Fiscal Monitor for December 2011 Indicates Federal Deficit Outcome for 2011-12 to be at Least $3 Billion Lower than Forecast in November 2011 Update due to Lower-Than-Expected Program Expenses

The December 2011 Fiscal Monitor, released on February 24, 2012 reports a deficit for the federal government of $17.7 billion for the first nine months (April to December) of fiscal year 2011-12, down $9.7 billion from the deficit of $27.4 billion reported in the same period in 2010-11.  In the “Update of Economic and Fiscal Projections”, presented on November 8, 2011, the Minister of Finance projected a deficit of $31.0 billion for fiscal year 2011-12 as a whole.  This deficit projection, however, included an “adjustment for risk” of $3.0 billion for 2011-12, implying an underlying deficit estimate for 2011-12 of $28 billion, a decline of $5.4 billion from the final outcome for 2010-11.   Based on the results to date, the “risk adjustment factor” for 2011-12 will not be required. We expect that the final outcome for 2011-12 will be at least $3 billion lower than forecast in the November 2011 Update, provided that there are no “extraordinary” adjustments at year-end.   <?xml:namespace prefix = o />


Of the $9.7 billion year-over-year improvement, budgetary revenues were up by $7.1 billion, primarily due to higher personal and corporate income tax revenues, while program expenses were down by $3 billion, due to lower “other “ transfer payments and employment insurance benefits, partially offset by higher transfers to provinces and elderly benefits. Public debt charges were up by $0.4 billion.


Based on the results to date, corporate income tax revenues could be higher than the November 2011 Update estimate.  However, monthly data on corporate income tax revenues may not be 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. However, based on the results to date, corporate income tax revenues could still come in higher than forecast in the November 2011 Update.


On a year-over-year basis, GST revenues were down $1 billion, whereas the Department of Finance expects them to increase by just over $0.6 billion for the year as a whole.  Among the other major revenue components, “other revenues” to date are down about $0.9 billion, whereas, the November 2011 Update estimates a decline of nearly $2.5 billion for the year as a whole. This component is very volatile and a decline of that magnitude for the year as a whole is possible. 


Personal income tax revenues are running above their November 2011 Update projection, while employment insurance premiums are below their Update estimate.  However, this is largely due to a prior-year adjustment from employment insurance premiums to personal income tax revenues, with no impact on the net result.


On balance, higher-than-expected corporate income tax revenues could offset lower-than-expected GST revenues.  The wild card is “other tax revenues”.


As for total expenses, employment insurance benefits and direct program expenses could come in well below the November 2011 Update estimates.  “Other transfers payments” are about  $6 billion lower to date than in the same period last year, reflecting the ending of the stimulus measures.  Yet, in the November 2011 Update, the Department of Finance projected a decline of only $1.1 billion.  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.  The tabling of Supplementary Estimates B for 2011-12 did nothing to eliminate this discrepancy. Based on our analysis, it appears that program expenses could be significantly overstated.  Public debt charges, given the current lower outlook for interest rates, could come in somewhat lower than expected as well. 


In the Budget Plan 2008, the Government set out its approach to “Budget Planning and Fiscal Forecasting”[1]. One of the principles was to provide quarterly updates of the fiscal outlook for the current fiscal year in the monthly Fiscal Monitor.  As in 2010, no quarterly assessments have been provided in 2011.


[1] “The Budget Plan 2008, Responsible Leadership” February 26, 2008, page 193.

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