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- Fiscal Monitor 2001 -

The Fiscal Monitor

Highlights of financial results for January 2002

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January 2002: budgetary results

Budgetary revenues declined $0.5 billion, or 3.4 per cent, on a year-over-year basis.

• Personal income tax revenues were $0.4 billion, or 6.0 per cent, lower due to the slowdown in the economy, tax reduction measures announced in the February 2000 budget and October 2000 Economic Statement and Budget Update, and enrichments to the Canada Child Tax Benefit announced in previous budgets.

• Corporate income tax revenues were marginally higher. Given the decline in corporate profits in 2001, the tax rate reductions that came into effect in January, and the December 2001 budget initiative to allow small businesses to defer their monthly income tax instalment payments, a decline was expected. With a stronger economy, it appears that small business is not taking full advantage of the tax deferral measure.

• EI premium revenues declined 4.5 per cent, in part reflecting the impact of lower premium rates (the employee rate for 2002 is $2.20 per $100 of insurable earnings compared to $2.25 in 2001).

• Excise taxes and duties increased $0.2 billion, or 5.5 per cent. Increases were reported in all components except customs import duties. The increase in goods and services tax (GST) revenues primarily reflected slower processing of refunds, as gross collections declined. Higher federal taxes on tobacco products, effective November 2, 2001, contributed to the increase in sales and excises taxes.

• Non-tax revenues declined 15.6 per cent, largely reflecting the impact of lower interest rates.

Program spending increased by $0.8 billion, or 6.7 per cent, on a year-over-year basis.

• Major transfers to persons declined by $1.0 billion, or 20.6 per cent, due to the January 2001 payment of the $1.4-billion Relief for Heating Expenses. EI benefit payments increased 33.8 per cent, reflecting the impact of benefit enhancements announced in the February 2000 budget and in September 2000, as well as an increase in the number of beneficiaries due to the slowdown in the economy.

• Major transfers to other levels of government were up $0.1 billion, or 6.8 per cent. The increase in the Canada Health and Social Transfer (CHST) reflects the September 2000 agreement reached by first ministers to increase base funding from $13.5 billion in 2000-01 to $17.3 billion in 2001-02. The decline in fiscal transfers is attributable to the timing of payments.

• Direct program spending, consisting of total program spending less major transfers to persons and other levels of government, increased $1.6 billion, or 32.2 per cent, with increases reported in all major components.

Public debt charges, on a year-over year basis, were down $0.1 billion, or 2.0 per cent, due primarily to the decline in the average effective interest rate on the debt.

Table 1
Summary statement of transactions

April 2001 to January 2002: budgetary results

Over the first 10 months of fiscal year 2001-02, the budgetary surplus was estimated at $11.5 billion, down $6.6 billion from the surplus reported in the same period of 2000-01. Program spending was up $7.2 billion while budgetary revenues were down $0.9 billion. Dampening the impact of these factors on the budgetary balance were lower public debt charges, down $1.5 billion.

• Personal income tax collections were marginally lower, as higher final tax payments received in April and May with respect to the 2000 taxation year and the effect of prior-year adjustments affecting the October 2000 results were offset by the impact of the tax reduction measures announced in the February 2000 budget and October 2000 Economic Statement and Budget Update.

• Corporate income tax revenues declined 3.6 per cent, reflecting the impact of both lower corporate profits and reductions in tax rates. Large year-over-year declines are expected over the balance of the fiscal year, primarily due to lower final settlement payments, reflecting the decline in corporate profits in 2001, and to the extent that small businesses defer payments of their corporate income tax instalments for the months of February and March 2002.

• EI premium revenues were down 4.3 per cent, as the impact of prior-year adjustments, which affected the October 2000 results, coupled with the decline in premium rates, more than offset the impact of the growth in the number of people employed and therefore paying premiums.

• Excise taxes and duties increased $0.7 billion, or 2.3 per cent. GST revenues were up marginally, customs import duties were up 6.1 per cent and sales and excise taxes increased 5.0 per cent.

• Non-tax revenues were down 5.9 per cent.

