Fiscal Monitor for April – December 2018

The federal government posted a surplus of $2.5 billion in December 2018, compared to a surplus of $523 million in December 2017.  Budgetary revenues increased 9.8%, reflecting strong increases in personal income tax revenues (up 12.7%), non-resident taxes (up 14.9%), GST revenues (up 50.7%) and customs import duties (up 32.7%), the latter primarily due to import tariffs on steel and aluminum. In contrast, corporate income tax revenues declined by 10.1%. December is the month in which corporations with a taxation year ending October 31st are required to remit any outstanding taxes owing for their previous taxation year. These are largely chartered banks. The extraordinary large increase in GST revenues could be due to timing factors and reversed in subsequent months.  Program expenses advanced 1.8%, substantially less than year-over-year increases in previous months, primarily due to virtually no change in direct program expenses. Public debt charges increased 13.7%, following a decline of nearly 9% in the previous month.  The year-over-year increase in December is attributable to higher inflation adjustments and a higher average effective interest rate on treasury bills.

For the first nine months of fiscal year 2018-19, the federal government posted a surplus of $325 million compared to a deficit of $8.9 billion in the same nine months of 2017-18. Budgetary revenues were up $19.3 billion, or 8.7%, program expenses increased by $8.4 billion, or 3.9%, while public debt charges were up $1.7 billion, or 10.3%, from year earlier levels.
Within budgetary revenues, personal income tax revenues were up $7.5 billion or 6.9%, corporate income tax revenues increased by $4.1 billion or 12.7%, non-resident taxes were up $1.2 billion or 21.3%, goods and services tax revenues advanced $3.0 billion or 10.8%, customs import duties increased $1.2 billion or 28.0% while other revenue increased by $1.7 billion or 8.1%. The year-to-date results for all these major components are considerably stronger than those forecast in the Fall 2018 Update.  The increase in total budgetary revenue to date is $19.3 billion whereas the Fall Update estimated an increase of only $15.3 billion for the year as a whole. The fiscal cost of initiatives proposed in the 2018 Budget and Fall 2018 Update are not expected to a have a significant impact on the 2018-19 results. Adjusting for timing factors, it is expected that budgetary revenues will be revised upwards in the upcoming March 19, 2019 Budget. 

Within grogram expenses, major transfers to persons were up 2.2% or $1.6 billion.  Elderly benefits increased 5.2% or $2.0 billion, reflecting in an increase in the eligible population and higher average benefits which are indexed to inflation.  Children’s benefits increased by 2.3% or $406 million, primarily due to an increase in the eligible population.  Partially offsetting these increases was a decline in employment insurance benefits (down 5.8% or $819 million) reflecting a decline in the number of unemployed. In the Fall 2018 Update, employment insurance benefits were projected to increase by 2.0% or $386 million. The other two components are largely in line with their Fall 2018 Update projections.

Major transfers to provinces and territories were up 3.5% or $1.8 billion. The increases in the components largely reflect the increases as set out in their applicable legislation, with difference attributable to timing factors. Over the remaining months of 2018-19, little change is expected from that forecast in the Fall 2018 Update.

Direct program expenses, which includes other subsidies and transfers and the operating costs of government, increased by 3.2% or $5.0 billion.  Other transfers were up 11.2% or $2.9 billion.  This is significantly greater than that forecast in the Fall 2018 Update of 1.8% or $862 million. Part of this large difference is due to extraordinary large accrual adjustments made in the end-of year adjustment period in 2017-18, whereas no such adjustments are currently expected in 2018-19. This component could also be affected by the timing of infrastructure payments. Other direct program expenses (the operating costs of government) increased by 3.2% or$2.1 billion, primarily reflecting higher personnel expenses, dampened by a decline in other subsidies and expenses.  The Fall 2018 Update forecast an increase of only 1.1%, or $1.1 billion for this component. However, the final results for 2017-18 included several large year end accrual adjustments. A significantly smaller adjustment is expected this year. The final outcome will largely be dependent on year-end accrual adjustments.

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 year-over-year increase to date is somewhat higher than expected for the year as a whole. 

On balance, given the current results to date, we would expect a somewhat better outcome for the budgetary balance than projected in the Fall 2018 Update.  The Fall 2018 Update  includes a Contingency Reserve of $3.0 billion, which we believe will not be needed.  We feel that the Contingency Reserve should only be used to offset the impact of adverse economic development in the fiscal forecast and/or errors in translating the economic forecast into the fiscal forecast.  It should not be used fund new policy initiatives. In addition, current results for budgetary revenues suggest that upward revisions are warranted.  Program expenses appear to be largely on track, but this will largely depend on the impact of year-end accruals. Public debt charges could be somewhat understated. On balance, the final outcome could be between $14 and $15 billion.

The Parliamentary Budget Officer recently revised down their forecast of the deficit for 2018-19 from $19.4 billion to $16.0 billion.

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