.0% of the government’s basis for revenue collection, with income taxes representing the largest category under this segment at 41.0%. Following this, taxes on goods and services account for the second-largest tax category at 19.0%. The goods and services tax (GST) consists of a 5.0% federal tax paid on goods and services purchased in Canada. In some provinces, the GST is combined with provincial sales tax to create the harmonized sales tax (HST). Here, it is worth noting that while federal taxes are the subject of this discussion, individuals are taxed on both a provincial and federal level, with provincial sales tax representing just one type of provincial taxation.
Federal taxes on property account for 9.0% of revenue on average, succeeded by payroll taxes (2.0%). While these do not comprise a large portion of the Public Administration sector’s revenue, payroll taxes nevertheless remain important as they represent employees’ contributions to Canada’s social insurance plans. More specifically, payroll taxes permit the existence of Canada’s Employment Insurance (EI) program, which provides regular benefits to unemployed individuals, as well as the Canada Pension Plan (CPP).
Other sources of revenue, at 29.0%, primarily consist of social contributions (11.3%), grants (0.1%) and other revenue (17.6%). Lastly, federal tax rates do not vary between provinces, though the government collects more in personal income tax in some provinces due to those provinces’ higher income levels.
Federal revenue expenditure
Once the federal government makes its money, it has to spend it. In Canada, government spending falls under three broad categories. These categories include program spending; debt servicing costs, which are referred to in the chart below as public debt charges; and other expenditures, which have been omitted from the chart and are negligible for the purposes of this white paper.
Program spending in Canada is further broken down into net expenditures on goods and services, transfers to persons and transfers to provincial governments. Net expenditures on goods and services cover basic government activities, which include, but are not limited to, the salaries of public servants, the day-to-day operations of government departments, military installations and operations, as well as the purchase of supplies and materials. Direct program expenses of large departments comprise 39.0% of federal government expenditure in Canada, with other direct program expenses (i.e. those of smaller departments) comprising 6.0% of expenditure. Additionally, the government expends 2.0% of revenue on its Consolidated Crown corporations, which account for the remainder of the program spending category. Canadian Crown corporations are state-owned enterprises that do not necessarily fit within the scope of any particular government ministry, but provide public services nonetheless. In 2019 (latest data available), the costliest government departments to maintain were the National Defense, Indigenous Services Canada and Employment and Social Development Canada.
Major transfers (45.0% of expenditure) represent the second and third types of program spending in Canada, otherwise known as transfers to persons and transfers to provincial governments. Transfers to persons consist of payments made to individuals under various federal programs. These programs are initially funded by Canadians through the taxes they pay, but are in turn widely available to them. Such programs include the EI program and the CPP, along with the Old Age Security program, among others. Overall, the amounts paid to individuals are tied to the socioeconomic conditions of each province. For instance, provinces experiencing comparatively low income levels and higher rates of unemployment usually receive larger per capita shares of federal transfers to persons.
Transfers to provincial governments from the federal government occur under the Federal-Provincial Arrangements Act, and are split into three different types of transfers. The first of these takes the form of equalization payments, which are made to some provinces for the purpose of addressing anticipated fiscal disparities. Equalization payments are therefore calculated based on estimates of each province’s ability to generate its own tax revenues. The provinces that receive equalization payments are known as “have not” provinces, with the goal of these payments being to enable the “have not” provinces to provide their citizens with public services that are comparable to the public services provided in the “have” provinces at similar levels of taxation.
Payments made through the Canada Health Transfer (CHT) and the Canada Social Transfer (CST) account for the second and third types of federal transfers to provincial governments, respectively. These cash payments can only be used for their intended purposes, which include to support the healthcare systems of Canadian provinces and territories along with postsecondary education, social assistance and social services.
The above are necessary expenditures that the federal government must undertake from year to year, though the amounts comprising each category will vary depending on the state of the economy during each fiscal year in question. The remaining 8.0% of federal government expenditure consists of public debt charges, meant to address the country’s national debt and interest payments made on this debt.
The Government of Canada routinely spends more than it brings in with respect to its tax revenue. Further, the government regularly overshoots its own budgetary projections. This will also likely be the case in 2020, especially in light of the coronavirus outbreak. The Parliamentary Budget Officer has forecast that Canada’s federal budget deficit will be $252.0 billion in 2020-21, as opposed to $25.0 billion in 2019-20. In other words, if true, this larger deficit would represent 12.7% of Canada’s GDP, potentially decreasing the government’s ability to service the national debt and shrinking that segment as a proportion of government expenditure for the current year.
