Annual Financial Report 1999-2000: 1
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Foreword by the Minister of Finance

In the February 2000 budget, the Government committed to a balanced budget or better for 1999-2000. This was after setting aside a $3-billion Contingency Reserve in order to ensure that the fiscal target would be realized. It also included an allocation of $6.2 billion to key priorities for Canadians including: a $2.5-billion cash supplement under the Canada Health and Social Transfer for health and higher education; $1.3 billion for initiatives to make the economy more innovative, such as the $0.9 billion for the Canada Foundation for Innovation; $0.8 billion to meet Canada's international obligations; and funding to assist Canadian farmers.

As a result of a better than expected economic performance, budgetary revenues grew much more strongly in the last quarter of 1999-2000 than forecast in Budget 2000, while program spending was lower. As a result, for fiscal year 1999-2000, there was a budgetary surplus of $12.3 billion – $9.3 billion above the $3-billion Contingency Reserve. This surplus was applied to reducing the net public debt. This marks the third consecutive year in which the federal government has reported a budgetary surplus – the last time that this happened was in the late 1940s and early 1950s. As a result, the stock of net public debt has declined by $18.7 billion in just three years. Market debt – the debt issued on credit markets – fell even faster than net public debt. Over the last three fiscal years, $20.4 billion of market debt has been retired.

This large paydown of net public debt is welcome news. Canada's debt level is high, both by historical Canadian and international standards. A high debt burden means that a large portion of the revenue the Government collects from taxpayers must go towards debt servicing payments rather than to reduce taxes, to fund valued programs and services or to pay down the debt. Reducing the debt burden also lessens the exposure of the fiscal situation to economic shocks, especially an increase in interest rates or prolonged slowdowns in economic activity. And a lower debt burden ensures that younger Canadians do not pay an unduly large portion of the debt.

Net public debt as a percentage of the economy is now at 58.9 per cent, a decline of more than 12 percentage points from its peak of 71.2 per cent in 1995-96. On an international basis, Canada has made more progress in reducing its debt burden than any other G-7 country. Public debt charges now account for about 25 cents of each revenue dollar received – back to where it was in 1981-82, whereas in 1995-96 it amounted to 36 cents. The Debt Repayment Plan, coupled with sustained economic growth, will ensure that both the stock of debt and the debt burden continue to decline.

The better fiscal outcome is not unique to the federal government. Most provinces as well as other major industrialized nations are reporting much better than expected financial results for the fiscal year just ended.

The Auditor General of Canada, Denis Desautels, has expressed a "clean" opinion on these financial statements. As his term expires at the end of March 2001, these will be the last financial statements on which he will express an audit opinion. Although there have been on occasion differences in interpretation between the Auditor General and the Government, the dedication and professionalism brought to the office by Mr. Desautels are exemplary. Canadians and the Government have been extremely well served during his tenure. I wish him well in whatever new endeavour he pursues.

The 1998-99 edition of the Annual Financial Report included a user survey. The results regarding the content and organization of the report were generally very positive and the majority of respondents felt that there was a sufficient amount of information. I wish to thank all of those who responded.

The financial data in this report are based on the audited results, which will appear in more detail in the 2000 Public Accounts of Canada, scheduled for tabling in the House of Commons this fall. They cover the federal government's spending and revenue performance for the past fiscal year (April 1, 1999–March 31, 2000) and detail the factors affecting these results. In addition, the Fiscal Reference Tables have been updated to incorporate the results for 1999-2000 and historical revisions to the National Economic and Financial Accounts published by Statistics Canada. These tables are an integral part of this report.

The Honourable Paul Martin, P.C., M.P.
Minister of Finance

Report Highlights

The Budgetary Balance

At the time of the February 1999 budget, private sector economists expected nominal income – a proxy for the federal tax base – to advance by only 2.7 per cent in 1999. However, this was revised up to 5.1 per cent in September 1999 and 5.4 per cent in the February 2000 budget.

