The federal government posted a surplus of $5.0 billion in the first quarter of 2015-16, up $4.6 billion from the same period in 2014-15. The Conservatives were quick to use this as proof that they were on track to post a surplus in 2015-16, despite a warning by the Department of Finance that early fiscal results are not reliable in forecasting results for the year as a whole.

Part of this improvement was attributable to one-time factors, including the sale of the remaining GM shares and timing factors affecting several of the major revenue components, which will likely be reversed in upcoming months. Even allowing for this, the results to date were well above expectations and in sharp contrast to what might have been expected given performance of the economy.  What explains the first quarter results and what implications does it have for the year as a whole?

There are at least three possible expectations for the surprising results. First, the Department of Finance decided to build additional prudence into the April 2015 Budget for 2015-16 to ensure that the Government’s commitment to a balanced budget would be met under any circumstance. As a result, the budget surplus for 2015-16 was not reflective of the economic forecast at that time.

Second, the final outcome for 2014-15 was considerably better than forecast in the April 2015 Budget and much of this better-than-better outcome has carried forward into the current fiscal year.

And third, there are a number of timing factors, which have over stated the financial results to date.

In the April 2015 Budget, a surplus of $1.4 billion was forecast.  That forecast included a Contingency Reserve of $1 billion, implying an underlying surplus of $2.4 billion.  However, the April Budget may have included some additional prudence.  For example, in the first quarter of 2015-16, “other revenues” are $2.5 billion higher than in the same period of 2014-15, whereas the April Budget forecast an increase of only $800 million for the year as a whole. Much of the improvement to date was attributable to the sale of GM shares.  These were known at the time of the April Budget but not fully incorporated in the April Budget forecast. The decline in public debt charges for the first quarter is also well above that forecast for the year as a whole.  These large discrepancies suggest that the April Budget forecast of a surplus of only $1.4 billion could be understated by at least $2.5 billion.

Since the April Budget, private sector forecasters have revised down their forecasts of economic growth by about one percentage point. Based on the Department by Finance’s fiscal sensitivity analysis, such a downward revision in real growth would reduce the budgetary balance by $4.1 billion.  If materialized, this would result in a deficit of $1.7 billion for 2015-16.  This further supports our claim that the April Budget was not reflective of the economic forecasts at that time and that the Budget included additional prudence.

Final results for 2014-15 should be released sometime in mid to late September.  We have argued before that, based on financial results to the end of March 2015, a surplus was posted in that year.  If that is the case, some of the better-than-expected outcome will carry forward into 2015-16.  The Fiscal Monitor is on an accrual basis of accounting.  The Department of Finance converts the cash received to accruals based on prior years’ experience. Based on preliminary results for 2014-15, the Department of Finance may have adjusted various accrual adjustment ratios, converting cash to accruals, thereby distorting the year-over-year comparisons.  For example, the year-over-year increases in corporate income taxes and GST revenues are well above the growth rates in their respective tax bases, which could be attributable to changes in the accrual adjustment ratios.

The annual lapse in direct program expenses may be higher than forecast in the April Budget for 2014-15.  The Department of Finance has consistently underestimated the lapse.  This, too, would carry forward into 2015-16, resulting in lower direct program expenses than currently estimated.  This can only be verified once the final results for 2014-15 become public later in September.

Finally, there are a number of timing factors, which could result in a lower surplus in coming months.  For example, the federal government did not record any transfers to municipalities under the Gas Transfer Tax.  Last year, however, an amount of $630 million was recorded in the first quarter.  By the end of fiscal year 2015-16, about $2 billion will be transferred to the municipalities, similar to that transferred in 2014-15.  In addition, the increases in corporate income tax and GST revenues to date well exceed the growth rates in their respective tax bases.  As a result, the monthly revenue outcomes could be affected by timing factors which will unwind over the course of the year.  .

The results to date are good news for the Harper Government.  Results for July 2015 are scheduled to be released on the last Friday in September.  Even if a deficit is recorded in July, it will not be large enough to show a deficit for the first four months of 2015-16.  Mr. Harper will continue to claim he has balanced the budget leading into the election.  This has been his claim to fiscal prudence and being a sound fiscal manager. However, whether or not a balance budget will be recorded for 2015-16 will not be known until the fall of 2016 – a full year from now.

However, As the Department of Finance warns caution should be exercised in making forecasts for the year based on the financial results at this time. At least five to six months of financial data are required before one can reasonably assess the outcome for the year as a whole. Although the results for the first three months of 2015-16 are encouraging, they are unlikely to hold over the remaining months of the fiscal year.