Fiscal Monitor for April – August 2015: Coming Into Line
The federal government posted a deficit of $2.5 in August 2015, reducing the surplus for the first five months of 2015-16 to $2.8 billion, up $3.9 billion from the same period in 2014-15. According to the Department of Finance, the deficit in August 2015 was primarily due to updated accrual estimates of employee pension and other employee future benefits, reflecting changes to the interest rate assumptions. For the first four months of 2015-16, a surplus of $5.2 billion was reported. This was used during the election campaign by the Conservatives to justify a balanced budget or better for the year as a whole.
Over the first five months of 2015-16, budgetary revenues were up $11.1 billion (10.3%), over the same period in 2014-15. Incorporating the final results for 2014-15 and comparing them to the April 2015 Budget forecast for 2015-16, an increase of only 2.8%, or $8.0 billion, is expected for the year as a whole. Year-to-date increases in a number of major revenue components significantly exceed what was expected in the April 2015 Budget for the year as a whole. For example, corporate income tax revenues are up 23.6%, or $2.9 billion, in the April to August 2015 period, compared to the same period last year. For the year as a whole, a decline of $2.6 billion is expected. GST revenues are up 10.8%, or $1.5 billion, in the first five months of 2015-16. For the year as a whole, an increase of $1.4 billion is expected. Finally, other revenues are up 27.6%, or $2.9 billion, in the first five months of 2015-16. An increase of $0.5 billion is expected for the year as a whole. All other things remaining equal, budgetary revenues could be $3 to $4 billion higher in 2015-16 than currently expected.
However, as we have cautioned before, the remittance requirements for corporate income tax revenues could have a significant impact on the results to date. Corporations are required to remit either based on their previous year’s tax liability or on an estimate of their current year’s tax liabilities. Final settlement payments are made sixty days after the end of their taxation year. For chartered banks, the settlement period is December. For all other large corporations, it is in the February/March period. Traditionally, about 40 per cent of corporate income tax revenues are received in the December/February/March period. Given the current weakness in corporate profits, revenues in the settlement periods could be significantly lower than that experienced last year.
Program expenses are up 7.6%, or $7.4 billion, over the first five months of 2015-16, compared to the same period in 2014-15. For the year as a whole, an increase of 3.7%, or $9.4 billion, is expected. Within major transfers to persons, employment insurance benefits were up 9.8%, or $0.7 billion, over the first five months of 2015-16. This compares to an increase of only 1.9%, or $0.3 billion, expected for the year as a whole. Major transfers to other levels of government are in line with the increase expected for the year as a whole. Direct program expenses were up 6.5%, or $2.6 billion in the April to August 2015 period compared to the same period last year. This compares to an increase of 1.3%, or $1.5 billion expected for the year as a whole. Most of this difference is attributable to increase in the accrual adjustments for employee pensions and other future benefits. This increase appears not to have been anticipated at the time of the April 2015 Budget. As a result, it is expected that program expenses could be about $2 billion higher than expected at the time of the April Budget.
Public debt charges are down by 2.1%, or $258 million, in the first five months of 2015-16 when compared to the same period in 2014-15. For the year as a whole, a decline of $894 million was expected.
Since the April Budget, private sector forecasters, the IMF, the OECD, and the Bank of Canada have revised down their forecasts of economic growth by about one percentage point. Based on the Department of Finance’s fiscal sensitivity analysis, such a downward revision in real growth would reduce the budgetary balance by $4.1 billion. In addition, the current results for revenues could be affected by timing factors, which could be unwound over the balance of the year . On balance there is likely to be a deficit for 2015-16.
 The April 2015 Budget projection for 2015-16 is compared to the final results for 2014-15.