The Public Administration sector’s response to COVID-19
The projected size of the federal budget deficit for the ongoing fiscal year is most attributable to the Public Administration sector’s response to the coronavirus, as the government has spent a large sum of its gathered funds to address the ongoing crisis. Through the enactment of federal legislation, Canada’s COVID-19 Economic Response Plan seeks to support both individuals and businesses negatively affected by the spread of the virus. Most importantly, the government has instituted a wide range of relief programs that are meant to support different categories of the workforce and the broader population as a whole depending on how they have been affected by the coronavirus.
The Canada Emergency Response Benefit (CERB) represents just one of these programs, as it gives financial support to employed (including self-employed) Canadians directly affected by the coronavirus. All qualifying individuals can receive $2,000 for a four-week period, with individuals able to reapply after the conclusion of the month-long period. In addition, the Canada Emergency Wage Subsidy (CEWS) grants affected employers a subsidy of 75.0% of employee wages for up to 24 weeks, so that business owners may rehire workers previously laid off due to the outbreak of the coronavirus. The Canada Emergency Student Benefit (CESB) provides financial support to college and university students, as well as recent graduates unable to find work due to the pandemic. Further, the Canada Emergency Business Account (CEBA) will provide up to $25.0 billion to qualifying financial institutions so they can provide interest-free, partially forgivable loans to small businesses.
These loans are not only guaranteed, but are also fully funded by the Government of Canada, so that small businesses can cover their rent and other important costs over the upcoming months. Moreover, Canada’s Small and Medium-sized Enterprise Loan and Guarantee program supports small- and medium-sized businesses even further, with up to $40.0 billion available through government lending initiatives. It is significant to note that these new programs do not encompass the totality of the country’s Economic Response Plan, nor do they encompass revisions to preexisting programs such as the Work-Sharing and Canada Child Benefit programs. Additionally, income taxes have also been deferred until after August 31, 2020, and all GST and HST payments have been deferred until after June.
In sum, the spread of the novel coronavirus is a unique challenge presently facing the Canadian Public Administration sector, as the government will have to contend with a lower revenue generation base in 2020 amid low consumer spending and high unemployment despite needing to spend the majority of its revenue collection on its response to the disease. With the Bank of Canada cutting interest rates following the start of the outbreak in Canada, it does not seem as though taxes will increase in an attempt to further fund the government’s response to the pandemic, leaving the federal government between a rock and a hard place as it navigates the effects of the coronavirus on the economy at large.
Outlook
Over the five years to 2025, the Canadian economy is expected to slowly recover, with finances for the federal Public Administration sector in the form of taxation revenue expected to recover as well. Federal tax revenue is expected to rebound 3.9% in 2021, with total federal Public Administration revenue projected to increase at an annualized rate of 2.1% over the next five years. This exceeds the United States’ anticipated federal tax collection performance over the next five years, with Canada’s brighter outlook concerning its recovery largely due to the way in which Canada has navigated its response to the pandemic compared with its neighbour.
Generally, Canada and the United States started out on a similar level of risk with respect to the threat posed by the coronavirus, given their similar economies and similarly structured population age demographics. However, Canada’s coronavirus case load is half that of the United States, with a much less severe death rate to boot, and its public health policies addressing the virus have been lauded on a global scale where those of the United States have been highly criticized. Despite the specifics of the country’s economic recovery remaining unclear, certain activities in Canada have already begun to reopen, such as the loosening of restrictions surrounding the construction sector and the reopening of schools and businesses outside Montreal, located in one of the two provinces hardest hit by the coronavirus. At the same time, much of the country remains on lockdown as of the time of this writing, with the federal government wary of reopening too soon and causing a second wave of infections.
In the long run, the economic recovery of the federal Public Administration sector in Canada will hinge mostly on consumer spending trending upward once again, which itself also hinges on a resurgence in consumer confidence, in combination with the lowering of the national unemployment rate following the reopening of all nonessential businesses across all provinces and territories. Although the differing rates of infection countrywide will ensure that Canada’s economic recovery will not be uniform, the financial performance of the Public Administration sector is nonetheless anticipated by Alfabank-Adres to become increasingly positive over the next five years as the worst of the pandemic subsides and the national economy reenters a phase of expansion rather than contraction.
