AN ENCOURAGING START BUT NOT LIKELY TO LAST
In the April 2015 Budget a surplus of $1.4 billion was forecast for this year. The forecast also included a Contingency Reserve of $1 billion. However, for the first five months of the year economic activity has been declining. Private sector forecasters, the IMF and the Bank of Canada have all revised down their forecasts of economic growth by about one percentage point. Based on the Department by Finance’s fiscal sensitivity analysis, a reduction in real growth of one percentage point would reduce the budgetary balance by $4.1 billion. This would result in a deficit of $1.7 billion for 2015-16.
For years, the government has built its political brand as a good economic manager on a commitment to eliminate the deficit in 2015-16. It now looks that this may very well not happen and the Opposition parties are attacking the government for its failed fiscal policies. The government is looking for any scrap of evidence, no matter how flimsy, to claim that they will still record a surplus.
And now they have the Fiscal Monitor for the first two months of fiscal year 2015-16, which shows the federal government posted a surplus of $3.9 billion, an improvement of $5.1 billion from the deficit of $1.1 billion from the same period in 2014-15.
Unfortunately for the government, this result has absolutely no bearing on the final budget outcome for the year. At least five to six months of financial data are required before one can assess the outcome for the year as a whole. Although the results for the first two months of 2015-16 are encouraging, they are unlikely to hold over the remaining months of the fiscal year.
Most of this improvement in first two months, for example, was attributable to one-time factors, including the sale of the remaining GM shares and timing factors affecting several of the major revenue components, which will be reversed in upcoming months. In addition, the current monthly results do not incorporate the effects of some previous policy initiatives, including the increase in the Universal Child Care Benefit.
Of the $5.1 billion improvement in the federal balance to date, all of it was attributable to higher budgetary revenues (up $5.5 billion) and lower public debt charges (down $121 million). In contrast, program expenses were up $577 million.
Within budgetary revenues, all the major revenue sources posted increases over the same period last year. Personal and corporate income tax revenues were up about 9%, well above the increases in their applicable tax bases, reflecting timing factors, which will be unwound in the upcoming months.
Similarly, sales and excise tax revenues were up 8.3%; again well above the increase in their applicable tax bases. Other revenues, which consist of net profits from enterprise Crown corporations, revenues from the sales of goods and services, return on investments, net exchange revenues and miscellaneous revenues, were up 58.2%, or $2.4 billion. About half of this increase was attributable to the net proceeds from the sale of government’s remaining GM shares.
The increase in program expenses was due to higher major transfers to persons (up 5.7%) and to other levels of government (up 4.8%). Dampening the impact of these increases were lower direct program expenses (down 3.9%). The increase in major transfers to persons understates the increase for the year to date as it does not include the increase in the Universal Child Care Benefit. This should be reflected beginning in July 2015. The decline in direct program expenses primarily reflects timing factors which should be reversed in the upcoming months.
Normally, the Fiscal Monitor is published on the last Friday in the month. However, the Fiscal Monitor for April – May 2015 was released nearly a week and a half earlier than expected. This could have been done to offset some of the negative commentaries concerning the fiscal outcome for 2015-16, such as the downward revisions to economic growth by the IMF, the Bank of Canada and a number of private sector economists. It is probably no coincidence that the release was on the same day as the release of the Parliamentary Budget Officer’s “An Update of the Budget 2015 Fiscal Outlook”, which forecasts a deficit of $1.0 billion for 2015-16.
It will be increasingly difficult for the government to claim a surplus for this year. Fortunately for them no one really cares other than their own Conservative voting base. For everyone else, (two-thirds of the voting population) the April budget was always a joke.