Fiscal Monitor for April – October 201

The federal government posted a deficit of $3.3 billion in October 2019, compared to a deficit of $1.1 billion October 2018.

Budgetary revenues declined by 4.6%, on a year-over-year basis, primarily to lower corporate income and Goods and Services tax revenues. Part of this could be due to higher year-over-year revenues reported in the previous month. Year-over-year declines were also reported for non-resident taxes, customs import duties (due to the elimination of the temporary retaliatory tariffs on steel and aluminum), energy taxes and other revenues. Partially dampening the impact of these declines were higher personal income taxes (up 7.2%). Program expenses were up 3.9% primarily due to a 14.3% increase in other direct program expenses, attributable mainly to higher personnel expenses. Major transfers to persons were 1.5% higher, as higher elderly and children’s benefits were dampened by lower employment insurance benefits. Major transfers to other levels of government were 7.1% higher, in line with the applicable legislative requirements, adjusted for timing factors. Public debt charges were 4.8% lower, reflecting lower inflation adjustments on Real Return Bonds.

For the first seven months of fiscal year 2019-20, the federal government posted a deficit of $9.1 billion compared to a surplus of $92 million for the same period in 2018-19. The deterioration to date reflects a number of factors: $1.9 billion related to the new Hibernia Dividend Backed Annuity Agreement reached in April 2019 between the federal government and Newfoundland and Labrador, weakness in revenues, especially corporate income taxes, Goods and Services Taxes (GST), customs import duties and higher direct program expenses.

On a year-over-year basis, budgetary revenues in the period April to October 2019 were up $4.9 billion from the same period in 2018, an increase of 2.6%, program expenses increased by $13.4 billion, up 7.9%, while public debt charges were up $612 million, or 4.3%, from year earlier levels.


The increase in budgetary revenues was primarily due to higher personal income taxes, up $4.5 billion or 5.1%, reflecting increases in employment and wages.  Changes in the other major components were largely offsetting.  Customs import duties declined of $943 million, primarily due to elimination of the retaliatory tariffs on steel and aluminum.  Corporate income taxes, non-resident taxes and GST revenues were slightly lower. These declines were offset by higher other revenues, up $580 million, the fuel charge proceeds yielded $731 million, excise duties and taxes were up $261 million while employment insurance premiums were up $304 million, 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 2.6% or $1.4 billion.  Elderly benefits increased 4.9% or $1.5 billion, primarily reflecting in an increase in the/eligible population and higher average benefits which are indexed to inflation.  Children’s benefits increased by 1.4% or $200 million. Employment insurance benefits declined 2.7% or $281 million.
Major transfers to provinces and territories were up 9.8% or $4.2 billion. Nearly 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 10.7% or $7.8 billion.  Other transfers increased by 5.6% or $1.2 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 10.5% or $5.3 billion. Two-thirds of this increase was due to higher personnel costs, which were up 11.2%, in part due to the impact of the latest actuarial valuations affecting pensions and other benefits.

The Minister of Finance tabled an Economic and Fiscal Update on December 16, 2019. The deficit for 2019-20 is now projected at $26.6 billion, compared to the March 2019 Budget projection of $19.8 billion. The increase in the deficit primarily reflects the impact of new policy initiatives and higher direct program expenses. The deficit outcome for 2019-20 could be higher as it does not include the liability for 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.

The financial results to date are largely in line for the revised projection for the year as a whole, with one possible exception; “Other fiscal arrangements”.  This component includes the Quebec Abatement payments under the 2005 Offshore Arrangements, fiscal stabilization payments and the expense related to the Hibernia Annuity Agreement. The Update forecasts a recovery of $5.5 billion, up $1.0 billion from 2018-19.  Excluding the Hibernia Annuity Agreement, this would result in a net recovery of $7.6 billion. This implies that the Department of Finance expects an additional recovery of at least $1 billion to be recorded by year end. No explanation was provided for this extraordinary increase in the Update.  In addition, large corporations are allowed to make monthly payments based on last year’s experience or estimates for the current taxation year.  Over/under payments are made 60 days after the end of their taxation year: in December or February. Significant adjustments can be made at that time, affecting the projected results for the year as a whole. As a result, it is difficult to make an accurate assessment of the monthly results until the end of the year.

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