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- Fiscal Monitor 2001 -

The Fiscal Monitor

Highlights of financial results for September 2001

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September 2001: budgetary results

Budgetary revenues declined $0.8 billion, or 5.2 per cent, on a year-over-year basis. All of the major components were lower.

• Personal income tax revenues declined $0.2 billion, or 2.8 per cent, primarily reflecting the impact of the tax reduction measures announced in the February 2000 budget and the October 2000 Economic Statement and Budget Update, as well as enrichments to the Canada Child Tax Benefit announced in previous budgets.

• Corporate income tax revenues declined $0.1 billion, or 3.4 per cent, primarily reflecting higher refunds paid in September 2001 than in September 2000.

• Employment insurance (EI) premium revenues declined $0.1 billion, or 6.6 per cent, reflecting both prior-year adjustments and the decline in premium rates (the employee rate for 2001 is $2.25 per $100 of insurable earnings compared to $2.40 in 2000), which more than offset the impact of the growth in the number of people employed and therefore paying premiums.

• Excise taxes and duties declined $0.3 billion, or 10.7 per cent. This decline was entirely the result of lower goods and services tax (GST) revenues ($0.4 billion), attributable to higher refunds and rebates and lower GST collected on imported goods and services.

• Non-tax revenues declined $0.2 billion, or 19.9 per cent, largely reflecting the timing of receipts and lower interest earnings on bank balances.

The year-over-year increase in program spending of $0.8 billion, or 9.0 per cent, primarily reflected strong increases in transfers to persons and other levels of government.

Table 1
Summary statement of transactions

• Major transfers to persons were up $0.3 billion, or 10.6 per cent, primarily reflecting higher EI benefit payments. The increase in EI benefit payments reflects the impact of policy enhancements announced in the February 2000 budget and last September, as well as an increase in the number of beneficiaries. Elderly benefits were virtually unchanged due to the timing of payments between August and September.

• Major transfers to other levels of government were up $0.4 billion, or 19.7 per cent, reflecting higher cash transfers under the Canada Health and Social Transfer (CHST) and fiscal transfer programs. The increase in the CHST reflected 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 attributable to higher equalization entitlements.

• Direct program spending, consisting of total program spending less major transfers to persons and other levels of government, was up slightly, as a decline in operating and capital expenditures was more than offset by higher payments in the other components. The monthly fluctuations in these components are due in large part to the timing of payments and the completion of the transition to the new Financial Information Strategy.

Public debt charges, on a year-over year basis, were down $0.3 billion, or 7.9 per cent, reflecting both a lower stock of interest-bearing debt and a decline in the average effective interest rate on that debt.

April 2001 to September 2001: budgetary results

Over the first six months of fiscal year 2001-02, the budgetary surplus was estimated at $13.6 billion, down $1.2 billion from the surplus reported in the same period of 2000-01. Budgetary revenues were up $1.4 billion, or 1.6 per cent, while public debt charges declined by $0.9 billion, or 4.3 per cent. These positive developments on the budgetary balance were more than offset by higher program spending, up $3.5 billion, or 6.6 per cent.

Table 2
Budgetary revenues

Among the major components of budgetary revenues, on a year-over-year basis:

• Personal income tax collections declined marginally, as the impact of the tax reduction measures announced in the February 2000 budget and October 2000 Economic Statement and Budget Update offset higher final tax payments, received in April and May, with respect to the 2000 taxation year.

• Corporate income tax revenues were up $1.0 billion, or 9.0 per cent. As noted in previous Fiscal Monitors, this current year-over-year increase primarily reflects the tax instalment procedures. Corporations are required to remit monthly instalments based on either their previous year’s actual tax liability or their current year’s projected tax liability, with final settlement payments made within 60 days of the end of their taxation year. Throughout most of 2000-01 monthly tax instalments were based on the tax liability for 1999. However, corporate profits grew strongly in 2000, with the result that the monthly instalment payments understated the final tax liability for 2000-01. With monthly instalments now based on the tax liability for 2000, the year-over-year change in the monthly results could be misleading, as they do not yet reflect the decline in operating profits of Canadian corporations in the first half of 2001.

