- Fiscal Monitor 1999 -

The Fiscal Monitor

Highlights of financial results for December 1999

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Budgetary surplus of $3.1 billion in December 1999

There was a budgetary surplus of $3.1 billion in December 1999, up $0.6 billion from the surplus recorded in December 1998. As noted in last month's Fiscal Monitor, a large surplus was expected in December. Budgetary revenues are typically highest in the final month of each quarter, reflecting remittances from quarterly personal income tax filers. In addition, December marks the settlement period for corporations whose financial year ends on October 31, primarily financial institutions.

• Budgetary revenues were up $1.5 billion, or 10.3 per cent, primarily attributable to higher corporate income tax revenues, which were up $0.9 billion, or 54 per cent. Corporate profits rebounded strongly in 1999, following general weakness in 1998. Personal income tax revenues were up $0.3 billion, or 4.2 per cent, primarily reflecting increases in the number of people employed. Employment insurance (EI) premium revenues were lower due to the reduction in premium rates, while higher refunds depressed goods and services tax (GST) revenues.

• Program spending increased $1.1 billion, or 12.4 per cent, with most of the increase attributable to higher operating and capital expenditures.

• Public debt declined $0.2 billion, or 6.3 per cent, primarily reflecting adjustments pertaining to previous months.

Year-to-date: budgetary surplus of $10.9 billion

Over the first three quarters of fiscal year 1999-2000, the budgetary surplus was estimated at $10.9 billion, up $0.6 billion from the surplus recorded in the same period of 1998-99. Monthly deficits are expected in the final quarter of 1999-2000. Revenues are typically depressed in January due to the payment of the GST quarterly credit and refunds. Personal income tax refunds pertaining to the processing of 1999 tax returns will serve to depress revenues in March 2000. The impact of the tax relief measures announced in the February 1999 budget and the recently announced reduction in EI premium rates from $2.55 to $2.40 (employee rate per $100 of insurable earnings) effective January 1, 2000, will also dampen budgetary revenues in the final quarter of the year. In addition, the timing of revenues and spending at year end, including the impact of spending initiatives announced before the 2000 budget, will also serve to reduce the budgetary balance. These factors are expected to reduce the surplus to date by about $3.4 billion.

In addition to these factors, the policy initiatives proposed in the 2000 budget will reduce the reported surplus to date by an additional $4.5 billion. Allowing for the $3-billion Contingency Reserve results in a balanced budget. To the extent that the Contingency Reserve is not needed, it will be used to pay down the public debt. For more information, see Chapter 3 of The Budget Plan 2000.

Over the first nine months of 1999-2000, budgetary revenues were up $3.7 billion, or 3.2 per cent, on a year-over-year basis.

• Personal income tax revenues were up $2.6 billion, or 4.5 per cent. This increase was largely attributable to higher receipts from monthly deductions from employment income, due to increases in the number of people employed. Dampening these developments were higher personal income tax refunds relating to the 1998 taxation year and higher Canada Child Tax Benefit payments, reflecting increases announced in previous budgets.

• Corporate income tax revenues were up $0.3 billion, or 2.0 per cent. Although corporate profits are estimated to have picked up strongly in the first three quarters of the 1999 calendar year, refunds relating to overpayments with respect to taxation year 1998 and instalment payments based on 1998 liabilities are dampening revenues to date in 1999-2000. The February 2000 budget projects a strong pickup in corporate income tax revenue over the final months of the fiscal year, as corporations file their settlement payments for taxation year 1999.

• EI premium revenues were down $0.7 billion, or 4.9 per cent, as the decline in EI premium rates and adjustments relating to previous years more than offset the impact of the growth in the number of people employed and therefore paying premiums.

• Excise taxes and duties increased $1.0 billion, or 4.1 per cent. Net GST collections were up $1.3 billion, or 8.0 per cent, due to the strong gains in those goods and services subject to the GST. However, the timing of refunds should depress revenues over the balance of the fiscal year. Customs import duties were down 2.9 per cent. Sales and excise taxes and duties declined 3.7 per cent, primarily attributable to the elimination of the Air Transportation Tax, effective November 1998.