Among the major components of program spending, on a year-over-year basis:

• Transfers to persons were up 6.0 per cent due to higher elderly and EI benefit payments. The increase in elderly benefit payments reflects an increase in the number of individuals eligible for benefits and higher average benefits, which are indexed to inflation. The increase in EI benefit payments primarily reflects the impact of program enhancements, as well as an increase in the number of beneficiaries. The net impact of these increases was dampened by the Relief for Heating Expenses paid in January 2001.

• Major transfers to other levels of government were up 11.4 per cent, reflecting higher cash transfers under the CHST and fiscal transfer programs. The increase in the CHST reflects the September 2000 agreement reached by first ministers to increase base funding from $13.5 billion in 2000-01 to $17.3 billion in 2001-02. The increase in fiscal transfers is primarily due to higher equalization entitlements. The overall growth in this component was dampened by the special payment of $1 billion to the Medical Equipment Fund in 2000-01.

• Direct program spending, consisting of total program spending less major transfers to persons and other levels of government, increased 7.2 per cent. Developments in this component are largely affected by the timing of payments as well as the full implementation of the new Financial Information Strategy. The introduction of the new system has resulted in a change in the monthly profile of spending. This will result in a larger portion of spending being recorded at the end of the fiscal year than in previous years.

The year-over-year decline in public debt charges of $1.5 billion reflects the impact of declines in both the stock of interest-bearing debt and the average effective interest rate on that debt.

Table 2
Budgetary revenues

Table 3
Budgetary expenditures

Financial source of $0.5 billion (excluding foreign exchange transactions) for April 2001 to January 2002

The budgetary balance is presented on a modified accrual basis of accounting, recording government liabilities when they are incurred, regardless of when the cash payment is made. In addition, the budgetary balance includes only those activities over which the Government has legislative control.

In contrast, financial requirements/source measures the difference between cash coming in to the Government and cash going out. Financial requirements/source differs from the budgetary balance as the former includes transactions in loans, investments and advances, federal employees’ pension accounts, other specified purpose accounts, and changes in other financial assets and liabilities. These activities are included as part of non-budgetary transactions. The conversion from accrual to cash is also reflected in non-budgetary transactions.

Non-budgetary transactions resulted in a net requirement of $11.0 billion in the first 10 months of 2001-02, compared to a net requirement of $5.6 billion in the same period of 2000-01. The increase to date is attributable to transfers of applicable pension assets to those Crown corporations setting up their own pension plans and higher transfers to the Canada Pension Plan Account.

As a result, with a budgetary surplus of $11.5 billion and a net requirement of $11.0 billion from non-budgetary transactions, there was a financial source (excluding foreign exchange transactions) of $0.5 billion in the April 2001 to January 2002 period, compared to a source of $12.5 billion in the same period of 2000-01.

Net financial source of $37 million for April 2001 to January 2002

Foreign exchange transactions represent all transactions in international reserves held in the Exchange Fund Account. The purpose of the Exchange Fund Account is to promote order and stability in the foreign exchange market. The buying of Canadian dollars represents a source of funds from exchange fund transactions, while the selling of Canadian dollars represents a requirement. Changes in foreign currency liabilities, which are undertaken to change the level of Canada’s foreign exchange reserves, also impact on foreign exchange transactions. Taking all of these factors into account, there was a net requirement of $0.5 billion in the first 10 months of 2001-02, compared to a net requirement of $3.3 billion in the same period of 2000-01.

With a budgetary surplus of $11.5 billion, a net requirement of $11.0 billion from non-budgetary transactions and a net requirement of $0.5 billion from foreign exchange transactions, there was a net financial source of $37 million in the April 2001 to January 2002 period, compared to a net source of $9.2 billion in the same period of 2000-01.

Table 4
The budgetary balance and financial requirements/source

Table 5
Net financial balance and net borrowings

Table 6
Condensed statement of assets and liabilities

Net borrowings down $8.8 billion for April 2001 to January 2002

Although there was a net financial source of only $37 million in the first 10 months of 2001-02, the Government did reduce its holding of market debt by $8.8 billion through the drawing down of cash balances. The level of cash balances varies from month to month based on a number of factors including periodic large debt maturities, which can be quite volatile on a monthly basis. At the end of January 2002 they stood at $4.4 billion.