The federal government posted a budgetary deficit of $2.8 billion in November 2017, compared to deficit of $3.3 billion in November 2016. The improvement of $0.5 billion in the deficit primarily resulted from higher personal income tax revenues, up 8.5%, and higher other revenues up 16.0%, coupled with lower employment insurance benefits (down 7.2%) and other transfers (down 11.6%).  Dampening the positive impact of these developments were lower excise taxes and duties, down5.6%, corporate income tax revenues, down 1.3%, higher elderly benefits, up 4.6%, higher major transfers to provinces, up 8.1% and higher other direct program expenses, up 2.0%. 

For the first eight months of fiscal year 2017-18, the federal government recorded a deficit of $9.1 billion, compared to a deficit of $12.7 billion for the same period in 2016-17.  Budgetary revenues were up $8.6 billion (4.8%) compared to the same period last year.  Program expenses were up $5.8 billion, or 3.2% in the first eight months of 2017-18, compared to the same period last year.  Public debt charges were down $489 million or 4.1%.

Within budgetary revenues, personal income tax revenues were up $5.1 billion (5.7%). In the October 2017 Fall Economic Statement (FES), an increase of 6.3% was forecast for the year as a whole. Corporate income tax revenues were up $1.9 billion or 7.5%, compared to an increase in the FES of 11.6% for the year as a whole. Sales and excise taxes were up $2.6 billion or 7.3%, well above the FES forecast of 4.4% for the year as a whole. Employment insurance premium contributions declined $1.7 billion or -11.9%, reflecting the decline in premium rates for 2017.  This compares to a FES decline of 5.1% for the year as a whole. Other revenues, consisting of net profits from enterprise Crown corporations, revenues from consolidated Crown corporations, revenues from the sale of goods and services, returns on investments, net foreign exchange and miscellaneous revenues, were up $45 million (0.2%), compared to the FES of an increase of 5.3% for the year as a whole.

Within program expenses, major transfers to persons rose $2.6 billion (4.4%), in line with the FES forecast of 4.9% for the year as a whole. Elderly benefits were up $1.8 billion or 5.7%, attributable to an increase in average benefits which are indexed quarterly to the CPI and an increase in the eligible population. Children’s benefits were up $1.3 billion or 9.3% due to the replacement of the Universal Child Care Benefit by the Canada Child Benefit. Employment insurance benefits declined $0.5 billion (-3.8%), reflecting a decline in regular benefits.

Major transfers to other levels of government were up $1.4 billion (3.0%) compared to the same period last year, primarily reflecting legislated increases in the various components.  The increase to date is somewhat higher than forecast in the FES for the year as a whole, as recoveries from Alternative Payments for Standing Programs is lower than expected.

Direct program expenses increased by $1.8 billion (2.3%), significantly below the FES forecast increase of 9.0%. for the year as a whole  Other transfers to business, students, aboriginals, farmers, etc. declined by $463 million (-2.0%), primarily due to the inclusion of disaster assistance liabilities during the first half of 2016-17 and the timing of recent budget initiatives. The FES forecasts an increase of 15.0% for the year as a whole.  Other direct program spending, consisting of operating expenses for Crown corporation, defence and all other departments and agencies, increased $2.3 billion (4.2%), primarily reflecting increases in federal government employee pension and other future benefit liabilities, reflecting the impact of lower interest rates. The FES forecast an increase of 6.2% for the year as a whole – it did not provide separate forecasts for expenses by Crown corporations or defence. This component has been consistently over estimated in recent years.
Public debt charges were $497 million lower (3.0%), largely reflecting lower CPI adjustments on Real Return Bonds. The FES forecast an increase of 0.4% for the year as a whole.

The deficit outcome for the year as a whole will largely depend on what happens over the balance of the year to personal income tax revenues.  The FES forecast assumes that there will again be a large end-of-year accrual adjustment. In 2015-16, there was an exceptionally large end-of-year accrual adjustment, which the Department of Finance attributable to aggressive tax planning by high-income earners in advance of the introduction of a new high-income tax bracket for taxation year 2016.  However, the end-of-year accrual adjustment in 2016-17 was nearly as large, which was surprising. No explanation was provided. If the year-of-year accrual for 2017-18 mirrors those of the past two years, then the outcome for budgetary revenues should be in line with the FES forecast. If the end-of-year accrual for personal income taxes comes in lower-than-expected, then budgetary revenues would be lower than forecast in the FES, by as much as $4 billion.

However, total expenses are expected to be lower than forecast in the FES.  Public debt charges are expected to be about $0.4 billion lower than that forecast in the FES. Among the major transfers to persons, lower-than-expected employment insurance benefits should more than offset an increase in children’s benefits. Major transfers to other levels of government should be about $0.4 billion higher than the FES forecast as recoveries under the Alternative Payments for Standing Programs are below that forecast.

Direct program expenses should come in well below the FES forecast, absence any unexpected year-end accrual adjustments. It appears that the lapse (total parliamentary approved spending less actual spending) will again be larger than forecast. In a reconciliation table included in the Supplementary Estimates “A” release, the lapse was estimated at $5.8 billion.  However, based on financial results to date, the lapse will likely mirror those in previous fiscal years (around $10 billion). If the personal income tax year-end accruals are close to those in 2016-17, the deficit could be $4 billion lower than forecast in the FES and lower than the outcome for 2016-17 ($17.8 billion). If the personal income tax revenue accruals are significantly lower, their impact on the deficit would be largely, if not all, be offset by the lower-than-expected direct program expenses and public debt charges. Even in this case, the Contingency Reserve of $1.5 billion would likely not be required. The Parliamentary Budget Officer recently updated their deficit outcome for 2017-18, from $20.2 billion to $18.2 billion. This is identical to the FES forecast of $19.9 billion, less the Contingency Reserve of $1.5 billion.