Deficit Outcome for 2011-12 to be Lower than Forecast in November Update

For the first six months of fiscal year 2011-12, the federal government posted a deficit of $13.2 billion, down $4.2 billion from the $17.4 billion reported in the same period in 2010-11.  Of the $4.2 billion year-over-year improvement, budgetary revenues were up by $4.3 billion, while program expenses were down by $0.4 billion. Public debt charges were up by $0.5 billion.

On November 8, 2011, the Minister of Finance presented the Government’s “Update of Economic and Fiscal Projections”.  The deficit for 2011-12 was revised to $31.0 billion, down from the June 2011 Budget estimate of $32.3 billion.  This deficit estimate, however, included an “adjustment for risk” of $3.0 billion for 2011-12, most of which was  allocated to corporate income tax and “other revenues”.  This means that the underlying deficit estimate for 2011-12 is now  $28 billion. 

Based on the results to date, corporate income tax for the year could be higher than the November 2011 Update estimate.  However, monthly data on corporate income tax revenues for the first nine months of the fiscal year may not be a good indicator of the potential outcome for the year as a whole.  Given corporate remittance requirements, final settlements are made close to year-end.

However, based on the results to date, which appear to include a $2 billion risk adjustment, corporate income tax revenues could come in higher than forecast in the November 2011 Update. In contrast, GST revenues could still be well below their revised November 2011 Update estimate.  On a year-over-year basis, they are down about 10 per cent, whereas the November 2011 Update has them increasing by just over 2 per cent.  Among the other major revenue components, “other revenues” to date are little changed, whereas, the November 2011 Update estimates a decline of nearly $2.5 billion for the year as a whole. This component is very volatile and a decline of that magnitude for the year as a whole is possible. 

As for total expenses, employment insurance benefits and direct program expenses could come in well below the November 2011 Update estimates.  As we pointed out in “Does Anyone Know What the Government is expected to Spend This Year? August 2011, there is a large disconnect between the Main Estimates tabled for 2011-12 and the June 2011 Budget estimate of total expenses for 2011-12.  The tabling of Supplementary Estimates B for 2011-12 did nothing to eliminate this discrepancy. Based on our analysis, it appears that program expenses could be significantly overstated.  Public debt charges, given the current lower outlook for interest rates, could come in lower than expected as well. 

The year-over-year improvement in the deficit to date is greater than what is expected for the year as a whole, in part due to the inclusion of the $3 billion “adjustment for risk”.  On balance, it appears that the overstatement of program expenses will more than offset any shortfall in budgetary revenues.  We would expect that the final outcome for 2011-12 will be $2 to $3 billion lower than forecast in the November 2011 Update, provided that there are no “extraordinary” adjustments at year end.  As we noted in our analysis of the November 2011 Update, the extra adjustment for risk of $1.5 billion was not required.  In fact, for 2011-12 the full $3 billion adjustment for risk may not be required, resulting in a final deficit outcome of about $28 billion.  This would result in an improvement of $5.4 billion from 2010-11.  A significant improvement in the deficit was expected between 2010-11 and 2011-12, given the ending of most of the Economic Action Plan stimulus spending in 2011-12.  In fact, even a deficit outcome of $28 billion implies no improvement due to economic developments, which appears highly unlikely given the results to date.


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