Fiscal Monitor for April – July 2015: Surplus of $5.2billion: What is Going On



The federal government posted a small surplus of $150 million in July 2015, raising the surplus for the first four months of 2015-16 to $5.2 billion, up $6 billion from the same period in 2014-15. Part of this improvement, however, was attributable to one-time factors, including the sale of the remaining GM shares (gain of $2.1 billion) and timing factors affecting several of the major revenue components, the latter which are expected to be reversed in upcoming months.  The results to date were well above expectations and in sharp contrast to the underlining economic data. 

There are at least three possible explanations for the surprising results to date. One, additional prudence could have been built into the April 2015 Budget for 2015-16, with the result that the fiscal projections for 2015-16 were 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 probably 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.

First, in the April 2015 Budget, a surplus of $1.4 billion was forecast for the year.  That forecast included a Contingency Reserve of $1 billion, implying an underlining surplus of $2.4 billion.  However, the April Budget may include some additional prudence.  For example, in the first four months of 2015-16, “other revenues” are $2.9 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. This misforecast is rather large and unusual to say the least.

Most of the improvement to date was attributable to one-time factors, such as the sale of GM shares.  These were known at the time of the April Budget but appear not to be fully incorporated in the April Budget forecast. The decline in public debt charges to date is well above that forecast for the year as a whole.  This suggests 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.

Second, final results for 2014-15 recorded a surplus of $1.9 billion – a deficit of $2.0 billion was estimated in the April 2015 Budget.  We have argued in other postings that, based on financial results to the end of March 2015, a surplus would be posted in that year.  Budgetary revenues were $3.0 billion higher than expected, program expenses were $0.8 billion lower and public debt charges were $0.1 billion lower. Some of this better-than-expected outcome will carry forward to 2015-16. 

Based on the results for 2014-15, the Department of Finance may have adjusted various accrual adjustment ratios, converting cash to accruals for 2015-16, 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 a change in the accrual adjustment ratios.  The Department of Finance, in the Annual Financial Report, also reported that the annual lapse in direct program expenses was again higher than forecast in the April Budget for 2014-15.  This, too, could carry forward into 2015-16, resulting in lower direct program expenses than currently estimated.  These assumptions can only be verified once the Public Accounts of Canada for 2014-15 become public and a detailed analysis of the lapse is undertaken.

Third, there are a number of timing factors which could result in a lower surplus. The increases in corporate income tax and GST revenues to date could be affected by timing factors which will unwind over the course of the year.  This may also explain why the increases to date in these revenue components far exceed the increases in their applicable tax bases.

Over the first four months of 2015-16, budgetary revenues were up 9.3%, or $8.3 billion, over the same period in 2014-15.  Incorporating the final results for 2014-15 and comparing them to the April 2015 Budget forecast for 2015-16, an increase of only 2.8% is expected.  In fact, the increase in the absolute change in the first four months exceeds the expected change for the year as a whole ($8.0 billion).

Program expenses are up 3.8% over the first four months of 2015-16, compared to the same period in 2014-15.  Increases in major transfers to persons and other levels of government more than offset decreases in direct program expenses. The increase to date is in line with the increase expected for the year as a whole, when the final results for 2014-15 and compared to the April Budget forecast for 2015-16.

Public debt charges are down by 7.2%, or $732 million, in the first four months of 2015-16 when compared to the same period in 2014-15. For the year as a whole a decline of $894 million was expected. It is expected that the final result for 2015-16 will be lower than forecast in the April 2015 Budget, as interest rates are lower than forecast in the April 2015 Budget.

The results to date are good news for the Government.  Based on the financial results to date, Mr. Harper will continue to claim he has balanced the budget for 2015-16. A balanced budget has been his “hell or high water” mark for the last few years. However, whether he is right or wrong will not be known until the fall of 2016. 

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