The February 2011 Fiscal Monitor reports a deficit of $28.3 billion for the first eleven months of 2010-11, $12.3 billion lower than reported for the same period last year.  In the March 2011 Budget, the Minister of Finance forecast a deficit for the year as a whole of $40.5 billion.  Based on the current results, the deficit for 2010-11 could be $3 to $6 billion lower than his current deficit forecast. 

Budgetary revenues to the end of February are running about one percentage point below that forecast in the Match 2011 Budget, due primarily to lower-than-expected personal income tax and other revenues.  In contrast, the year-over-year growth rate in corporate income tax revenues to date is much higher-than-forecast in the March 2011 Budget.  In the Annual Financial Report for 2009-10, the Department of Finance[1] stated that corporate income tax revenues in 2009-10 were affected by a number of one-time factors at year end, which inflated the final outcome for 2009-10.  If this is true, we should see a decline in corporate income tax revenues of about $3 billion over the balance of 2010-11 compared to the same period last year.  If this materializes, budgetary revenues for 2010-11 could be about $3 billion lower-than-estimated in the March 2011 Budget.  If not, higher-than-estimated corporate income taxes could well offset lower-than-expected outcomes in the other components.   

Total expenses at the end of February 2011 were 0.4 per cent higher than in the same period last year.  The March 2011 Budget forecast an increase of 0.6 per cent for the year as whole.  However, at the end of 2009-10, the Government booked the full liability ($5.9 billion) for the one-time HST harmonization costs for Ontario and British Columbia and an increase in accrual liabilities for federal employee pensions of about $3 billion.  Adjusting the 2009-10 outcome for program expenses for these extraordinary one-time liabilities implies an underlying increase for 2010-11 of 4 per cent.  This is highly unlikely.  We continue to believe that the March 2011 Budget estimate for total expenses is overstated, especially for “Other transfer payments” and “Other program expenses for departments and agencies”. Based on the results to date, the March 2011 Budget estimate for program expenses could be overstated by at least $6 billion.

It is interesting to note that the February 2011 monthly results include an “increase in the Government’s estimated liabilities” (non specified but estimated by the authors to be up to $0.9 billion). In 2009-10, adjustments to the Government’s liabilities were made in March 2010 and the end-of-year accounting period. As a result, the current year’s estimate to date for program expenses is overstated vis-à-vis last year. It appears that Finance aggressively looked to book some liabilities earlier in order to downplay the potential improvement for the year as a whole.      

As a result, the final deficit outcome for 2010-11 could be between $3 and $6 billion lower-than-estimated in the March 2011 Budget.  This will largely depend on what happens to corporate income tax revenues (was 2009-10 really affected by extra-ordinary one-time developments at year end as claimed by Finance) and by the impact of yet unannounced liabilities (last year, the full HST harmonization liability was booked even though the March 2010 Budget indicated that only $0.3 billion of the $5.9 billion would be recognized in 2009-10).  The Conservatives, who criticized the Liberals for not forecasting the budgetary balance with any degree of accuracy, are now finding that they can’t do any better.

The better-than-expected deficit outcome for 2010-11 does not necessarily mean that the forecasts for the outer years will be better as well.  We, as well as others, continue to believe that the forecast for program expenses beyond 2010-11 are understated and that “Other revenues” are overstated, in aggregate by $4 billion in 2011-12, rising to $8.5 billion by 2015-16[2]. 

[1] Annual Financial Report of the Government of Canada Fiscal Year 2009-10 – page 13: Department of Finance 

[2] See “March 2011 Budget: The Deficit That Won’t Go Away” March 2011 www.3dpolicy.ca.