November 2010 Fiscal Monitor Indicates Deficit for 2010-11 to be $7 billion Lower than Forecast
The November 2010 Fiscal Monitor shows that the deficit for the first eight months of 2010-11 was $26.0 billion, $10.3 billion lower than reported in the same period last year. The improvement to date is about equal to that expected in the October 2010 Update for the year as a whole ($10.2 billion). Based on the improvement to date and the absence of any large "bookings" of liabilities at the end of 2010-11 (which inflated the deficit outcome for 2009-10), we expect that the deficit for 2010-11 will be $38.5 billion, about $7 billion lower than the forecast of $45.4 billion in the October 2010 Update. This would result in an improvement of about $17 billion from 2009-10, entirely attributable to the impact of a number of one-time factors, which inflated the deficit for 2009-10, including assistance to the auto sector, booking of the HST harmonization liabilities, incremental accrual liabilities for employee benefit plans, among others.
The November 2010 Fiscal Monitor contained a number of special adjustments: a revaluation of the Government's shares in General Motors (this increased the deficit by $0.7 billion in November 2010) and a retroactive adjustment in November 2009 for the increase in the Working Income Tax Benefit (which increased the deficit in that month by $0.4 billion). Under generally-accepted accounting principles, the WITB should be included as part of program expenses (like the Canada Child Tax Benefit) rather than being netted against personal income tax revenues. In addition, the year-over-year change in GST revenues to the end of October 2010 had been overstated due to unexplained declines through the first half of 2009-10. However, gains were reported from November 2009 onward. The results to date are now slowly coming in line with expectations.
We are now entering the most interesting and largely unknown period for fiscal results due to a number of factors. First, large corporations will be making their final tax settlement payments for the 2010 taxation years. Over the course of the year, most large corporations make monthly tax installments based on their tax liabilities for their previous taxation year. They have 60 days after the end of their taxation year to file their final tax payments for that year. Traditionally, this installment procedure results in large settlement payments. For chartered banks, their taxation year end October 31st. The December results will, therefore, include their tax settlement payments for their 2010 taxation year. Most other large corporations have taxation years ending December 31st. They make their final tax settlements in February and March. These three months - December, February and March - usually account for about 40 per cent of corporate income tax revenues for the fiscal year as a whole. The final tax settlement payments can have a significant impact on the fiscal results for the year as a whole.
On the expense side of the budget, large liabilities are usually "booked" in the "end-of-year" accounting period. In 2009-10, the Government booked the full liability ($5.9 billion) related to the one-time HST harmonization costs for Ontario and British Columbia. In addition, the Government also booked an increase in accrual liabilities for federal employee benefits of about $3 billion. The October 2010 Update did not include or identify any large liabilities for 2010-11.
Our reading of the results to date, coupled with the absence of any large liabilities to be booked in the end-of-year accounting period, would imply a deficit for 2010-11 of about $38.5 billion, about $7 billion lower than the deficit of $45.4 billion forecast in the October 2010 Update. However, there has been some speculation that the Government might provide compensation to Quebec for the harmonization of its sales tax with the GST and/or provide a heating rebate to low-income Canadians. If this occurs, our expected improvement in the deficit will be reduced accordingly.