• EI premium revenues were down 1.2 per cent, as the decline in premium rates more than offset the growth in the number of people employed and therefore paying premiums. The employee rate for 2001 is $2.25 per $100 of insurable earnings, compared to $2.40 in 2000 and $2.55 in 1999.

• Excise taxes and duties increased $0.2 billion, or 1.2 per cent. GST revenues were down 2.4 per cent, primarily attributable to higher refunds and rebates and lower collections on imports. Customs import duties were up 8.1 per cent, while sales and excise taxes were up 9.5 per cent, in part reflecting the increase in tobacco excise taxes.

• Non-tax revenues were up 2.8 per cent.

Table 3
Budgetary expenditures

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

• Transfers to persons were up 8.2 per cent, attributable 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.

• Major transfers to other levels of government were up 20.6 per cent, reflecting higher cash transfers under the CHST and fiscal transfer programs. The increase in the CHST reflected 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 was primarily due to higher equalization entitlements, reflecting the continued stronger growth in Ontario than in the equalization-receiving provinces.

• Direct program spending, consisting of total program spending less the major transfers to persons and other levels of government, declined by 0.9 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 in the second half of the year than that recorded in previous years.

The year-over-year decline in public debt charges of $0.9 billion reflected the impact of declines in both the stock of interest-bearing debt and the average effective interest rate on that debt.

Financial source of $4.2 billion (excluding foreign exchange transactions) for April 2001 to September 2001

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 $9.4 billion in the first six months of 2001-02, compared to a net requirement of $6.2 billion in the same period in 2000-01. Traditionally, there are large requirements in the first half of any fiscal year, reflecting the payment of personal income tax refunds and certain liabilities, which were recognized in previous years’ budgetary results.

As a result, with a budgetary surplus of $13.6 billion and a net requirement of $9.4 billion from non-budgetary transactions, there was a financial source (excluding foreign exchange transactions) of $4.2 billion in the April 2001 to September 2001 period, compared to a source of $8.6 billion in the same period last year.

Net financial source of $4.7 billion for April 2001 to September 2001

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 source of $0.5 billion in the first six months of 2001-02, compared to a net requirement of $0.6 billion in the same period in 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

With a budgetary surplus of $13.6 billion, a net requirement of $9.4 billion from non-budgetary transactions and a net source of $0.5 billion from foreign exchange transactions, there was a net financial source of $4.7 billion in the April 2001 to September 2001 period, compared to a net source of $8.0 billion in the same period in 2000-01.

Net borrowings down $14.3 billion for April 2001 to September 2001

Although there was a net financial source of only $4.7 billion in the first six months of 2001-02, the Government did reduce its holding of market debt by $14.3 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 September 2001 they stood at $3.6 billion, down $9.6 billion from March 31, 2001.

Note to Readers:

The Government’s financial statements are presented on a modified accrual basis of accounting. This means that while most operating expenditures and non-tax revenues are recorded in the financial statements when they are incurred or earned (even if cash is not paid out or received until later), tax revenues are accounted for when cash is received and the entire amount of capital acquisitions, such as buildings, are treated as expenditures when acquired. In the February 1995 budget the Government announced its intention to adopt full accrual accounting. To this end, it has successfully introduced the Financial Information Strategy (FIS), a multi-year project which modernized financial systems and accounting practices. FIS consists of three components: the implementation of new financial systems, the adoption of full accrual accounting, and the provision of improved financial information to managers. In the 2000 budget the Government set a target date of 2001-02 for implementation of the first two components of FIS.

For the time being the monthly results for 2001-02 will continue to be presented on a modified accrual basis of accounting. However, the final audited financial statements for 2001-02, scheduled for release in the fall of 2002, will be presented on a full accrual basis of accounting. Previous years’ results will also be restated on a full accrual basis. For more information, see the backgrounder Implementation of Full Accrual Accounting in the Federal Government’s Financial Statements at www.fin.gc.ca.