Fiscal Monitor for April – September 2019

The federal government posted a deficit of $578 million in September 2019, compared to a deficit of $1.4 billion September 2018. Budgetary revenues increased by 9.0%, reversing the year-over-year decline in the previous month. Corporate income taxes increased by 21.0%, while Goods and Services Tax revenues were up 31.1%, attributable in part to the timing of receipts. Customs import duties declined by 38.5%, due the elimination of the temporary retaliatory tariffs on steel and aluminum and other products. Program expenses were up 7.2% primarily due to a 13.6% increase in other direct program expenses, due mainly to higher personnel expenses. Major transfers to persons were 1.1% higher, as higher elderly and children’s benefits were dampened by lower employment insurance Major transfers to other levels of government were 3.8 higher, in line with the applicable legislative requirements. Public debt charges were 1.3% lower, reflecting lower inflation adjustments on Real Return Bonds.
For the first six months of fiscal year 2019-20, the federal government posted a deficit of $5.8 billion compared to a surplus of $1.2 billion for the same six months of 2018-19. The April –September 2019-20 results include an expense of $1.9 billion related to the new Hibernia Dividend Backed Annuity Agreement reached in April 2019 between the federal government and Newfoundland and Labrador.  This expense was not included in the March 2019 Budget. The other major factor contributing to the deterioration in the fiscal balance to date was attributable to a 12.1% increase direct program expenses, primarily due to higher other transfer payments (up 10.6%) and personnel costs (up 10.4%), the latter primarily due to an increase in federal employee pension and other benefit expenses based on the latest actuarial valuations. .
On a year-over-year basis, budgetary revenues in the period April to September 2019 were up $6.1 billion from the same period in 2018, an increase of 3.9 per cent, program expenses increased by $12.4 billion, up 8.6 percent, while public debt charges were up $703 million, or 5.7%, from year earlier levels.
The increase in budgetary revenues was primarily due to higher income taxes, up $4.6 billion or 4.4%.  Personal income taxes were $3.6 billion, or 4.8% higher, reflecting higher employment and wage and salaries, while corporate income taxes were up $1.0 billion, or 4.4%.  In contrast, sales and excise taxes and duties declined by $105 million, or 0.4%. This was largely attributable to a decline of $699 million in customs import duties (due to elimination of the retaliatory tariffs) and weak growth in GST revenues. Other revenues increased by $852 million, or 5.6%.  The fuel charge proceeds yielded $572 million in the first six months. Employment insurance premiums were up $230 million, or 2.1%, reflecting increases in the number of employed and the base to which the rate is applied, dampened somewhat by a decline in the premium rate. 
Within grogram expenses, major transfers to persons were up 2.8% or $1.3 billion.  Elderly benefits increased 4.8% or $1.3 billion, primarily reflecting in an increase in the eligible population and higher average benefits which are indexed to inflation.  Children’s benefits increased by 1.3% or $159 million. Employment insurance benefits declined 0.9% or $84 million.
Major transfers to provinces and territories were up 10.3% or $3.8 billion. Half of this increase was attributable to the inclusion of the $1.9 billion expense to the Hibernia Dividend Backed Annuity Agreement. The remaining components largely reflect the increases as set out in their appropriate legislation, with some components affected by timing factors.
Direct program expenses, which includes other subsidies and transfers, the fuel charge refund and the operating expenses of government, increased by 12.1% or $7.3 billion.  Other transfers increased by 10.6% or $1.9 billion. On a monthly basis, this component is strongly affected by the timing of payments. The fuel charge refund amounted to $1.3 billion. The impact on the deficit of this refund should largely be offset by the fuel charge proceeds. The operating expenses of the government increased by 9.8% or $4.2 billion. Two-thirds of this increase was due to higher personnel costs, which were up 10.4%, in part due to the impact of the latest actuarial valuations affecting pensions and other benefits... 
In the March 2019 Budget, the Government forecast a deficit of $19.8 billion for 2019-20.  The final outcome for 2018-19 was $14.0 billion, slightly below the March 2019 Budget estimate of $14.9 billion.  The lower-than-expected outcome is not expected to have a material impact on 2019-20, but could well affect the various components.
It is expected that the Minister of Finance will table an Economic and Fiscal Update, or mini budget) in mid-December before the winter break.  There are four major developments which will impact negatively on the 2019-20 budgetary results. First is the April 2019 payment of $1.9 billion to the Newfoundland and Labrador government related to the new Hibernia agreement. Second is the ruling by the Canadian Human Rights Tribunal to compensate First Nations children and possibly their families impacted by the on-reserve child welfare system. This could increase the 2019-20 deficit by $4 to $6 billion, if not more. This could be offset if the Government has been provisioning for this in previous financial statements. Third, the year-to-date increase in direct program expenses is much greater than that forecast in the March 2019 Budget, which could increase the deficit outcome for 2019-20 even more. Finally, the update could include some election tax reduction promises, which would be effective on January 1, 2020. Given the financial results to date, budgetary revenues could be higher than forecast by $4-5 billion, due to much stronger corporate income tax and other revenues higher employment insurance premiums than forecast in the March 2019 Budget. In addition, employment insurance benefits could be $1 billion lower.  On balance, however, the 2019-20 deficit outlook will likely be higher than forecast in the March 2019 Budget.

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