DEFICIT FOR 2016-17 COULD BE $3 BILLION LOWER THAN FORECAST IN NOVEMBER UPDATE
The November 2016 Update forecasts a deficit of $25.1 billion for 2016-17. Based on the financial results for the first nine months of 2016-17, public debt charges could be as much as $1 billion lower than forecast in the Update, while direct program expenses could be at least $2 billion lower. Budgetary revenues appear to be on track, with differences in components offsetting each other. On balance, the final outcome for 2016-17 could be at least $3 billion lower than forecast in the November Update, excluding extraordinary accrual adjustments. In its latest update, the Office of the Parliamentary Budget Officer estimated that the federal deficit could be about $5 billion lower.
A deficit of $1.3 billion was reported for December 2016, compared to a surplus of $2.2 billion for December 2015. Much of the surplus in December 2015 was due to the accelerated repayment of contributions by Pratt and Whitney Canada. As a result, for the first nine months of the 2016-17 fiscal year, the federal government posted a deficit of $14.0 billion, compared to a surplus of $3.2 billion in the same period in 2015-16. Budgetary revenues were $1.9 billion lower (a decline of 0.9%) while program expenses were up by $16.7 billion (up 8.8%). Public debt charges were $1.4 billion lower (down 7.0%).
Within budgetary revenues, personal income taxes were down $1.0 billion (0.9%), as gains in employment income subject to tax were offset the impact of the Budget 2016 tax reductions. In the Update, a decline of $1.2 billion was projected, primarily reflecting extraordinary tax payments made in the end-of-year accounting period in 2015-16 reflecting tax planning in advance of the introduction of the high-income tax bracket for taxation year 2016. Based on results to date, personal income tax revenues could be at least $2 billion lower than estimated in the November Update. Corporate income taxes were up $603 million (2.1%), primarily due to a rebound in corporate profits. The decline in sales and excise taxes/duties (down $32 million or 0.1%) was primarily due to lower energy taxes and other excise taxes/duties, partially offset by marginally stronger goods and services taxes and customs import duties. Employment insurance contributions were up $223 million or 1.5%, reflecting increases in maximum insurable earnings and employment, as premium rates were unchanged. Other revenues (consisting of net profits from enterprise Crown corporations, revenues from sales of goods and services, return on investments, net foreign exchange revenues and miscellaneous revenues) were down $1.9 billion, (8.6%,) solely due to the $2.2 billion gain realized on the sale of the Government’s remaining shares in GM in April 2015. For the year as a whole, this component could be $1.5 billion higher than estimated in the November Update.
In the November 2016 Update, budgetary revenues were forecast to decline by $4.5 billion or 1.5%. Based on developments to date, along with expected developments at year end, this forecast appears reasonable.
The increase of $16.7 billion in program expenses was spread among all the major categories. Major transfers to persons increased $5.7 billion (9.3%) in the first nine months of 2016-17. Elderly benefits were up $2.0 billion (5.9%), due to an increase in the eligible population and to higher average benefits, which are indexed to the Consumer Price Index on a quarterly basis. In addition, benefits under the Guaranteed Income Supplement were up strongly, reflecting the 10% increase in average benefits as proposed in the March 2016 Budget. Children’s benefits increased by $2.8 billion (20.5%), due to the enhancement and expansion of the Universal Child Care Benefit (UCCB) and the replacement in July 2016 of the UCCB and the Canada Child Tax Benefit by the new Canada Child Benefit. Employment insurance benefits increased $911 million, (6.6%), primarily reflecting legislative changes, which came into effect in July 2016, and also to an increase in the number of people eligible for EI benefits.
Major transfers to other level of government were up $2.2 billion (4.4%), reflecting legislated increases affecting the major components.
Direct program expenses (other transfers, expenses related to Crown corporations, defence and operating and capital expenses for other departments and agencies) were up $8.9 billion (11.3%). Other transfer payments were up $5.3 billion or 25.3%, reflecting the recording of liabilities associated with disaster assistance, the implementation of the March 2016 Budget measures and the accelerated repayment of contributions by Pratt and Whitney Canada in December 2015. In addition, expenses for Crown corporations and defence were up strongly, 9.0% and 6.0%, respectively, due in part to an increase in federal government employee pension and other future benefit liabilities. Expenses for all other departments and agencies advanced $1.9 billion (5.6%), also reflecting, in part, the impact of new initiatives proposed in Budget 2016 and increased liabilities for employee pension and other future benefits.
In the Update, total program expenses were projected to increase by $20.4 billion or 7.5%. However, the final results for 2015-16 included $4.6 billion in allowances related to the reversal of previous policy decisions relating to veterans’ benefits and sick leave provisions. As a result, the underlying increase of $25 billion or 9.2% appears to be excessive given the results to date.
The decline to date in public debt charges of $1.4 billion (7.0%) largely reflects lower average effective interest rates and lower inflation adjustments on Real Return Bonds. The Update forecast a decline of only $700 million. The final outcome could be at least $1 billion lower than forecast.