The Department of Finance released the Fiscal Monitor for November 2011 on Friday, January 27, 2012.  For the first eight months (April to November) of fiscal year 2011-12, the federal government posted a deficit of $17.3 billion, down $8.7 billion from the deficit of $21.5 billion reported in the same period in 2010-11.

On November 8, 2011, the Minister of Finance presented the Government’s “Update of Economic and Fiscal Projections”.  The deficit forecast for 2011-12 was revised down slightly to $31.0 billion from the June 2011 Budget estimate of $32.3 billion.  The revised deficit estimate, however, included an “adjustment for risk” of $3.0 billion for 2011-12.  This means that the underlying deficit forecast  for 2011-12 was $28 billion, a decline of $5.4 billion from the final outcome for 2010-11.

Based on the results to date, the “adjustment for risk” factor will not be required. We expect that the final outcome for 2011-12 will be at least $3 billion lower than forecast in the November 2011 Update, provided that there are no “extraordinary” adjustments at year-end.  

 Of the $8.7 billion year-over-year improvement, budgetary revenues were up by $5.7 billion, primarily due to higher personal and corporate income tax revenues, while program expenses were down by $3.5 billion, due to lower “other “ transfer payments and employment insurance benefits, partially offset by higher transfers to provinces and elderly benefits. Public debt charges were up by $0.5 billion.

Based on the results to date, corporate income tax revenues for the year could be higher than the November 2011 Update estimate.  Corporate income taxes are up $2.3 billion in the first eight months of 2011-12, whereas the Department of Finance forecast an increase of only $0.5 billion for the year as a whole.  It appears that the $3 billion adjustment to risk was primarily allocated to this component. Monthly data on corporate income tax revenues are not a good indicator of the potential outcome for the year as a whole, until there is at least nine months of data. Given corporate remittance requirements, final settlements are made close to year-end. However, based on the results to date, corporate income tax revenues are expected to come in higher than forecast in the November 2011 Update.

On a year-over-year basis, GST revenues were down 6.3 per cent in November 2011, whereas the Department of Finance expects them to increase by just over 2 per cent for the year as a whole.  Among the other major revenue components, “other revenues” to date are down about $1 billion, 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.  “Other transfers payments” are over $6 billion lower to date than in the same period last year, reflecting the ending of the stimulus measures. Yet, in the November 2011 Update, the Department of Finance projected a decline of only $1.1 billion.  As we pointed out in “Does Anyone Know What the Government is expected to Spend This Year? www.3dpolicy.ca 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 are  significantly overstated.  Public debt charges, given the current lower outlook for interest rates, could come in somewhat lower than expected as well. 

On balance, we expect the deficit for 2011-12 to be at least $3 billion lower than forecast in the November 2011 Update.  Higher-than-expected corporate income taxes and lower-than-expected “other transfers” should more than offset shortfalls in any of the other revenue components.  Clearly, the $3 billion adjustment for risk will not be required.