The much stronger than expected growth in the economy resulted in much higher revenues and lower employment insurance benefits than forecast at the time of the February 1999 budget. At the time of the February 2000 budget, an underlying budgetary surplus of $9.2 billion was expected for 1999-2000. Of that amount, a $3-billion Contingency Reserve was maintained to ensure that the budgetary target of a balanced budget or better would be realized. That left a planning surplus after the Contingency Reserve of $6.2 billion. This surplus was allocated to a number of key priorities: a cash supplement of $2.5 billion to the Canada Health and Social Transfer was made available to help the provinces and territories fund post-secondary education and health care; $1.3 billion was directed to initiatives to make the economy more innovative, including the $0.9-billion transfer to the Canada Foundation for Innovation; another $0.8 billion was allocated to meet Canada's international obligations; and additional financial assistance was provided to Canadian farmers.

However, data that became available after the 2000 budget indicated that nominal income growth averaged 6.2 per cent for 1999, and this strength continued into 2000. As a result, budgetary revenues were $5.8 billion higher than estimated in the February 2000 budget while expenditures were $3.5 billion lower. This, in combination with the $3-billion Contingency Reserve, resulted in a budgetary surplus for 1999-2000 of $12.3 billion – all of which has been applied to reducing the net public debt.

In 1993-94, the federal deficit stood at $42 billion. The actions taken in the 1994, 1995 and 1996 budgets, coupled with sustained economic growth, resulted in the elimination of that deficit in just four years.

Table 1
Financial Highlights

In 1997-98, a budgetary surplus of $3.5 billion was recorded, the first surplus in 28 years. This was followed by surpluses of $2.9 billion in 1998-99 and $12.3 billion in 1999-2000.

This turnaround in the budgetary balance reflects the combined effects of lower program spending, primarily reflecting the expenditure reduction measures introduced since 1993, and higher revenues, primarily reflecting the growth in the economy. The contributions are best viewed in terms of their relationship to gross domestic product (GDP). Over the period 1993-94 to 1999-2000, there was an improvement of 7.1 percentage points of GDP in the budgetary balance – from a deficit of 5.8 per cent of GDP in 1993-94 to a surplus of 1.3 per cent of GDP in 1999-2000. Over two-thirds of this improvement is attributable to the decline in program spending – from 16.6 per cent of GDP in 1993-94 to 11.7 per cent of GDP in 1999-2000. Budgetary revenues increased by 1.3 percentage points of GDP – representing less than 20 per cent of the overall improvement in the budgetary balance, while public debt charges, as a per cent of GDP, declined by 0.9 of a percentage point, accounting for about 13 per cent of the improvement in the budgetary balance.

Net Public Debt

The 1999-2000 surplus of $12.3 billion brings the federal government's net public debt – the accumulation of annual deficits and surpluses – down to $564.5 billion. As a share of GDP, the net public debt dropped to 58.9 per cent, down 12.3 percentage points from the peak of 71.2 per cent in 1995-96. The decline in the ratio in 1999-2000 is the largest since 1951-52. This ratio is generally recognized as the most appropriate indicator of the debt burden as it measures debt relative to the ability of the Government and the country's taxpayers to finance it. This is the fourth consecutive year in which the debt-to-GDP ratio has declined and this is the lowest ratio since 1990-91. The net public debt at the end of 1999-2000 was $18,408 for each Canadian, down from $18,972 a year earlier.

Net public debt consists of interest-bearing debt and other liabilities, net of financial assets. Interest-bearing debt, in turn, consists of unmatured, or market debt, and the Government's obligations to internally held accounts – primarily the liabilities for the federal government employees' pension plans.

• In 1999-2000, market debt declined by $4.0 billion to $456.4 billion. This reflected a smaller stock of marketable bonds, offset in part by a larger stock of Treasury bills. This brings the decline in market debt since 1996-97 to $20.4 billion.

• Overall, interest-bearing debt was $597.9 billion, up $2.9 billion from 1998-99, as the decline in market debt was more than offset by an increase of $6.9 billion in liabilities to public sector pensions and other accounts.

Financial Requirements/Source

Financial requirements/source measures the difference between cash coming in to the Government and cash going out. Most industrialized countries currently use a measure comparable to the financial requirements/source as their main budget measure.

• There was a financial source (excluding foreign exchange transactions) of $14.6 billion in 1999-2000 – the fourth consecutive year in which a financial source has been recorded – the only G-7 country to do so.

During the course of the fiscal year, there was a net requirement of $6.8 billion relating to foreign exchange transactions, up from a net requirement of $5.7 billion in 1998-99. Including these amounts, the financial source in total was $7.7 billion, up from a source of $5.8 billion in 1998-99.

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