Fiscal Monitor for April 2019 – November 2019

The federal government posted a deficit of $2.7 billion in November 2019, compared to a deficit of $2.2 billion November 2018. All of this deterioration in the monthly deficit was attributable to the timing of payments, most notably transfers to provinces and territories for the Labour Market Development Agreements program and to the Gas Tax Fund and Home Care and Mental Health programs. This implies lower year-over-year expenses in future months.  

Budgetary revenues increased by 3.1%, on a year-over-year basis, primarily due to higher personal income tax revenues (up 11.6%), non-resident tax revenues (up 65.6%), employment insurance premiums (up 8.5%) and other revenues (up 7.6%)  The fuel tax proceeds (carbon tax) yielded an additional $0.2 billion. These increases were dampened by lower GST revenues (down 13.7%, in part reflecting the timing of receipts) and customs import duties (down 45.3% due to the elimination of the temporary retaliatory tariffs on steel and aluminum).

Program expenses were up 5.2% primarily due to the timing of payments as noted above. Major transfers to persons were 11.8% higher, primarily attributable to a 50% increase in employment insurance benefits, reflecting the timing of transfers under the Labour Market Development Agreements program. Major transfers to other levels of government were 6.6% higher, in line with the applicable legislative requirements, adjusted for timing factors as noted above. Direct program expenses were marginally lower, due to a decline in other transfers and subsidies. Public debt charges were 3.4% lower, reflecting lower inflation adjustments on Real Return Bonds.

For the first eight months (April 2019 to November 2019) of fiscal year 2019-20, the federal government posted a deficit of $11.8 billion compared to a deficit of $2.1 billion 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, largely attributable to higher personnel expenses due to higher employee future benefit liabilities. 

On a year-over-year basis, budgetary revenues in the period April 2019 to November 2019 were up $5.7 billion or 2.7% from the same period in 2018, an increase of 7.5% or $14.8 billion in, program expenses, while public debt charges were up $564 million, or 3.5%, from year earlier levels.

The increase in budgetary revenues was primarily due to higher personal income taxes, up $5.9 billion or 5.9%, reflecting strong growth in employment and wages, the implementation of fuel charge proceeds ($885 million), and higher “other revenues” (up 4.0% or $753 million), which consist of net profits from enterprise Crown corporations, revenues from consolidated Crown corporations, revenues from sales of goods and services, returns on investments, net foreign exchange revenues and miscellaneous revenues. Dampening the impact of these increases were declines in customs import duties (down $$1.2 billion or 25.7%), attributable to elimination of the retaliatory tariffs on steel and aluminum.  Corporate income taxes declined by $0.9 billion or 3.0%, while GST revenues were $0.6 billion or 2.2% lower.

Within grogram expenses, major transfers to persons were 3.7% or $2.4 billion.  Elderly benefits increased 5.0% or $1.8 billion, primarily reflecting in an increase in the/eligible population and higher average benefits which are indexed to inflation.  Children’s benefits increased by 1.6% or $0.3 billion. Employment insurance benefits recorded an increase of 2.8% or $0.3 billion, attributable to the timing of transfers under the Labour Market Development Agreements program. This is estimated at $600 million which implies that expenses will be lower in future months on a year-over-year basis..

Major transfers to provinces and territories were up 9.4% or $4.6 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, as noted above.

Direct program expenses, which includes other subsidies and transfers, the fuel charge refund and the operating expenses of government, increased by 9.2% or $7.8 billion.  Other transfers were up 4.4% or $1.1 billion. On a monthly basis, this component is strongly affected by the timing of payments. The fuel charge proceeds returned (which is labelled as “Climate Action Incentive” in the 2019 Income Tax Package) 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 9.2% or $5.4 billion. Two-thirds of this increase was due to higher personnel costs, which were up 10.8% or $3.9 billion, 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 (see “ The Mysterious Increase in the Deficit – 3DPolicy January 2020). 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, as the final financial statements for 2018-19 include an increase in liabilities relating to “potential claims and litigation” of $2 billion.

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 Alternative Payments for Standing programs, the Youth Allowance Recovery Program, payments under the 2005 Offshore Accords, statutory subsidies and the expense related to the Hibernia Dividend Annuity Agreement. The Update forecasts a recovery of $5.5 billion, up $1.0 billion from 2018-19.  Excluding the Hibernia Dividend 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 tax liability 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, depending on the corporation’s taxation year. 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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