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- Fiscal Monitor 2002 -

The Fiscal Monitor

Highlights of financial results for September 2002

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Table 1
Summary statement of transactions

September 2002: budgetary results

On a year-over-year basis, the budgetary surplus increased by $0.4 billion to $3.1 billion in September 2002. Budgetary revenues increased $1.0 billion, or 6.7 per cent, in September 2002 on a year-over-year basis, with virtually all of the increase attributable to higher GST revenues.

• Personal income tax revenues were down $0.1 billion, or 1.3 per cent, primarily due to lower tax remittances from quarterly filers, which more than offset higher monthly deductions from employment income, reflecting the strong growth in employment.

• Corporate income tax revenues were up slightly, as higher instalment payments were largely offset by higher refunds.

• 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 ($1.0 billion or 32.7 per cent). Most of this increase was due to higher GST revenues, up $0.9 billion or 44.6 per cent. This was due to both higher gross collections and unexpectedly lower refunds.

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

On a year-over-year basis, program spending increased by $0.9 billion, or 9.7 per cent, with increases recorded in all major components.

• Transfers to persons were up 6.3 per cent. Elderly benefits increased 2.4 per cent while EI benefits were up 14.8 per cent. Both components were affected by the timing of payments between August and September.

• Last month the year-over-year increase in elderly benefits was higher than expected, while that for EI benefits was considerably lower than expected.

• Transfers to other levels of government were up 4.0 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 16.0 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 $0.3 billion, or 8.2 per cent, due to a decline in the stock of interest-bearing debt and a lower average effective interest rate on that debt.

Table 2
Budgetary revenues

April to September 2002: budgetary results

Over the first six months of fiscal year 2002-03, the budgetary surplus was estimated at $7.8 billion, compared to a surplus of $14.2 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 six months of 2002-03, budgetary revenues were down $4.6 billion, or 5.0 per cent, on a year-over-year basis. Among the major components:

• Personal income tax collections were down $4.0 billion, or 9.2 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. Quarterly instalment payments were also lower, as these payments are now largely based on tax liabilities for 2001. 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 $3.2 billion, or 26.2 per cent, primarily due 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.

• Excise taxes and duties increased by $2.8 billion, or 15.3 per cent, primarily reflecting higher GST revenues, customs import duties and tobacco excise taxes and duties, as well as the introduction of the Air Travellers Security Charge. Revenues from energy-related taxes were lower. GST revenues were up 19.3 per cent, compared to an increase in the applicable tax base – consumer expenditures – of about 4 per cent. The difference in growth rates was largely attributable to a decline in refunds, which appears to be overstating the underlying increase in net GST revenues. Traditionally, GST refunds move closely in line with the growth in gross GST collections. It is expected that over the balance of the year, GST refunds will more closely reflect the changes in gross GST collections, bringing net GST revenues more in line with the growth in the applicable GST tax base.

• Non-tax revenues were virtually unchanged from the same period last year.

Table 3
Budgetary expenditures

Over the first six months of 2002-03, program spending increased by $4.0 billion, or 7.1 per cent, compared to the same period last year.

• Transfers to persons were up 7.9 per cent, reflecting both higher elderly and EI benefits. The increase in elderly benefits reflects the increase in the number of people eligible to receive benefits as well as higher average benefits, which are adjusted quarterly to reflect changes in consumer prices.

• 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 8.1 per cent. Subsidies and other transfers were virtually unchanged. Developments in this component are largely affected by the timing of payments. Payments to Crown corporations were up 5.5 per cent. Departmental and agency operating and capital spending were up 12.4 per cent, in part due to the implementation of initiatives announced in the December 2001 budget.

Public debt charges declined by $2.1 billion, or 10.8 per cent, reflecting both a reduction in the stock of interest-bearing debt and a lower average effective interest rate on that debt.

Financial requirement of $5.8 billion (excluding foreign exchange transactions) for April to September 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 $13.6 billion in the first six months of 2002-03, compared to a net requirement of $10.0 billion in the same period in 2001-02. Part of the higher requirement was attributable to lower transfers to the Tax Collection Accounts due to lower personal and corporate income tax revenues over the first six months of this year compared to the same period last year.

As a result, with a budgetary surplus of $7.8 billion and a net requirement of $13.6 billion from non-budgetary transactions, there was a financial requirement (excluding foreign exchange transactions) of $5.8 billion in the April to September 2002 period, compared to a financial source of $4.2 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 financial requirement of $5.1 billion for April to September 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 source of $0.7 billion in the first six months of 2002-03, compared to a net source of $0.5 billion in the same period in 2001-02.

With a budgetary surplus of $7.8 billion, a net requirement of $13.6 billion from non-budgetary transactions and a net source of $0.7 billion from foreign exchange transactions, there was a net financial requirement of $5.1 billion in the April to September 2002 period, compared to a net source of $4.7 billion in the same period last year.

Net borrowings down $2.9 billion for April to September 2002

To finance this net financial requirement of $5.1 billion, the Government reduced its cash balances by $8.0 billion to $3.9 billion. This also allowed it to reduce its holding of market debt by $2.9 billion to the end of September 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.