Fiscal Monitor for April – September 2018

The federal government posted a deficit of $1.4 billion in September 2018, compared to a deficit of $3.3 million in September 2017.  Budgetary revenues were up 13.4%, reflecting strong increases in all major components.  Program expenses advanced 2.2%, as a decline in other direct program expenses dampened increases in the other major components.  Public debt charges were up a whopping 33.5% reflecting higher CPI adjustments on Real Return Bonds and a higher average effective interest rate on the stock of Treasury Bills.

.As a result, for the first six months of fiscal year 2018-19, the federal government posted a surplus of $1.2 billion compared to a deficit of $6.2 million in the same six months of 2017-18. Budgetary revenues were up $12.9 billion, or 8.8%, program expenses increased by $4.0 billion, or 2.8%, while public debt charges were up $1.5 billion, or 14.3%, from year earlier levels.
Within budgetary revenues, personal income tax revenues were up $5.0 billion or 7.1%, corporate income tax revenues increased by $3.4 billion or 17.6%, goods and services tax revenues advanced $1.3 billion or 7.0% while other revenue increased by $1.2 billion or 8.7%. The year-to-date results for all major components are considerably stronger than those forecast in the recent Fall Update.  In fact, the year-to-date changes significantly exceed those expected for the year as a whole.

The increase in total budgetary revenue to date is $12.9 billion whereas the Fall Update estimated an increase of only $15.3 billion for the year as a whole. The fiscal cost of initiatives proposed in the 2018 Budget and Fall 2018 Update are not expected to a have a significant impact on the 2018-19 results. As a result, it is expected that budgetary revenues will be revised upwards in the 2019 Budget (if there is one). 

Within grogram expenses, major transfers to persons were up 2.3% or $1.1 billion.  Elderly benefits increased 5.3% or $1.3 billion, reflecting in an increase in the eligible population and higher average benefits which are indexed to inflation.  Children’s benefits increased by 2.8% or $330 million, primarily due to an increase in the eligible population.  Partially offsetting these increases was a decline in employment insurance benefits (down 5.8% or $561 million) reflecting a decline in the number of unemployed.

Major transfers to provinces and territories were up 2.8% or $984 million. The increases in the components largely reflected the increases as set out in their appropriate legislation, as well as some timing adjustments.

Direct program expenses, which includes other subsidies and transfers and the operating costs of government, increased by 3.2% or $1.9 billion.  Other transfers were up 4.4% or $742 million.  No explanation was provided, as departmental details are no longer provided. Other direct program expenses increased by 2.7% or $1.2 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.  Over the balance of 2018-19, the fiscal cost of new policy initiatives should result in a faster growth in this component, than that witnessed to date.

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, resulting in lower public debts. 

On balanced, given the current results to date, we would expect a somewhat better outcome for the budgetary balance than projected in the Fall 2018 Update.  The Fall 2018 Update  includes a Contingency Reserve of $3.0 billion, which we believe will not be needed.  We feel that the Contingency Reserve should only be used to offset the impact of adverse economic development in the fiscal forecast and/or errors in translating the economic forecast into the fiscal forecast.  It should not be used fund new policy initiatives. In addition, current results for budgetary revenues suggest that upward revisions are warranted.  Program expenses and public debt charges appear to be on track once the impact of the Fall 2018 Update initiatives is included.

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