Fiscal Monitor for April – November 2015
The federal government posted a surplus of $0.4 in November 2015, compared to a deficit of $.6 billion in November 2014. As a result, there was a surplus of $1.0 billion for the first eight months of 2015-16, compared to a deficit of $3.3 billion in the same period in 2014-15.
Over the first eight months of 2015-16, budgetary revenues were up 8.2%, ($14.2 billion), over the same period in 2014-15. The November 2015 Update of the Economic and Fiscal Projections forecast an increase of only 2.1%, ($6.1 billion) for the year as a whole. Year-to-date increases in all of the major revenue components equal or exceed what is currently forecast in the November Update for the year as a whole.
For example, corporate income tax revenues are up 23.1%, ($4.7 billion), in the April to November 2015 period. The November Update forecast a decline of $2.6 billion. Other revenues are up 12.5%, ($2.2 billion), in the first eight months of 2015-16. A decline of $0.9 billion was expected for the year as a whole. The year-over-year increases in personal income taxes and GST revenues are equal to those forecast for the year as a whole. This would suggest that budgetary revenues for 2015-16 could be significantly higher than forecast in the November Update.
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 their taxes either on the basis of their previous year’s tax liability or on an estimate of their current 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. The increase in GST revenues to date reflects, in part, the timing of receipts, which should be reversed in November. However, even so, total budget revenues could be between $3 and $5 billion higher than forecast in November.
Program expenses are up 6.8%, ($10.7 billion), over the first eight months of 2015-16, compared to the same period in 2014-15. For the year as a whole, the November Update forecast an increase of 4.6%, ($11.7 billion). The current year-over-year changes for major transfers to persons and to other levels of government appear to be on track with the forecasts for these components in the November Update. However, for the first eight months of 2015-16, direct program expenses are up 5.6% ($3.7 billion) from the same period last year. For the year as a whole, the November Update forecasts an increase of only 2.1% ($2.4 billion). The results to date suggest that the final outcome for direct program expenses could be at least $2 billion higher than forecast in the November Update.
Public debt charges are down by 4.7%, ($876 million), in the first eight months of 2015-16 when compared to the same period in 2014-15, reflecting the impact of lower interest rates. For the year as a whole, the November Update forecast a decline of $694 million.
The April 2015 Budget forecast a surplus of $2.4 billion for 2015-16. This was revised to a deficit of $3.0 billion in the November Update.
However, economic circumstances have continued to deteriorate since the November Update. Oil prices are much lower than assumed in the November Update. Private sector economists have revised down their forecast for real GDP for 2015. For example, in the November Update, the Department of Finance forecast real economic growth of 2.0% for 2016, based on the average of private sector economic forecasts at that time. TD Economics is now forecasting real GDP growth of only 1.5 for 2016, the Bank of Canada has lowered its forecast to 1.4%, while CIBC Economics have revised down their forecast to 1.3%.
These downward revisions to real GDP growth would adversely affect budgetary revenues by about $1 billion to $1.5 billion in 2015-16. In addition, the November Update includes $900 million in savings from changing sick leave provisions for federal public servants. The Government has indicated that it will introduce legislation to reverse the impact of the changes implemented by the previous Government.
On balance, the outcome for 2015-16 could be somewhat better than the November Update de