Fiscal Monitor for April to August 2011


For the first five months of fiscal year 2011-12, the federal government posted a deficit of $10.7 billion, down $2.8 billion from the $13.5 billion reported in the same period in 2010-11.  Most of this improvement occurred in August as the year-over-year deficit dropped by $2.2 billion, primarily reflecting lower program expenses (down $1.3 billion), due to lower employment insurance benefits and the timing of transfer payments to the provinces. 

Based on the results to date, corporate income tax and GST revenues for the year could fall well short of their June 2011 Budget estimates.  However, monthly data on corporate income tax revenues for the first eight months of the fiscal year are not a good indicator of the potential outcome for the year as a whole.  Given corporate remittance requirements, final settlements are made close to year-end – December for financial institutions and February/March for other large corporations.

As for total expenses, employment insurance benefits and direct program expenses could come in well below the June 2011 Budget estimates.  As we pointed out in “Does Anyone Know What the Government is expected to Spend This Year? August 2011, there is a large disconnect between the Main Estimates tabled for 2011-12 and the June 2011 Budget estimate of total expenses for 2011-12.  Based on our analysis, it appears that components of the June 2011 Budget program expenses could be significantly overstated.  Public debt charges, given the current lower outlook for interest rates, could also come in lower than expected as well. 

The rejection of the provincial HST by voters in British Columbia will result in the recovery of the $1.6 billion paid to British Columbia for its HST transitional costs.  This was not included in the June 2011 Budget. According to the Department of Finance, the agreement by the province of Quebec to harmonize its sales tax with the GST and the resulting payment of $2.2 billion by the federal government is not expected to affect the 2011-12 results.  However, if all of the conditions are met in 2011-12, a liability for the $2.2 billion will need to be set up, even if the payments are not made until a later date.  Originally, transitional payments to Ontario and British Columbia were to be spread out over two years, but the full liability was booked in 2009-10 instead. So don’t be surprised if the liability to Quebec is booked in 2011-12.

On balance, it appears that the overstatement of program expenses will more than offset any shortfall in budgetary revenues, even if the full liability for the sales tax harmonization agreement with Quebec is booked in 2011-12. In addition, the final audited outcome for 2010-11 was somewhat better than estimated in the June 2011 Budget and some of this should forward into 2011-12. 

The Minister of Finance is to provide an economic and fiscal update in the upcoming Economic and Fiscal Statement, traditionally presented in the early fall.


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