The Minister of Finance released the final financial results for 2015-16 in the Annual Financial Report.  The deficit for 2015-16 was estimated at $1.0 billion, $4.5 billion lower than the March 2016 Budget estimate of $5.4 billion. However, the outcome for 2015-16 includes the impact of a number of policy initiatives proposed in the March 2016 Budget – the Liberal’s first budget.  These include, among others, changes to veterans’ benefit plans (estimated at $3.7 billion) and the reversal of the previous government’s decision with respect to sick leave provisions ($0.9 billion). Excluding the impact of these policy initiatives, there would have been a surplus of $3.7 billion.

Virtually all the better-than-expected outcome for 2015-16 was attributable to higher corporate and personal income tax revenues, up $2.6 billion and $2.2 billion respectively. Part of this was due the fact that the prudence of $1.5 billion included in the March 2016 Budget projections for revenues was not required. The Department of Finance attributes part of the higher-than-expected outcome for personal income tax revenues to tax planning by high-income Canadians to recognize income in 2015 in advance of the introduction of the new 33% tax bracket for taxation year 2016.  Personal income tax revenues in the end-of-year accounting period were $6.9 billion – an all-time record – supporting the use of aggressive tax planning at year end.  The higher-than-expected corporate income tax revenues primarily reflects an overly cautious estimate in the March 2016 Budget. Indications during the year suggested that the final outcome would be considerably higher than estimated in the March 2016 Budget.

Both program expenses and public debt charges were marginally lower than estimated in the March 2016 Budget.

Some of the better-than-expected revenue outcome for 2015-16 will likely carry forward to 2016-17 and over the medium-term. As a result, all other things remaining equal, the deficit in these years should be lower than projected in the March 2016 Budget.  However, a key unknown is what impact tax planning in 2015 will have on personal income taxes in 2016 and beyond.

The Annual Financial Report contained little information of the factors impacting on the financial outcome for 2015-16.  Hopefully, more details will be provided in the Public Accounts, scheduled for release shortly. In addition, further details should be provided in the upcoming Economic and Fiscal Update, scheduled for release some time in November.

The classification system used in the Annual Financial Report differs from that presented in the Budget and the monthly Fiscal Monitor.  This makes it difficult to analyze the results in the Annual Financial Report to the other sources. It is recommended that a consistent classification system be used in all applicable reports.