Thank you, Mr. Chair.
Good afternoon, Mr. Chair, Vice Chairs, and members of the committee.
I am joined by my colleagues Mostafa Askari, Deputy Parliamentary Budget Officer, Chris Matier, Senior Director, Economic and Fiscal Analysis, and Trevor Shaw, Economic Analyst, also with the Economic and Fiscal Analysis team. We are grateful for your invitation to appear to discuss our economic and fiscal outlook for October 2017. As you know, these are part of the PBO's legislated mandate, in order to promote greater budget transparency and accountability.
As members of the committee may know, this report was prepared in response to the motion adopted by this committee on February 4, 2016. However, since then, the PBO legislation under the Parliament of Canada Act was amended. It is therefore in accordance with that legislation that yesterday we provided a copy of the report to the chair and the clerk. We made the report available to the public one business day after, that is, this morning.
Going back to the report, regarding the economic outlook, the Canadian economy advanced at a robust pace in the first half of 2017. However, beginning in the second half, we project that growth and consumer spending will moderate and residential investment will continue to decline as borrowing rates rise and disposable income gains diminish.
We project real GDP growth to slow from 3.1% in 2017 to 1.9% in 2018, and then average 1.7% annually over 2019 to 2022. Nominal GDP, which is the broadest single measure of the tax base, is projected to grow at 4.1% annually, on average, over 2017 to 2022. Compared with our April outlook, the projected level of nominal GDP is broadly unchanged.
We assume that the Bank of Canada will maintain its policy interest rate at 1% until January 2018. As core inflation continues to firm through 2018, we project that the Bank of Canada will gradually increase its policy rate by 25 basis points each quarter until it reaches its neutral level of 3% by the end of 2019.
Our economic outlook reflects the view that possible upside and downside outcomes are, broadly speaking, equally likely. In terms of downside risks, we maintain that the most important risk is weaker business investment. In terms of upside risks, we maintain that the most important risk is stronger household spending.
On the fiscal outlook, the budgetary deficit in 2016-17 was $17.8 billion. This is $2.8 billion lower than we projected in April, reflecting lower than expected direct program expenses, due in part to an estimated $2 billion in unspent infrastructure funding.
For the current fiscal year, 2017-18, we expect that the budgetary balance will show a deficit of $20.2 billion, which is 0.9% of GDP. We project that budgetary deficits will decline gradually, falling to $9.9 billion, which is 0.4% of GDP, in 2022-23. Lower direct program spending accounts for most of the reduction in the deficit over the projection horizon.
Compared with our April outlook, we are projecting budgetary deficits that are $2.2 billion lower, on average, from 2017-18 to 2021-22.
In budget 2016, the government committed to reducing the federal debt-to-GDP ratio to a lower level over a five-year period ending in 2020-21. This translates into a fiscal target of 31% or lower for the federal debt-to-GDP ratio in 2020-21. Under current tax and spending plans, we project that the federal debt-to-GDP ratio will be 29% in 2020-21, which is two percentage points of GDP lower than the government’s target.
Given the possible scenarios surrounding our economic outlook, and on a status quo basis, it is unlikely that the budget will be balanced, or in a surplus position, over the medium term. However, it is likely that the federal debt-to-GDP ratio will fall below its target level of 31% over 2017-18 to 2022-23. We estimate that there is, approximately, a 70% chance that the federal debt-to-GDP ratio will be below its target.
Lastly, in our report published today, we also provided some tables comparing our economic and fiscal projections to the government's projections presented in the fall economic statement. Consistent with the PBO's legislated mandate, we plan to publish an analysis of the fall economic statement in the coming weeks.
Once again, my colleagues and I would be pleased to answer any questions you may have about our economic and fiscal outlook or any other analysis.
Thank you, Mr. Chair.