Federal Deficit Outcome for 2011-12 on Track to be Lower than Forecast in November 2011 Update
For the first seven months (April to October) of fiscal year 2011-12, the federal government posted a deficit of $15.4 billion, down $6.2 billion from the deficit of $21.5 billion reported in the same period in 2010-11.
Of this $6.2 billion year-over-year improvement, budgetary revenues were up by $5.7 billion, primarily due to higher personal and corporate income tax revenues, while program expenses were down by $1.0 billion, due to lower “other “ transfer payments and employment insurance benefits, partially offset by higher transfers to provinces and elderly benefits. Public debt charges were up by $0.6 billion.
On November 8, 2011, the Minister of Finance presented the Government’s “Update of Economic and Fiscal Projections”. The deficit for 2011-12 was revised down slightly to $31.0 billion from the June 2011 Budget estimate of $32.3 billion. The revised deficit estimate, however, included an “adjustment for risk” of $3.0 billion for 2011-12. This means that the underlying deficit estimate for 2011-12 is $28 billion.
Based on the results to date, corporate income tax revenues for the year could be higher than the November 2011 Update estimate. However, monthly data on corporate income tax revenues for at least the first nine months of the fiscal year may not be a good indicator of the potential outcome for the year as a whole. Given corporate remittance requirements, final settlements are made close to year-end. However, based on the results to date, corporate income tax revenues could still come in higher than forecast in the November 2011 Update.
On a year-over-year basis, GST revenues were up over 25 per cent in October 2011, reflecting the building up of inventories for the Christmas season. They are not net of refunds paid at final sales. As a result, GST revenues could still be below their revised November 2011 Update estimate. On a year-over-year basis, they are down 5.5 per cent, whereas the November 2011 Update has them increasing by just over 2 per cent. Among the other major revenue components, “other revenues” to date are little changed, whereas, the November 2011 Update estimates a decline of nearly $2.5 billion for the year as a whole. This component is very volatile and a decline of that magnitude for the year as a whole is possible.
As for total expenses, employment insurance benefits and direct program expenses could come in well below the November 2011 Update estimates. As we pointed out in “Does Anyone Know What the Government is expected to Spend This Year? www.3dpolicy.ca August 2011, there is a large disconnect between the Main Estimates tabled for 2011-12 and the June 2011 Budget estimate of total expenses for 2011-12. The tabling of Supplementary Estimates B for 2011-12 did nothing to eliminate this discrepancy. Based on our analysis, it appears that program expenses could be significantly overstated. Public debt charges, given the current lower outlook for interest rates, could come in lower than expected as well.
The year-over-year improvement in the deficit to date is $6.2 billion, whereas the November 2011 Economic and Fiscal Update estimated an improvement of only $2.4 billion for the year as a whole. Clearly, the $3 billion “adjustment for risk” will not be needed. In addition, it appears that the overstatement of program expenses will more than offset any shortfall in budgetary revenues. We expect that the final outcome for 2011-12 will be at least $3 billion lower than forecast in the November 2011 Update, provided that there are no “extraordinary” adjustments at year-end.
A falling deficit means that the federal government sector is not contributing to economic growth. It is in fact a drag on economic growth. This could become an issue in 2012 and 2013.