FISCAL MONITOR FOR NOVEMBER 2012: SIGNS POINT TO A LOWER DEFICIT OUTCOME FOR 2012-13
For the first eight months (April to November) of fiscal year 2012-13, the federal government posted a deficit of $12.4 billion, down $3.1 billion from the deficit of $15.5 billion reported in the same period in 2011-12.
Of this $3.1 billion improvement, budgetary revenues were up by $4.8 billion, reflecting higher revenues in all major components with the exception of “other revenues”. Public debt charges declined by $1.3 billion, reflecting the impact of lower effective interest rates, as the stock of interest-bearing debt increased. Program expenses were up by $3 billion, with higher expenses recorded in all of the major components.
The Minister of Finance is currently forecasting a deficit of $26 billion for 2012-13, virtually unchanged from the final outcome for 2011-12. The revised deficit estimate, however, includes an “adjustment for risk factor” of $1.0 billion for 2012-13. This means that the underlying deficit estimate for 2012-13 is $25 billion.
Based on the results to date, a number of revenue and expenses components are doing much better than estimated in the November 2012 Update. Assuming the year-over-year growth rates to date are applicable for the year as a whole, corporate income tax revenues would be $2.7 billion higher, employment insurance benefits $1 billion lower, direct program expenses $1 billion lower and public debt charges $0.5 billion lower. In contrast, personal income taxes and the Goods and Services Tax would be $0.7 billion and $0.3 billion respectively, lower. This would imply a deficit closer to $22 billion than $26 billion.
The key unknown is corporate income tax revenue. We believe that the “risk adjustment factor” of $1 billion for 2012-13 was allocated to corporate income tax revenues and based on results to date, it is very likely it will not be required. According to the Department of Finance, some of the improvement to date reflects lower refunds applicable to prior-year taxes paid, which would not be expected to continue over the balance of the year. Given the remittance requirements, about forty per cent of corporate income tax revenues are received in the months of December, February and March, such that the current monthly results may not be reflective of the final results for the year as a whole. In addition, the general corporate income tax rate was reduced in 2012 from 16.5% to 15% and the full impact of this reduction may not be reflected in the monthly results to date. As a result, it is still too early to assess the potential outcome for this component, although final tax liabilities for 2012 would have to be significantly lower than in 2011 in order to meet the November 2012 Update estimate. Excluding corporate income revenues, it would appear that the deficit will come in lower than estimated in the November 2012 Update.
For the deficit to come in at $26 billion:
1. Current monthly corporate income tax revenues are not reflective of final revenues for the year as a whole.
2. The economy would have to slow very dramatically over the balance of the fiscal year – much more than implied in the November 2012 Update. The third quarter national accounts results indicated continued weakness. Most forecasters are lowering their nominal GDP forecast for both 2012 and 2013, so this is a possibility.
3. 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.
4. Increased unknown liabilities, which could result in large adjustments at year end.
5. Dampening the impact of the above, 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.
As noted previously, the current deficit outlook for 2012-13 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. The underlying deficit, however, is $11.5 billion lower as the “risk adjustment factor” was increased by $2 billion. About $3.5 billion of this improvement is attributable to the impact of incremental restraint measures. The balance, about $8 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 and no improvement in the deficit outlook is expected for 2012-13. This suggests that either the deficit outlook for 2012-13 is overstated or that of 2013-14 understated.