Fiscal Monitor for July 2011: Indication of Things to Come?


For the first four months of fiscal year 2011-12, the federal government posted a deficit of $7.1 billion, down only $0.6 billion from the $7.7 billion reported in the same period in 2010-11.  Based on historical experience, a small surplus/deficit was expected in July 2011.  Instead, a deficit of $1.6 billion was reported, up $1.1 billion from the same period in 2010-11.  About $1 billion of this deterioration was attributable to transfer protection payments to provinces to prevent declines in their transfers between 2010-11 and 2011-12.  Still, the results for July 2011 are disappointing and could put the June 2011 Budget deficit target in jeopardy.

Over the first three months of the current fiscal year, most of the improvement in the deficit has come from strong year-over-year growth in budgetary revenues, especially from personal and corporate income tax revenues. However, budgetary revenues declined in July 2011 on a year-over-year basis, primarily due to declines in corporate income taxes and in excise taxes and duties.  The Department of Finance gave no explanation for these declines (higher refunds, timing of receipts, economic factors, etc.).  For the first four months of 2011-12, GST revenues are now 12 per cent lower than in the same period last year and well below Finance’s forecast for the year as a whole.  Part of it could be due to timing of receipts and refunds, which may not be “corrected” until the end of the fiscal year. Corporate income taxes are also well below Finance’s expectation for the year as a whole.  However, as noted previously[1], monthly corporate income tax flows can be extremely misleading, given the reporting procedures afforded corporations.

Program expenses for the first four months of 2011-12 were up $1.9 billion, or 2.6%, over the same period in 2010-11.  However, as noted above, about $1 billion was due to the transfer protection payments to provinces.  Public debt charges are running above the June 2011 Budget estimates.

Based on the results to date, it appears that employment insurance benefits and direct program expenses could come in lower than expected at the time of the June 2011 Budget.  In addition, the rejection of the provincial HST by voters in British Columbia will result in the recovery of the $1.6 billion paid to British Columbia for its HST transitional costs.  The agreement by the province of Quebec to harmonize its sales tax with the GST and the resulting payment of $2.2 billion by the federal government is not expected to affect the 2011-12 results.  However, if all of the conditions are met in 2011-12, a liability for the $2.2 billion will need to be set up, even if the payments are not made until a later date.  Originally, transitional payments to Ontario and British Columbia were to be spread out over two years.  However, the full liability was booked in 2009-10 instead. 

At least five to six months of financial data are required before one can properly assess the current results to the June 2011 Budget forecast of $32.3 billion for the fiscal year as a whole.  In addition, final results for 2010-11, which will likely be released with the fall Economic and Fiscal Update, are required to fully understand the current year’s fiscal results.  For example, if the final audited deficit outcome for 2010-11 is lower than that estimated in the June 2011 Budget, some, if not all, of this improvement could carry forward into 2011-12. 

However, 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.  Based on our analysis, it appears that components of the June 2011 Budget program expenses could be significantly overstated.  This could offset a potential deterioration in budgetary revenues as nominal gross domestic product – the applicable tax base for federal revenues – is now expected to be below the June 2011 Budget estimate.

The Minister of Finance is to provide an economic and fiscal update in the upcoming Economic and Fiscal Statement, traditionally presented in the early fall.

Normally, the Fiscal Monitors released on a Friday are available at 11:00 AM, before Question Period.  However, unexpectedly, the Fiscal Monitor for July 2011 was delayed to 1:00 PM, after Question Period. No explanation was given


[1] “Why You Should Read the Fiscal Monitor” August 2010

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