In his first budget last April, Finance Magician Joe Oliver pulled a handful of rabbits out of his hat to achieve the long-promised balanced budget in 2015-16.  He sold GM shares at cut-rate prices for a net savings of $900 million; cut the contingency reserve by $2 billion; and, booked a “settlement” of $900 million for a new disability and sick leave management system for federal government employees. All this was necessary to pay for the Family Tax Cut package while still honouring the Government’s commitment of a balanced budget in 2015-16.Last week, the Mr. Oliver released the Fiscal Monitor for the period April 2014 to March 2015.  The monthly Fiscal Monitor provides information on the federal government’s financial affairs. For the 12-month period, the government reported a surplus of $2.9 billion, compared to a deficit of $11.4 billion in the same period in 2013-14, an improvement of $14.4 billion.   

These, however, are not the final financial results for 2014-15.  Still to come are the traditional end-of-the-year accounting adjustments, which in the past have delayed the release of the final financial results to early October.  Whether the results for 2014-15 will actually be released before the election remains to be seen.

Mr. Oliver claimed that “the results to date are broadly in line with a small deficit in 2014-15, as projected in Budget 2015”, which forecast a deficit of $2.0 billion. So, now he has to do another magic trick by turning a $2.9 billion surplus for 2014-15 into a deficit of $2.0 billion.

To do this, he needs to come up with almost $5 billion  “rabbits”.  Slightly over half of this could come from two initiatives proposed in the 2015 Budget: enhancements to the New Veterans Charter ($1.6 billion) and increases to the Universal Child Care Benefit ($1.1 billion).  The fiscal impact of these proposed initiatives will be recorded once Bill C-59, receives Royal Assent, expected before the summer recess.  These two initiatives would cut the surplus to $200 million for 2014-15.

For the remainder he has to hope that year-end accrual adjustments for tax revenues together with valuation adjustments for assets and liabilities will produce some more rabbits. Unfortunately, there appear to be no more rabbits. The financial results clearly indicate that it will be very difficult, if not impossible, for the government not to report a surplus for 2014-15.

 Budgetary revenues were up $11.7 billion in the April 2014 to March 2015 period, compared to the same period in 2013-14.  In the April 2015 Budget, an increase of only $7.6 billion was forecast for the year as a whole.  Within budgetary revenues, corporate income taxes and other non-tax revenues were considerably higher than forecast. End-of-year accounting adjustments have traditionally resulted in an increase in revenues rather than a decline. 

Program expenses declined $1.2 billion in the April 2014 to March 2015 period compared to an increase of $6.0 billion forecast in the April Budget. As noted above, the proposed changes with respect to the New Veterans Charter and the Universal Child Care Benefit will increase program expenses by $2.7 billion in the end-of-year accounting period.  However, as in previous fiscal years, it is expected that the lapse on direct program expenses will again be larger than forecast in the April 2015 Budget. 

Public debt charges are largely on track.

Last year, the end-of-year accounting period posted a surplus of $6.2 billion.  This year, it is expected to be lower, given the accrual adjustments mentioned above. There could easily be a surplus of $3 to $5 billion for 2014-15, based on the financial results to date, rather than a forecast deficit of $2.0 billion.

This will be the first surplus since 2007-08 and it would actually go to debt reduction just as the Conservatives originally committed.

It’s hard to understand why the government isn’t happy about this?

The revised outcome for 2014-15 is also good news for the government since some of it will carry forward to 2015-16 and they will need it. Economic growth for the first quarter of 2015 was to quote the Governor of the Bank of Canada “atrocious” and has raised questions about the economy’s underlying strength.

 Private sector economists are now revising down their prospects for economic growth in Canada in 2015.  Investment and consumption continue in the doldrums and growth in the U.S is sputtering with weak exports and weak retail sales. The U.S consumer is still very reluctant to start spending especially with weak income growth.  

The Conservatives have been betting their entire growth strategy on a stronger U.S. economy and right now this is not looking like a good bet.

It is almost certain the government will record a surplus in 2014-15. The chances of a surplus this year, 2015-16, are rapidly declining from “good” to “ not so good”. Fortunately for Harper and Oliver this is unlikely to be an election issue, since the final results for 2015-16 won’t be known until October 2016

You have to love the irony. All those “fiscal contortions” to show a surplus in 2015-16, when they already had one in 2014-15.






Add new comment