Fiscal Monitor for April – August 2018

The federal government posted a deficit of $1.9 billion in August 2018, compared to a deficit of $2.6 million in August 2017.  Budgetary revenues were up 10.4%, reflecting strong increases in all major components.  Program expenses advanced 6.0%, due largely to higher other transfers and personnel expenses.  Public debt charges were up 10.9% due largely to an increase in the average effective interest rate.

As a result, for the first five months of fiscal year 2018-19, the federal government posted a surplus of $2.6 billion compared to a deficit of $2.9 million in the same five months of 2017-18. Budgetary revenues were up $9.9 billion, or 8.0%, program expenses increased by $3.5 billion, or 2.9%, while public debt charges were up $1.0 billion, or 10.9%, from year earlier levels.
Within budgetary revenues, strong increases were reported in personal income tax revenues (up $3.3 billion or 5.5%), corporate income tax revenues ($2.9 billion or 17.0%), goods and services tax revenues ($1.4 billion or 8.2%) and other revenue ($816 million or 6.9%). Comparing the Budget 2018 revenue projections to the final results for 2017-18, the results to date far exceed the projections for the year as a whole.  The Minister of Finance has announced that the Fall Economic Statement will be released on November 21st.  It is expected that several of the revenue components for 2018-19 will be revised upwards, absence any new policy initiatives.

Within grogram expenses, major transfers to persons were up 1.5% or $574 million.  Elderly benefits increased 5.2% or $1.1 billion, reflecting in an increase in the eligible population and higher average benefits which are indexed to inflation.  Children’s benefits increased by 3.4% or $325 million, primarily due to an increase in the eligible population.  Partially offsetting these increases was a decline in employment insurance benefits (down 10.0% or $832 million) reflecting a decline in the number of unemployed. It is expected that this component will be revised down from the Budget 2018 forecast.
Major transfers to provinces and territories were up 2.7% or $800 million. The increases in the components largely reflected the increases as set out in their appropriate legislation, as well as some timing adjustments. No major changes are expected in the Update for 2018-19.

Direct program expenses, which includes other subsidies and transfers and the operating costs of government, increased by 4.2% or $2.1 billion.  Other transfers were up 4.8% or $854 million.  No explanation was provided, as departmental details are no longer provided. Other direct program expenses increased by 4.0% or $1.4 billion, primarily reflecting higher personnel expenses. This component was affected by the change in discount rate methodology used in valuing unfunded federal employee pension obligations, introduced in the finalization of the audited results for 2017-18.  What impact this change will have on the results for 2018-19 is currently difficult to assess.

The increase in public debt charges reflected higher Consumer Price Index adjustments on Real Return Bonds and higher annual average effective interest rates on the stock of Treasury Bills. This component was also affected by the change in discount rate methodology.

On balanced, given the current results to date, we would expect a somewhat better forecast for the budgetary balance than projected in the February 2018 Budget, prior to any new policy decision. The February 2018 Budget forecast included a Contingency Reserve of $3.0 billion, which we believe will not be needed.  In addition, current results for budgetary revenues suggest that upward revisions is warranted.  In addition, major transfers to persons will likely be lower than currently forecast. Our view is contrary to that of the Parliamentary Budget Office, which recently forecasts a slight increase in the deficit for 2018-19.

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