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- Fiscal Monitor 2002 -

The Fiscal Monitor

Highlights of financial results for November 2002

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Table 1
Summary statement of transactions

November 2002: budgetary results

On a year-over-year basis, the budgetary balance increased by $1.2 billion, from a deficit of $0.8 billion in November 2001 to a surplus of $0.3 billion in November 2002. Budgetary revenues increased by $1.3 billion, or 10.4 per cent, in November 2002 on a year-over-year basis, in large part due to the timing of receipts.

• Personal income tax revenues were up $0.5 billion, or 8.2 per cent, primarily due to higher monthly deductions from employment income. Part of this increase is attributable to the timing of receipts between November and December, which is expected to be reversed in December 2002.

• Corporate income tax revenues were up $0.1 billion, or 6.6 per cent, reversing the year-over-year decline reported last month.

• Employment insurance (EI) premium revenues were up slightly, as the impact of the growth in the number of people employed and therefore paying premiums offset 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, $0.6 billion or 18.9 per cent, primarily due to higher GST revenues and customs import duties. This is largely attributable to the impact of processing delays at the border, which depressed customs receipts in November 2001. The increase in other excise taxes and duties is primarily due to the increase in tobacco excise taxes and higher energy tax revenues.

• Non-tax revenues were up slightly on a year-over-year basis.

On a year-over-year basis, program spending was up $0.5 billion, or 4.9 per cent.

• Transfers to persons increased 1.8 per cent, as higher elderly benefits more than offset the decline in EI benefits. The decline in EI benefits is attributable to a decline in the number of benefit weeks, as both the number of beneficiaries and the average weekly benefit were higher.

• Transfers to other levels of government were up 6.6 per cent, primarily 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, was up 6.3 per cent. The monthly fluctuations in this component are due in large part to the timing of payments. Last month there was a year-over-year decline.

Public debt charges, on a year-over year basis, declined $0.4 billion, or 11.2 per cent, due to a decline in the average effective interest rate, as the stock of interest-bearing debt was higher.

Table 2
Budgetary revenues

April to November 2002: budgetary results

Over the first eight months of fiscal year 2002-03, the budgetary surplus is estimated at $8.2 billion, compared to a surplus of $13.3 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 eight months of 2002-03, budgetary revenues were down $3.3 billion, or 2.8 per cent, on a year-over-year basis. Among the major components:

• Personal income tax collections were down $3.3 billion, or 5.9 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 21.5 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 virtually unchanged, as lower premium rates offset the impact of the growth in the number of people employed and therefore paying premiums.

• Excise taxes and duties increased by $3.4 billion, or 13.5 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. GST revenues were up 13.9 per cent compared to an increase in the applicable tax base – consumer expenditures – of about 6 per cent. The difference in growth rates is largely attributable to a decline in refunds, which appears to be overstating the underlying increase in 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 down 3.5 per cent from the same period of 2001-02.

Over the first eight months of 2002-03, program spending increased by $4.5 billion, or 5.9 per cent, compared to the same period of 2001-02.

• Transfers to persons were up 6.0 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. The increase in EI benefits is attributable to the lagged effects of the economic slowdown in 2001 and the impact of program enhancements, including the extension of and related changes to parental benefits.

• Transfers to other levels of government were up 4.5 per cent due to higher cash transfers under the CHST. Entitlements under the fiscal transfer programs were unchanged, primarily reflecting the timing of payments.

• Direct program spending increased by 6.5 per cent. Subsidies and other transfers were slightly lower, primarily due to the timing of payments. Payments to Crown corporations were up 3.5 per cent. Departmental and agency operating and capital spending was up 11.1 per cent, in part due to the implementation of initiatives announced in the December 2001 budget.

Public debt charges declined by $2.7 billion, or 10.3 per cent, reflecting a decline in the average effective interest rate on interest-bearing debt.

Table 3
Budgetary expenditures

Financial requirement of $5.3 billion (excluding foreign exchange transactions) for April to November 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 $13.5 billion in the first eight months of 2002-03, compared to a net requirement of $12.2 billion in the same period of 2001-02. Part of the higher requirement is attributable to lower transfers to the Tax Collection Accounts due to lower personal and corporate income tax revenues over the first eight months of this year compared to the same period of 2001-02.

As a result, with a budgetary surplus of $8.2 billion and a net requirement of $13.5 billion from non-budgetary transactions, there was a financial requirement (excluding foreign exchange transactions) of $5.3  billion in the April to November 2002 period, compared to a financial source of $1.1 billion in the same period of 2001-02.

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 $4.7 billion for April to November 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 $0.6 billion in the first eight months of 2002-03, compared to a net requirement of $0.5 billion in the same period of 2001-02.

With a budgetary surplus of $8.2 billion, a net requirement of $13.5 billion from non-budgetary transactions and a net source of $0.6 billion from foreign exchange transactions, there was a net financial requirement of $4.7 billion in the April to November 2002 period, compared to a net source of $0.6 billion in the same period of 2001-02.

Net borrowings up $5.0 billion for April to November 2002

To finance this net financial requirement of $4.7 billion, the Government increased its net borrowings by $5.0 billion. In addition, it increased its cash balances by $0.3 billion. 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.