Fiscal Monitor for April to July 2012

For the first four months of fiscal year 2012-13 (April to July), the federal government posted a deficit of $3.0 billion, $2.9 billion lower than the $5.9 billion reported in the same period in 2011-12.

Although this is encouraging news, at least five to six months of financial data are required before one can properly assess the current results to the March 2012 Budget forecast of  $21.1 billion for the fiscal year as a whole.  In addition, final results for 2011-12, which should be released shortly, 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. 

More than all of improvement in the current fiscal results of $2.9 billion is due to higher revenues (up $3.0 billion or 3.7 per cent).  Total expenses were slightly higher (up $0.1 billion as higher program expenses (up $0.9 billion) offset lower public debt charges (down $0.8 billion).

All major components of budgetary revenues were higher with the exception of “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.

We continue to 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, with most of this improvement carrying 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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