Fiscal Monitor for June 2012

For the first three months of fiscal year 2012-13 (April to June), the federal government posted a deficit of $2.0 billion, less than half of the $4.2 billion deficit reported in the same period in 2011-12.  This is encouraging news, although at least five to six months of financial data are usually required before one can properly assess the current results to the latest budget forecast for the year as a whole.  In addition, final results for 2011-12, which will be released in the early fall, are required to fully understand the current year’s fiscal results.  For example, if the final audited deficit outcome for 2011-12 is lower than that estimated in the March 2012 Budget, some, if not all, of this improvement could carry forward into 2012-13.  Despite the above, it is expected that the deficit target of $21.1 billion for 2012-13 will be met, if not bettered

The improvement in the current fiscal results of $2.3 billion is due to higher revenues (up $2.8 billion or 4.7 per cent) and lower public debt charges (down $0.4 billion or 5.2 per cent), dampened by somewhat higher program expenses (up $1.0 billion or 1.8 per cent). All major components of budgetary revenues were higher with the exception of non-resident taxes and “other revenues”. The increase in program expenses was primarily attributable to higher elderly benefits and major transfers to other levels of government.  Partially offsetting the impact of these increases were lower employment insurance benefits and direct program expenses.  The Department of Finance attributes the decline in public debt charges due to lower inflation adjustments on real return bonds and a lower effective interest rate on the stock of interest-bearing debt.

As noted above, the final results for the previous fiscal year coupled with about six months of data for the current fiscal year are required before one can assess the current results against the latest official forecast.  The Fiscal Monitor notes that the results for the “first three months of the 2012-13 fiscal year are broadly consistent with those projected for 2012-13 in Budget 2012”.  However, they also noted that there are downside risks to the fiscal outlook given recent economic developments. The Minister of Finance is to provide an update in the upcoming Economic and Fiscal Statement, traditionally presented in the early fall.

Despite the caveats noted above, we believe that the deficit target for 2012-13 will be met, if not improved up upon. As we have argued in the past, we believe that the deficit for 2011-12 will come in lower than forecast.  Most of this improvement is expected to carry forward into 2012-13.  In addition, the March 2012 Budget included a “risk adjustment” of $3 billion for 2012-13.  These two factors, coupled with the improvement in the deficit to date, should ensure that the deficit for 2012-13 will be lower than forecast in the March 2012 Budget.  It appears that Minister Flaherty has realized, what other Ministers of Finance practiced in the past, to under promise and over deliver on his fiscal targets.

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