FISCAL MONITOR FOR OCTOBER 2012: TOO SOON TO PREDICT DEFICIT OUTCOME FOR THIS YEAR
For the first seven months (April to October) of fiscal year 2012-13, the federal government posted a deficit of $10.6 billion, down $3.3 billion from the deficit of $13.9 billion reported in the same period in 2011-12.
Of this $3.3 billion year-over-year improvement, budgetary revenues were up by $4.9 billion, reflecting higher revenues in all major components with the exception of “other revenues”. Public debt charges declined by $1.1 billion, reflecting the impact of lower effective interest rates as the stock of interest-bearing debt increased. Program expenses were up by $2.7 billion, with higher expenses recorded in all of the major components.
On November 13, 2012, the Minister of Finance presented the Government’s “Update of Economic and Fiscal Projections”. The deficit for 2012-13 was revised to $26 billion from the March 2012 Budget estimate of $21.1 billion. The revised deficit estimate, however, included an “adjustment for risk” of $1.0 billion for 2012-13. This means that the underlying deficit estimate for 2012-13 is $25 billion, down slightly from the final audited deficit outcome of $26.2 billion for 2011-12.
To meet the revised deficit target of $26.0 billion for 2012-13, the deficit for the balance of the fiscal year would need to be no higher than $15.4 billion, compared to a deficit of $12.3 billion for the same period last year. However, when the incremental impact of the restraint measures are removed, the underlying deficit for the balance of this fiscal year would have to be closer to closer to $18 billion, which appears quite large.
As indicated in the analysis of the April to September financial results for 2012-13, in order for the deficit to come in at $26 billion:
1. The economy would have to slow very dramatically over the balance of the year – much more than implied in the November 2012 Update. The third quarter national accounts results indicated continued weakness. The OECD has recently lowered its nominal GDP forecast for Canada, which is now below the risk adjusted level used in the November 2012 Update, so that this is a possibility;
2. The accrual adjustments to date, especially for personal and corporate income tax revenues, are understated, which will result in significant downward adjustments over the balance of the year, especially in the end-of-year accounting period;
3. Increased unknown liabilities, which could result in large adjustments at year end; or
4. Increased implicit prudence built into the current forecast to ensure that the deficit for 2012-13 will not be higher than currently forecast and hopefully will come in lower to avoid the embarrassment of underestimating the deficit again; or
5. Some combination of the above.
The current deficit outlook for 2012-13 also raises issues for the outlook for 2013-14. In the November 2012 Update, the deficit is forecast to decline by $9.5 billion in 2013-14, of which about $3.5 billion is attributable to the impact of incremental restraint measures, with an additional $2 billion related to an increase in the “risk adjustment factor. The balance, about $4 billion, would have to come from growth in the economy. However, nominal gross domestic product (GDP) is projected to grow only slightly faster in 2013 than 2012 so no improvement in the deficit outlook would be expected. This suggests that either the deficit outlook for 2012-13 is overstated or that of 2013-14 understated.
Economic and fiscal forecasting is more of an “art than science”. The risks and uncertainties are well documented in The Economic and Fiscal Update November 2005 Annex 1. Nevertheless, the above suggests that there are a number of issues relating to the November 2012 Update. Little new information will be forthcoming until large corporations file their final tax settlements for their 2012 taxation year in December, February and March (n these three months, up to 45 per cent of corporate income tax revenues are received) and final accrual adjustments are made in the “end-of-year” accounting period.
Canadians will have to wait until next October to find out what really happened.