Fiscal Monitor for April – September: Coming Into Line
The federal government posted a deficit of $1.2 in September 2015, reducing the surplus for the first six months of 2015-16 to $1.6 billion, up $2.3 billion from the same period in 2014-15. There has been a significant reduction in the year to date surplus, from a high of $5.2 billion reported for the April to July 2015 period to $2.3 billion for the April to September 2015 period. According to the Department of Finance, most of this deterioration in the fiscal balance was primarily due to updated accrual estimates of pension and other employee future benefits, reflecting changes to the interest rate assumptions.
The Fiscal Monitor for September was released with the Update of Economic and Fiscal Projections (Update). A deficit of $3.0 billion is now forecast for 2015-16. In the April 2015 Budget, the Harper Government forecast a surplus of $1.4 billion. The deterioration in the budgetary balance is attributable to both lower revenues and higher program expenses.
Over the six months of 2015-16, budgetary revenues were up 8.3%, or $10.9 billion, over the same period in 2014-15. The Update forecast an increase of only 2.1%, or $6.1 billion for the year as a whole. Year-to-date increases in a number of major revenue components significantly exceed what is currently forecast in the Update for the year as a whole. For example, corporate income tax revenues are up 21.6%, or $3.3 billion, in the April to September 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 9.3%, or $1.5 billion, in the first six months of 2015-16. For the year as a whole, an increase of $1.9 billion is expected. Finally, other revenues are up 18.2%, or $2.4 billion, in the first six months of 2015-16. A decline of $0.9 billion is now expected for the year as a whole.
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. However, based on the financial results to date, the final outcome for budgetary revenues could be higher than that forecast in the Update, by $2 to $3 billion.
Program expenses are up 7.7%, or $9.0 billion, over the first six months of 2015-16, compared to the same period in 2014-15. For the year as a whole, the current Update forecast an increase of 4.6%, or $11.7 billion for the year as a whole. The current year-over-year changes for major transfers to persons and to other levels of government appear to be on track to the forecasts for these components in the Update. However, for the first six months of 2015-16, direct program expenses are up 7.3% or $3.6 billion. For the year as a whole, the Update forecasts an increase of only 2.1% or $2.4 billion. The results to date strongly suggest that the final outcome for direct program expenses could be at least $2 billion than forecast in the Update.
Public debt charges are down by 3.2%, or $455 million, in the first six months of 2015-16 when compared to the same period in 2014-15. For the year as a whole, a decline of $694 million is now expected.
All other things remaining equal, the current results suggest that the deficit for 2015-16 could be somewhat lower than that forecast in the Update.