The Annual Financial Report for 2018-19 was released by the Department of Finance on September 17, 2019. It contains condensed consolidated financial results for 2018-19 and actual restated financial results for 2017-18.  Financial results for 2017-18 were restated to reflect the change in the discount rate methodology used in calculating the present value of the Government’s unfunded pension obligations and to reflect a change in accounting for the Canadian Commercial Corporation. The complete consolidated financial statements will be contained in the Public Accounts 2019, to be released in the fall.

For the 21st consecutive year, the Auditor General of Canada expressed a clean opinion on the financial statements.
The federal government posted a deficit of $14.0 billion in 2018-19, an improvement of $5.0 billion from 2017-18.  Budgetary revenues increased by 6.7%, or $21.0 billion, program expenses were up 4.7%, or $14.6 billion, while public debt charges were 6.3%, or $1.4 billion.

Within budgetary revenues, increases were recorded in all major components. Personal income tax revenues increased by 6.6% ($10.3 billion), reflecting the strength in the labour market.  Corporate income tax revenues increased 5.4% ($2.6 billion), due to higher corporate profits in several sectors. Non-resident tax revenues rose by 19.4% ($1.6 billion) reflecting growth in corporate earnings and dividends. GST revenues increased by 4.0% C$1.5 billion), in line with the growth in retail sales. Customs import duties were up 27.0% ($1.7 billion), primarily due to the application of steel and aluminum retaliatory tariffs. Other excise taxes and duties increased by 4.1% ($474 million), primarily due to an increase in tobacco excise duties. Employment increase premiums were up 5.5% ($1.2 billion), due to increase in employment, the earnings base to which the premium rate is applied and in premium rates. Other revenue, consisting of net income from enterprise Crown corporations, other government business enterprises, return on investments, proceeds from the sale of goods and services, foreign exchange transactions and other miscellaneous revenues, increased by 7.7% ($2.1 billion), due primarily to an increase in interest, penalties and return on investments.

There are three major components within program expenses: major transfers to persons, major transfers to other levels of government and direct program expenses.  Major transfers to persons increased by 2.5% ($2.3 billion), as increases in elderly and children’s benefits were dampened by a decline in employment insurance benefits.  Elderly benefits increased by 5.4% ($2.7 billion), reflecting increases in the elderly population and higher benefits which are indexed to changes in the consumer price index.  Children benefits increased by 1.9%, or ($450 million), reflecting the indexation of benefits beginning in July 2018. In contrast, employment increased benefits declined by 4.2% ($827 million), reflecting lower numbers of unemployed.

Major transfers to other levels of government increased by 7.7% ($5.4 billion). Few details were presented.  However, the increase primarily reflects legislated increases as specified under the applicable legislation.  In addition, Budget 2019 provided a one-time increase of $2.2 billion to the Gas Tax Fund. Further details will be provided in the Public Accounts.

Direct program expenses consisted of other transfers and subsidies as well as the operating and capital expenses of the government. An increase of 4.6% ($6.9 billion) was recorded.  Of this amount, $4.6 billion, was due to increased other transfers and subsidies. Other direct program expenses increased by 1.7%, ($1.6 billion).  No details were provided.

The increase in public debt charges, 6.3% or $1.4 billion, was attributable to higher average effective interest rates.

The final outcome for 2018-19 was $0.9 billion lower than forecast in the March 2019 billion. Budgetary revenues were virtually identical to the March 2019 Budget forecast, as differences in the components were offsetting.  Tax revenues were lower by $2.0 billion, primarily due to lower-than-expected corporate income tax and GST revenues ($2.8 billion lower).  Personal income tax revenues were $1.1 billion higher-than-expected. Offsetting lower-than-expected tax revenues were higher employment insurance premiums ($0.9 billion) and other revenues ($1.1 billion). Program expenses were $0.6 billion lower-than-forecast, with virtually all of the difference due to lower-than-forecast direct program expenses.  Other transfers and subsidies were $2.3 billion lower, while other direct program expenses were $1.7 billion higher. Public debt charges were $0.3 billion higher-than-forecast.

In comparison to the deficit forecast contained in the February 2018 Budget, the final outcome for 2018-19 was $4.1 billion lower.  The Contingency Reserve of $3.0 billion included in the February 2018 Budgetary was not required. Changes in the discount rate methodology increased the deficit by $696 million. Budgetary revenues were $11.2 billion higher-than-forecast, while total expenses were $9.4 billion higher.  

Without additional information (which should be contained in the upcoming Public Accounts) it is difficult to assess the impact of the 2018-19 final results on future years. Revenues in total were virtually unchanged from the March 2019 Budget forecast.  Other revenues were understated but this is a very difficult component to forecast with any accuracy. Within program expenses, other transfers and subsidies were $2.3 billion lower-than-forecast but this lapse could well be a requirement in future years. We will await the release of the Public Accounts and continue to assess the monthly Fiscal Monitor results.