The December 2010 Fiscal Monitor shows the deficit for the first nine months of 2010-11 was $27.4 billion, $12 billion lower than reported for the same period last year.  The improvement to date is about $2 billion more than that expected in the October 2010 Update for the year as a whole ($10.2 billion).

The key development in the December was the settlement of taxes owing by the chartered banks for their 2010 taxation year.   Their taxation year ends in October and they have 60 days to make their final tax payments for their 2010 taxation year.  Corporate income tax revenues were up.  Corporate income taxes were up 21.3% in December 2010 over the same month last year, primarily reflecting higher bank profits.

As noted in last month’s write-up, we are now entering the most interesting and largely unknown period for fiscal results.  Over the course of the year, large corporations make tax installments, usually based on their tax liabilities for their previous taxation year.  They have 60 days after the end of their taxation year to file their final tax payments for that year.  With the chartered banks reporting their settlement payments in December, we are now waiting for the other large corporations.  Their taxation year ends in December, so that they will be making their final tax payments in February and March. 

On the expense side of the budget, large liabilities are usually “booked” in March and the “end-of-year accounting period”. For example, in 2009-10, the Government booked the full liability ($5.9 billion) related to the one-time HST harmonization costs for Ontario and British Columbia. The government also booked an increase in accrual liabilities for federal employees of about $3 billion.  

Deficit Outcome Expected to be $7 billion Lower Than Estimated in October 2010 Update

Based on the financial results to the end of December 2010 and in the absence of any large unanticipated liabilities to be recognized in the final months of 2010-11, we expect that the deficit for 2010-11 will be about $7 billion lower than forecast in the October 2010 Update, at about $38.5 billion rather than the Government’s forecast of $45.4 billion.  However, given the much better than expected deficit outcome for 2010-11, the Government may book some liabilities at the end of the fiscal year, as it has done in the past.  These could include one-time initiatives to gain opposition support for the upcoming budget, such as a heating rebate, funding to provinces for health-related initiatives (through the setting up of a trust fund), among others.

No Assessment of Mid-Year Results Provided   

In the Budget Plan 2008, the Government set out its approach to “Budget Planning and Fiscal Forecasting”[1].  One of the principles was to provide quarterly updates of the fiscal outlook for the current year in the monthly Fiscal Monitor.  No assessment was provided in the December 2010 Fiscal Monitor.  The currently results clearly indicate that the deficit outcome for 2010-11 will be lower than forecast; yet the Government remains silent. 

[1] “The Budget Plan 2008 Responsible Leadership” Tabled in the House of Commons by the Honourable James M. Flaherty Minister of Finance February 26, 2008.  See page 193