Last week the Minister of Finance released the Annual Financial Report (AFR) for 2017-18 showing the deficit for last fiscal year at $19.0 billion, virtually unchanged from the restated deficit for 2016-17.

Changes in accounting practices had an important impact on reported deficits and debt. The Government implemented a change in accounting policy with respect to the discount rate used in the measurement of its long-term assets and liabilities. The Auditor General had raised the previous methodology as a concern in his “Observations” to previous annual financial statements. 
This change  increased the deficit in 2017-18 by $507 million and by $1.2 billion in 2016-17, from what it otherwise would have been. The accounting change was applied retroactively to 2008-09, resulting in an increase in the federal debt by $20.1 billion in 2017-18.

In the past, changes in accounting policy were first announced in a budget to provide transparency with respect to the financial statement.  The Public Sector Accounting Board (PSAB) is currently reviewing the discount rate methodology, but has yet to release its final recommendations. Although governments, being sovereign entities and can establish their own accounting policies, it would have been preferable to await the outcome of the PSAB review before implementing the change. 
The outcome for 2017-19 was $0.9 billion lower than the restated deficit estimate in the February 2018 Budget.  Budgetary revenues were $4.0 billion higher, primarily reflecting higher revenues from enterprise Crown corporations and personal income tax revenues for taxation year 2017.  Program expenses increased by $3.3 billion, reflecting higher-than-expected increases in provisions for claims and litigation, dampened somewhat by lower major transfers to persons. Public debt charges were marginally higher than forecast.

As noted, the deficit outcome for 2017-18 was virtually identical to the restated outcome for 2016-17.  Budgetary revenues were $20.1 billion higher, virtually offset by lower total expenses. Within budgetary revenues, personal income tax revenues were $9.9 billion higher, corporate income tax revenues were up $.6 billion, other taxes and duties increased $2.5 billion, while other revenues were up $2.3 billion. Program expenses were $19.5 billion higher, primarily due to direct program expenses, up $14.7 billion.  Within that component, other transfer payment advanced $5.6 billion and other direct program expenses advanced by $9.2 billion, primarily reflecting the impact of budget measures and higher provision for claims and other litigation. Major transfers to persons advanced by $2.9 billion, reflecting higher elderly and children’s benefits, offset partially by lower employment insurance benefits.  Major transfers to provinces advanced by $1.9 billion, reflecting primarily attributable to legislative increases.  Public debt charges increased by $0.7 billion, attributable to an increase in the average effective interest rate on market debt.
The outcome for 2017-18 should have a positive impact on the deficit projection for 2018-19.  Budgetary revenues in 2017-18 were significantly higher than estimated and some of this should carry-forward into the current fiscal year. Direct program expenses should decline in 2018-19 as the outcome for 2017-18 included one-time provisions of over $5 billion. The Minister of Finance is expected to present his fall Economic and Fiscal Update within the next few weeks.