Fiscal Monitor for April 2016 to February 2017; Consistent with the Revised 2017 Budget Forecast for the Year as a Whole

A surplus of $1.3 billion was reported for February 2017, compared to a surplus of $3.2 billion for February 2016. On a year-over-year basis, budgetary revenues were down $0.4 billion, while program expenses increased $1.5 billion. Public debt charges were virtually unchanged.

As a result, for the first eleven months of the 2016-17 fiscal year, the federal government posted a deficit of $11.5 billion, compared to a surplus of $7.5 billion in the same period in 2015-16. Budgetary revenues were virtually unchanged, while program expenses were up by $20.0 billion (up 8.5%). Public debt charges were $1.5 billion lower (down 6.3%).
Within budgetary revenues, personal income taxes were down $1.0 billion (0.8%), as gains in employment income subject to tax were offset the impact of the Budget 2016 tax reductions. In the latest budget, a decline of $1.7 billion is projected, primarily reflecting extraordinary tax payments made in the end-of-year accounting period in 2015-16 reflecting tax planning in advance of the introduction of the high-income tax bracket for taxation year 2016. The final outcome will largely depend upon what impact this tax planning will have on the 2016-17 results. Based on results to date, personal income tax revenues could be at least $3 billion lower, reflecting the impact of tax planning with respect to the 2015 taxation year. Corporate income taxes were up $1.5 million (3.8%), primarily due to a rebound in corporate profits. Based on results to date, corporate income tax revenues could be at least $0.5 billion higher than currently estimated. Sales and excise taxes/duties were up $0.7 billion or 1.4% in the current period compared to the same period in 2015-16. Based on results to date, the final outcome could also be $0.5 billion higher than currently estimated. Employment insurance contributions were down $0.4 billion or 1.9%, partially reflecting the decline in premium rates, effective January 1st, from $1.88 (employee rate) in 2016 to $1.63 for 2017. In addition, accrual adjustments with respect to previous years lowered EI premium revenues but increased personal income tax revenues by a comparable amount. Other revenues (consisting of net profits from enterprise Crown corporations, revenues from sales of goods and services, return on investments, net foreign exchange revenues and miscellaneous revenues) were down $1.9 billion, (7.3%,) solely due to the $2.2 billion gain realized on the sale of the Government’s remaining shares in GM in April 2015.  For the year as a whole, this component could be $1.5 billion higher than currently anticipated. On balance, budgetary revenues could be slightly lower than forecast in the March 2017 Budget.

The increase of $20.0 billion in program expenses in the first eleven months of 2016-17 compared to the same period in 2015-16 was spread among all the major categories.  Major transfers to persons increased $7.3 billion (9.7%) in the first eleven months of 2016-17. Elderly benefits were up $2.5 billion (5.9%), due to an increase in the eligible population and to higher average benefits, which are indexed to the Consumer Price Index on a quarterly basis. In addition, benefits under the Guaranteed Income Supplement were up strongly, reflecting the 10% increase in average benefits as proposed in the March 2016 Budget. Children’s benefits increased by $3.7 billion (22.4%), due to the enhancement and expansion of the Universal Child Care Benefit (UCCB) and the replacement in July 2016 of the UCCB and the Canada Child Tax Benefit by the new Canada Child Benefit. Employment insurance benefits increased $1.2 billion, (6.7%), primarily reflecting legislative changes, which came into effect in July 2016, and also to an increase in the number of people eligible for EI benefits. The developments to date for this component appear consistent with the March 2017 Budget forecast.

Major transfers to other level of government were up $2.5 billion (4.2%), reflecting legislated increases affecting the major components. Again, this increase appears to be consistent with the forecast for the year as a whole.
Direct program expenses (other transfers, expenses related to Crown corporations, defence and operating and capital expenses for other departments and agencies) were up $10.2 billion (10.4%). Other transfer payments were up $6.1 billion or 21.6%, reflecting the recording of liabilities associated with disaster assistance, the implementation of the March 2016 Budget measures and the accelerated repayment of contributions by Pratt and Whitney Canada in December 2015.  In addition, expenses for Crown corporations and defence were up strongly, 7.4% and 5.5%, respectively, due in part to an increase in federal government employee pension and other future benefit liabilities. Expenses for all other departments and agencies advanced $2.4 billion (5.8%), also reflecting, in part, the impact of new initiatives proposed in Budget 2016 and increased liabilities for employee pension and other future benefits.

In the March 2017 Budget, total program expenses were projected to increase by $20.0 billion or 7.2%.  However, the final results for 2015-16 included $3.7 billion in allowances related to the reversal of previous policy decisions relating to veterans’ benefits and sick leave benefits.  As a result, it appears that the results to date are consistent with the projected increase for the year as a whole.

The decline to date in public debt charges of $1.5 billion (6.3%) largely reflects lower average effective interest rates and lower inflation adjustments on Real Return Bonds. The 2017 Budget forecast a decline of only $1.3 billion.  The final outcome could be about $0.5 billion lower than forecast.

In the March 2017 Budget, the Minister of Finance lowered the deficit forecast for 2016-17 from $25.1 billion to $23.0 billion. This improvement of $2.1 billion was primarily due to somewhat better-than-expected economic conditions and an increase in the lapse ($3.2 billion) partially offset by provisions for anticipated Cabinet decisions ($0.9 billion) and the impact of new policy initiatives proposed in the March 2017 Budget ($0.3 billion). There are still two accounting periods in the 2016-17 fiscal year: March 2017 and the end-of-year accounting period. In 2015-16, a cumulative deficit of $8.5 billion was recorded in March 2016 and the end-of-year accounting period. However, as noted earlier, personal income tax revenues were inflated in the end-of-year accounting period due to tax planning, thereby providing a one-time windfall. As a result, we believe that the results for the first eleven months of 2017-18 are roughly on track to the March 2017 Budget forecast for the year as a whole.

The Parliamentary Budget Officer (PBO) released his April 2017 Economic and Fiscal Outlook the same day as the Department of Finance released the Fiscal Monitor for February 2017.  The PBO is forecasting a deficit of $20.7 billion for 2016-17, $2.3 billion lower than that forecast in the March 2017 Budget. Budgetary revenues are expected to be $5.0 billion higher than forecast in the April 2017 Budget, program expenses $3.1 billion higher and public debt charges $0.4 billion lower. Based on our analysis of the fiscal results to date, we believe that PBO’s revenue forecast is overly optimistic, especially with respect to income taxes.  As noted above, the final outcome for budgetary revenues in 2016-17 will largely be dependent on what impact tax planning in 2015-16 will have on the results for 2016-17.   This will only be known when the final results for 2016-17 are published in the fall of 2017.