Fiscal Monitor for April – July 2018: The Good News Continues

The federal government posted a surplus of $140 million in July 2018, compared to a deficit of  $193 million in July 2017.  The turnaround primarily reflected higher GST revenues, up 22.1%, due primarily to timing factors given the abnormally low receipts in June 2018 and an increase in other revenues, up 11.8%. These increases were offset in part by lower personal income tax revenues, down 2.6% and higher total expenses, up 2.7%.

As a result, for the first four months of fiscal year 2018-19, the federal government posted a surplus of $4.4 billion compared to a deficit of $109 million in the same four months of 2017-18. Budgetary revenues were up $7.6 billion, program expenses increased by $2.2 billion, while public debt charges were up $0.8 from year earlier levels.

Within budgetary revenues, strong increases were reported in personal income tax revenues (5.0% or $2.4 billion), corporate income tax revenues (18.0% or $2.6 billion), goods and services tax revenues (8.1% or $1.1 billion and employment insurance premiums (4.9% or $0.4 billion). The Department of Finance provided no explanations for these increases. The increases in personal and corporate income tax revenues and GST revenues far exceed the increases in their applicable tax bases. As such, part of the increase could be attributable to timing factors or adjustments related to converting the monthly cash collections to accruals.  The increase in employment insurance premiums partly reflects an increase in maximum insurable earnings. 
Within grogram expenses, major transfers to persons were up 1.7% or $517 million.  Elderly benefits increased 5.2% or $864 million, reflecting in an increase in the eligible population and higher average benefits which are indexed to inflation.  Children’s benefits increased by 3.5%, or $268 million, primarily due to an increase in the eligible population.  Partially offsetting these increases was a decline in employment insurance benefits (down 9.3% or $615 million) reflecting a decline in the number of unemployed.

Major transfers to provinces and territories were up 3.7% or $885 million. The increases in the components reflected the increases as set out in their appropriate legislation.

Direct program expenses, which includes other subsidies and transfers and the operating costs of government, increased by 2.1% or $765 million.  Other transfers were virtually changed, while other direct program expenses increased by 2.8% or $765 billion, primarily reflecting higher personnel expenses.

The increase in public debt charges reflected higher Consumer Price Index adjustments on Real Return Bonds and higher annual average effective interest rates on the stock of Treasury Bills.

The Department of Finance correctly notes that financial results for the first three months of the fiscal year provide only limited information with respect to the year as a whole. However, they still conclude that the results to date “are broadly in line with the fiscal projection for 2018-19 presented in the budget as expenses are expected to be concentrated later in the fiscal year, consistent with prior year trends”.   This is true for “other direct program expenses”, but not for other components of expenses. In addition, the increase to date in total budgetary revenues far exceeds the budget projection for the year as a whole while employment insurance benefits are considerably lower than expected. On balance, the outcome will likely be better than forecast in the 2018 Budget.

The Department of Finance is providing additional details on the composition of direct program expenses.  This is welcomed.  However, such detail is not provided in the budgets, which makes analysis of the monthly movements difficult to track in relation to their fiscal year forecasts. In providing this additional detail, the Department no longer provides details on the departmental expenses for transfers and subsidies, thereby making it extremely difficult to understand what is happening in this major component.  In addition, monthly information on Crown corporations and defence has been eliminated.
We would strongly recommend that the Department again publish details on the components of transfers and subsidies and for Crown corporations and defence.  In addition, the budget should include the annual forecasts for these components as well as for the components of other direct program expenses.

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