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A stochastic debt sustainability analysis of Budget 2022

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Published on May 17, 2022 PDF

This report provides a stochastic debt sustainability analysis of the medium-term outlook presented in Budget 2022.

Highlights

  • Based on past experience, our results suggest that the Government could maintain debt sustainability over the medium term. We estimate there is a 65 per cent chance that the Government’s gross debt-to-GDP ratio in 2026-27 will be below its 2021-22 value.

  • However, our results also suggest that, on balance, there is upside risk to the Budget 2022 projection of gross debt as a share of GDP. We estimate there is a 65 per cent chance that the gross debt-to-GDP ratio in 2026-27 will exceed the Budget 2022 projection.

  • Based on past experience, it is highly likely that the gross debt-to-GDP ratio will not return to its 2019-20 pre-pandemic level of 46.9 per cent by the end of the medium-term planning horizon in 2026-27.

  • We estimate there is effectively an even chance that the budgetary deficit in 2026-27 will be lower than the Government’s 1 per cent of GDP medium-term deficit target and that, on balance, there is upside risk to the Budget 2022 projection of the deficit as a share of GDP.


Communications

Quotes

  • Given our approach to drawing future debt drivers from a historical sample, our projected distributions for debt, deficit and debt service ratios should not be viewed as forecasts. Rather, our approach should be seen as providing a stress test of the Government’s financial position over the medium term.

  • However, our results also suggest it is highly unlikely that the gross debt-to-GDP ratio will return to its 2019-20 pre-pandemic level by the end of the medium-term planning horizon in 2026-27. We also estimate that there is a 69% chance that the budgetary deficit-to-GDP ratio in 2026-27 will exceed Budget 2022 projections.

Yves Giroux
Parliamentary Budget Officer

News Release

{"id":33,"created_at":"2022-05-16T17:26:10-04:00","updated_at":"2022-05-16T17:26:10-04:00","slug":"pbo-releases-a-debt-sustainability-analysis-of-budget-2022-le-dpb-publie-une-analyse-de-la-viabilite-de-la-dette-du-budget-2022","title_en":"PBO releases a debt sustainability analysis of Budget 2022","title_fr":"Le DPB publie une analyse de la viabilit\u00e9 de la dette du budget 2022","body_en":"The Parliamentary Budget Officer (PBO) today released a stochastic debt sustainability analysis of Budget 2022.\n\nThe report assesses the prospects of maintaining a declining debt-to-GDP ratio and of meeting the Government\u2019s medium-term deficit target of 1% of GDP based on Canada\u2019s experience over the 1990-91 to 2019-20 period. The analysis also assesses the balance of risks to the budget outlook and highlights potential fiscal stress over the medium term.\n\n\u201cGiven our approach to drawing future debt drivers from a historical sample, our projected distributions for debt, deficit and debt service ratios should not be viewed as forecasts. Rather, our approach should be seen as providing a stress test of the Government\u2019s financial position over the medium term,\u201d says PBO Yves Giroux.\n\nThe report finds that there is a 65% chance that the Government\u2019s gross debt-to-GDP ratio in 2026-27 will be below its 2021-22 value. In other words, most future debt paths would result in a lower gross debt ratio after five years.\n\nBased on past experience, the report finds that the Government could maintain debt sustainability over the medium term. Moreover, it is likely that the Government will meet its objective of maintaining a declining federal debt-to-GDP ratio over the medium term.\n\n\u201cHowever, our results also suggest it is highly unlikely that the gross debt-to-GDP ratio will return to its 2019-20 pre-pandemic level by the end of the medium-term planning horizon in 2026-27,\u201d adds Mr. Giroux. \u201cWe also estimate that there is a 69% chance that the budgetary deficit-to-GDP ratio in 2026-27 will exceed Budget 2022 projections\u201d.","body_fr":"Le directeur parlementaire du budget (DPB) a publi\u00e9 aujourd\u2019hui une analyse stochastique de la viabilit\u00e9 de la dette du budget 2022.\n\nLe rapport \u00e9value les perspectives de maintien d\u2019un ratio de la dette au PIB en baisse et du respect de l\u2019objectif de d\u00e9ficit \u00e0 moyen terme du gouvernement, fix\u00e9 \u00e0 1 % du PIB, en se basant sur l\u0027exp\u00e9rience du Canada au cours de la p\u00e9riode de 1990-1991 \u00e0 2019-20. L\u2019analyse \u00e9value \u00e9galement l\u2019\u00e9quilibre des risques pesant sur les perspectives budg\u00e9taires et met en \u00e9vidence les tensions budg\u00e9taires potentielles \u00e0 moyen terme.\n\n\u00ab Compte tenu de notre approche consistant \u00e0 se baser sur l\u2019exp\u00e9rience des derni\u00e8res d\u00e9cennies afin de d\u00e9terminer les facteurs pertinents, nos distributions projet\u00e9es de la dette, du d\u00e9ficit et des ratios du service de la dette ne doivent pas \u00eatre consid\u00e9r\u00e9es comme des pr\u00e9visions. Notre approche doit plut\u00f4t \u00eatre consid\u00e9r\u00e9e comme un test de r\u00e9sistance de la position financi\u00e8re du gouvernement \u00e0 moyen terme \u00bb, d\u00e9clare le DPB Yves Giroux.\n\nSelon le rapport, il y a 65 % de chances que le ratio de la dette brute au PIB du gouvernement en 2026-2027 soit inf\u00e9rieur \u00e0 sa valeur de 2021-2022. En d\u2019autres termes, la plupart des trajectoires d\u2019endettement futures se traduiraient par un ratio d\u2019endettement brut inf\u00e9rieur apr\u00e8s cinq ans.\n\nSur la base de l\u2019exp\u00e9rience pass\u00e9e, le rapport estime que le gouvernement pourrait maintenir la viabilit\u00e9 de la dette \u00e0 moyen terme. En outre, il est probable que le gouvernement atteigne son objectif de maintenir un ratio de dette f\u00e9d\u00e9rale au PIB en baisse \u00e0 moyen terme.\n\n\u00ab Cependant, nos r\u00e9sultats sugg\u00e8rent \u00e9galement qu\u2019il est peu probable que le ratio de la dette brute au PIB revienne \u00e0 son niveau pr\u00e9pand\u00e9mique de 2019-2020 d\u2019ici la fin de l\u2019horizon de planification \u00e0 moyen terme, en 2026-2027 \u00bb, ajoute M. Giroux. \u00ab Nous estimons \u00e9galement qu\u0027il y a 69 % de chances que le ratio du d\u00e9ficit budg\u00e9taire au PIB en 2026-27 d\u00e9passe les projections du budget 2022 \u00bb.","release_date":"2022-05-17T09:00:00-04:00","is_published":"2022-05-17T09:00:00-04:00","internal_id":"COM-2223-033","permalinks":{"en":{"website":"https:\/\/www.pbo-dpb.ca\/en\/blog\/news-releases--communiques-de-presse\/pbo-releases-a-debt-sustainability-analysis-of-budget-2022-le-dpb-publie-une-analyse-de-la-viabilite-de-la-dette-du-budget-2022"},"fr":{"website":"https:\/\/www.pbo-dpb.ca\/fr\/blog\/news-releases--communiques-de-presse\/pbo-releases-a-debt-sustainability-analysis-of-budget-2022-le-dpb-publie-une-analyse-de-la-viabilite-de-la-dette-du-budget-2022"}},"pivot":{"publication_id":681,"news_release_id":33}}