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- Fiscal Monitor 2002 -

The Fiscal Monitor

Highlights of financial results for August 2002

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August 2002: budgetary results

Budgetary revenues declined $472 million, or 3.5 per cent, in August 2002 on a year-over-year basis.

• Personal income tax revenues were down $116 million, or 2.0 per cent, primarily due to higher tax refunds with respect to the 2001 tax year. Despite the strong growth in employment since the beginning of the year, monthly deductions from employment income were virtually unchanged.

• Corporate income tax revenues were down $0.9 billion, or 45.8 per cent, primarily due to higher refunds relating to the application of losses to taxes paid in previous years. In addition, monthly instalments for the current year’s tax liability are somewhat lower.

• Employment insurance (EI) premium revenues were up slightly, as the impact of the growth in the number of people employed and therefore paying premiums is offsetting the effect of the decline in 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 were up strongly ($570 million or 18.1 per cent). However, most of the increase was attributable to delays in the processing of goods and services tax (GST) refunds, which should be corrected in future months, thereby bringing the overall growth in net GST revenues more in line with its tax base - consumer expenditures.

• Non-tax revenues were down, reflecting the timing of receipts.

Table 1
Summary statement of transactions

On a year-over-year basis, program spending increased by $495 million, or 5.2 per cent, with increases recorded in all major components.

• Transfers to persons were up 3.7 per cent. Elderly benefits increased 5.2 per cent while EI benefits were up marginally, the latter reflecting the timing of payments. A larger increase in EI benefits was expected given the increase in the number of beneficiaries and the impact of previously enacted program enhancements.

• Transfers to other levels of government were up 4.2 per cent, reflecting higher cash transfers under the Canada Health and Social Transfer (CHST). This increase reflects the September 2000 agreement reached by first ministers to increase base funding from $17.3 billion in 2001-02 to $18.6 billion in 2002-03.

• Direct program spending, consisting of total program spending less transfers to persons and other levels of government, increased by 6.8 per cent. The monthly fluctuations in this component are due in large part to the timing of payments.

Public debt charges, on a year-over-year basis, declined $575 million, or 17.1 per cent. This decline reflects both amortization adjustments relating to previous periods and a decrease in the average effective interest rate. The stock of interest-bearing debt was slightly higher.

Table 2
Budgetary revenues

April to August 2002: budgetary results

Over the first five months of fiscal year 2002-03, the budgetary surplus was estimated at $4.6 billion, compared to a surplus of $11.4 billion reported in the same period of 2001-02. This decline reflects lower budgetary revenues, largely attributable to developments related to the 2001 tax year, and higher program spending. In contrast, public debt charges were lower.

Over the first five months of 2002-03, budgetary revenues were down $5.6 billion, or 7.4 per cent, on a year-over-year basis. Among the major components:

• Personal income tax collections declined $3.9 billion, or 11.0 per cent. Virtually all of this decline is attributable to lower final tax payments and higher refunds with respect to the 2001 tax year, reflecting weakness in the stock market and the associated lower net capital gains realizations. However, it should be noted that the results for the same period in 2001 were affected by the extraordinary stock market gains in 2000, which resulted in record final tax settlement payments in April and May 2001. The results to date were also dampened by the impact of the tax reduction measures announced in the February 2000 budget and October 2000 Economic Statement and Budget Update. Partially offsetting these impacts were higher taxes associated with increases in employment income.

• Corporate income tax revenues were down $3.3 billion, or 30.1 per cent. This is primarily attributable to higher refunds pertaining to previous years’ taxes paid. In addition, monthly instalment payments are lower as they are largely based on 2001 tax liabilities, a year in which corporate profits declined.

• EI premium revenues were down marginally, primarily due to the lower premium rates in effect for 2002.

Table 3
Budgetary expenditures

• Excise taxes and duties increased by $1.8 billion, or 11.9 per cent, primarily reflecting higher GST revenues, customs import duties and tobacco excise taxes and duties, and the introduction of the Air Travellers Security Charge. As noted above, part of this increase was attributable to delays in the processing of GST refunds.

• Non-tax revenues were down 2.3 per cent.

Program spending increased by $3.1 billion, or 6.6 per cent, in the April to August 2002 period, compared to the same period last year.

• Transfers to persons were up 8.2 per cent, reflecting both higher elderly and EI benefits.

• Transfers to other levels of government were up 4.2 per cent, attributable to higher cash transfers under the CHST. Entitlements under the fiscal transfer programs were virtually unchanged, primarily reflecting the timing of payments.

• Direct program spending increased by 6.6 per cent. During the first few months of the fiscal year, developments in this component are largely affected by the timing of payments and the implementation of initiatives announced in the December 2001 budget.

Public debt charges declined by $1.9 billion, or 11.3 per cent, reflecting the impact of the lower average effective interest rate on the stock of debt.

Financial requirement of $7.6 billion (excluding foreign exchange transactions) for April to August 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 $12.2 billion in the first five months of 2002-03, compared to a net requirement of $9.5 billion in the same period in 2001-02.

As a result, with a budgetary surplus of $4.6 billion and a net requirement of $12.2 billion from non-budgetary transactions, there was a financial requirement (excluding foreign exchange transactions) of $7.6 billion in the April to August 2002 period, compared to a financial source of $1.9 billion in the same period last year.

Net financial requirement of $8.1 billion for April to August 2002

Foreign exchange transactions represent all transactions in international reserves held in the Exchange Fund Account (EFA). The objectives of the EFA are to provide general foreign currency liquidity for the Government and promote orderly conditions in the foreign exchange market. The EFA contains foreign currency investments, the Government’s gold holdings and assets related to Canada’s commitment to the International Monetary Fund (IMF). Increases in the level of the reserves through borrowings, contributions to the IMF, and/or selling of Canadian dollars represent a requirement. Conversely, decreases in the level of reserves represent a source of funds. Taking all of these factors into account, there was a net requirement of $0.6 billion in the first five months of 2002-03, compared to a net requirement of $1.2 billion in the same period in 2001-02.

With a budgetary surplus of $4.6 billion, a net requirement of $12.2 billion from non-budgetary transactions and a net requirement of $0.6 billion from foreign exchange transactions, there was a net financial requirement of $8.1 billion in the April to August 2002 period, compared to a net source of $0.7 billion in the same period last year.

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 up $4.1 billion for April to August 2002

To finance this net financial requirement of $8.1 billion, the Government reduced it cash balances by $4.0 billion and increased its holding of market debt by $4.1 billion to the end of August 2002. 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.