For the first three months of fiscal year 2013-14, the federal government posted a deficit of $2.6 billion, down $0.3 billion from that reported in the same period in 2012-13.  In the March 2013 Budget, the deficit was expected to decline by $7.2 billion for the year as a whole, from $25.9 billion to $18.7 billion. Although the current results appear to be at odds with the expected decline for the year, at least five to six months of financial data are required before one can properly assess the expected decline for the fiscal year as a whole. In addition, as explained below, there are a number of factors that distort the expected year-over-year decline for the year as a whole.

Of the $0.3 billion reduction in the deficit to date, budgetary revenues were up $2.7 billion, while public debt charges were $0.2 billion lower.  .  However, these positive contributions were virtually offset by higher program expenses (up $2.6 billion). 

Within budgetary revenues, the year-over-year changes to date for all major components were higher, with the exception of Goods and Service Tax revenues, which declined by 2%.  The increases in the other components reverses the declined witnessed in April and May, primarily reflecting the timing of receipts.  Personal income taxes were up 3.7%, still somewhat below the March 2013 estimate of 4.2%.  Corporate income taxes were up a whopping 9.2% compared to the Budget 2013 estimate of 4.8% for the year as a whole. Total excise and duties declined by 1.0% for the year to date, compared to the March 2013 Budget estimate of an increase of 1.6% for the year as a whole. The increases to date in employment insurance contributions and other revenues were roughly in line with the March 2013 Budgets expectations.  On balance, budgetary revenues increased by 4.3% on a year-over-year basis, bang on the March 2013 Budget forecast for the year as a whole.

The increase in program expenses to date of $2.6 billion is well above the March 2013 Budget expected increase of $1.6 billion for the year as a whole. Most of the difference is attributable to “direct program expenses”, up $1.5 billion on a year-over-year basis, compared to a March 2013 Budget expected decline of $2.9 billion for the year as a whole.  Some of this difference is due to the timing in the recording of liabilities.  For example, the March 2013 Budget estimate for 2012-13 includes the recording of a $2.4 billion for AECL’s environmental liabilities.  In the April-May 2013 Fiscal Monitor, the Department of Finance noted that the year-to-date increase in “other direct program expenses” was largely due an “an increase in the accrual cost of employee and veteran future benefits”.   

As noted above, at least five to six months of financial data are required before one can properly assess the expected decline for the fiscal year as a whole.   In addition, final results for 2012-13, which will be released in the early fall, are required to fully understand the current year’s fiscal results.  For example, if, as expected, the final audited deficit outcome for 2012-13 is lower than that estimated in the March 2013 Budget, some, if not all, of this improvement could carry forward into 2013-14, thereby resulting in a lower outcome that currently estimated. 

Although the deficit is expected to decline by $7.2 billion for the year as a whole, there are a number of one-time factors which distort that year-over-year change.   The 2012-13 deficit estimate includes a one-time $2.4 billion environmental liability for AECL, which inflated the deficit estimate for 2012-13. Adjusting for this implies an underlining deficit of $23.5 billion for 2012-13.  This means that the deficit only needs to decline by $4.8 billion between 2012-13 and 2014-15 to meet the target of $18.7 billion for 2013-14. 

This should not be overly difficult given that incremental restraint measures announced in previous budgets are estimated to amount to $4.3 billion in 2013-14.  The 2013-14 deficit projection also includes a $3 billion “risk adjustment factor”. If this is not needed, the 2013-14 deficit outcome would be reduced by a comparable amount. As a result, the deficit target for 2013-14 is not overly ambitious, all other things remaining equal.

However, the upcoming fall update will have to take into account federal liabilities related to the Alberta floods and the rail disaster in Lac-Megantic. Reports indicate that the federal liabilities for these disasters could exceed what has been paid out to date (since 1970, $2.3 billion has been paid) under the Disaster Financial Assistance Arrangements program). In order to ensure that the federal government’s liabilities with respect to these disasters do not affect the government’s balanced budget target for 2015-16, it will try to book as much of these liabilities in 2013-14 and 2014-15 as possible.   The upcoming fall update should provide some indication as to what the government feels it can reasonably “book” in 2013-14.