Weaker momentum takes its toll on federal finances

Canada is not immune to the problems plaguing global economies and recent government releases quantify the extent of the impact.

Nov. 13 federal Minister of Finance Jim Flaherty released his Update of Economic and Fiscal Projections. This week the federal Department of Finance released The Fiscal Monitor for September 2012. Both documents paint a picture of a government bent on deficit reduction but challenged by lack of global growth.

“The weaker momentum trickles through the entire fiscal plan,” noted Sonya Gulati, TD Bank Group senior economist, in a report entitled “Lower Economic Growth Assumptions Bleed into the Federal Fiscal Plan."

The takeaway from the Update is a budget deficit for the fiscal year ending March 31, 2013, almost $5 billion higher than expected. Well-documented problems in the euro zone, a weakening recovery and the “fiscal cliff” in the U.S., slowing growth in emerging economies all contributed to lower-than-expected growth in real GDP, lower-than-expected commodity prices, and lower-than-expected government revenues.

“As a result of weaker global commodity prices,” the Update reported, “the expected level of nominal GDP is on average $25 billion (1.3%) lower than projected in Budget 2012 over the 2012 to 2016 period. Since nominal GDP is the broadest single indicator of the tax base, this downward revision has a direct and significant negative impact on expected government revenues over this period.”

The feds are now calling for a budget deficit of $26 billion in the fiscal 2012-2013 year, vs the $21.1 billion forecast in the 2012 budget. As Gulati noted, “The return to surplus is now pushed out to 2016-17, one year later than the original deficit-reduction timetable.”

Certainly, the trail of lower revenues continued in The Fiscal Monitor, which reviews the federal financial performance for April through September, the first half of the government’s fiscal year. For the six months, revenues were $120.9 billion, up 2.8% or $3.3 billion from the same period in 2011, reflecting higher income tax revenues, excise taxes and duties, and Employment Insurance premium revenues. But in the month of September, revenues decreased by $25 million, or 0.1%, from September 2011 to $18.5 billion, reflecting decreases in excise taxes, duties and other revenues, offset in part by higher income tax revenues.

The budgetary deficit is not so straightforward. In September 2012, it was $2.7 billion, the same as in September 2011. In the first six months, the budgetary deficit stood at $8.9 billion, vs a deficit of $11.8 billion reported in the same period of 2011–12. First-half expenses were $129.8 billion, with direct program expenses accounting for $50.6 billion, major transfers to persons $34.9 billion, transfers to persons to other levels of government $29.6 billion and public debt charges $14.8 billion. Direct program expenses and debt charges decreased.

But that deficit of $8.9 billion for the first half of the year seems counter to a $26-billion deficit projected for yearend. As Gulati commented: “Fiscal trends gleaned from The Fiscal Monitor are out of sync with the annual 2012-13 numbers presented in the fall update. This could be simply due to a timing of payments issue in the second half of the fiscal year. It could also mean more yearend adjustments and restatements are anticipated than is normally the case.”

It seems the feds are expecting a challenging global economy that will take the wind out of Canada’s sails in the near term before stability returns in the medium term.