• Non-tax revenues, consisting of the return on investments and other non-tax revenues, such as fees and proceeds from sales, were up 1.0 per cent. This component of budgetary revenues is quite volatile, reflecting the timing of receipts.

Program spending increased by $3.3 billion, or 4.5 per cent, in the April to December 1999 period, compared to the same period of 1998.

• Major transfers to persons were up 0.7 per cent, as higher elderly benefit payments more than offset a decline in EI benefits. The increase in elderly benefits reflected an increase in the number of individuals eligible for benefits and higher average benefits, which are indexed to inflation. The decline in EI benefit payments was due to a decline in the number of beneficiaries, reflecting a reduction in the number of people unemployed. In contrast, special EI benefits and payments under employment benefit and support measures were higher.

• Major transfers to other levels of government were up $0.8 billion, or 5.7 per cent, reflecting much higher fiscal transfers, most notably for Equalization. As indicated in the 1999 budget, Equalization entitlements were revised up significantly due to historical data revisions, which indicated much stronger economic 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, increased by $2.3 billion, or 6.7 per cent. This component includes subsidy and other transfer payments, payments to Crown corporations, and the operating and capital costs of government, including defence. Developments in this component are affected by the timing of payments, as well as the lifting of the wage freeze, the effect of new initiatives announced in the February 1999 budget, and the costs associated with Canada's international peacekeeping commitments.

Public debt charges declined 0.8 per cent from year-earlier levels, as a decline in the average effective interest rate more than offset the impact of an increase in the stock of interest-bearing debt.

Year-to-date: financial surplus of $5.6 billion (excluding foreign exchange transactions)

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/surplus measures the difference between cash coming in to the Government and cash going out. Financial requirements/surplus 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 $5.4 billion in the first nine months of 1999-2000, up from the net requirement of $3.3 billion in the same period of 1998-99. The higher requirement was due to the payment to a third-party trust of the $3.5-billion Canada Health and Social Transfer cash supplement, as announced in the 1999 budget. As a result, there was a financial surplus (excluding foreign exchange transactions) of $5.6 billion in the April to December 1999 period, down from the $7.1-billion surplus recorded in the same period of 1998.

Year-to-date: net financial surplus of $5.3 billion (including foreign exchange transactions)

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. It fulfills this function by buying foreign exchange (selling Canadian dollars) when there is upward pressure on the value of the Canadian dollar and selling foreign exchange (buying Canadian dollars) when there is downward pressure. 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 requirement of $0.3 billion in the April to December 1999 period, compared to a net source of $3.4 billion in the same period of 1998.

With a budgetary surplus of $10.9 billion, a net requirement of $5.4 billion from non-budgetary transactions and a net requirement of $0.3 billion from foreign exchange transactions, there was a net financial surplus of $5.3 billion in the April to December 1999 period, compared to a net surplus of $10.5 billion in the same period of 1998.

With a financial surplus of $5.3 billion and a retirement of $0.6 billion of market debt to the end of December 1999, there was a net increase in cash balances of $4.7 billion to $14.0 billion. The buildup of cash reflected the impact of precautionary measures relating to end-of-year considerations.

The Debt Servicing and Reduction Account

In June 1991, legislation to establish the Debt Servicing and Reduction Account received Royal Assent. As a result, effective April 1, 1991, all GST revenues net of the applicable input tax credits, rebates and the low-income credit, along with the net proceeds from the sale of Crown corporations and gifts to the Crown identified for debt reduction, must, by law, go directly to the Debt Servicing and Reduction Account. The funds in this Account can only be used to pay the cost of servicing the public debt and ultimately to reduce the debt. The Account is audited on an annual basis by the Auditor General of Canada.

With a budgetary surplus of $10.9 billion, a net requirement of $5.4 billion from non-budgetary transactions and a net requirement of $0.3 billion from foreign exchange transactions, there was a net financial surplus of $5.3 billion in the April to December 1999 period, compared to a net surplus of $10.5 billion in the same period of 1998.

With a financial surplus of $5.3 billion and a retirement of $0.6 billion of market debt to the end of December 1999, there was a net increase in cash balances of $4.7 billion to $14.0 billion. The buildup of cash reflected the impact of precautionary measures relating to end-of-year considerations.

The Debt Servicing and Reduction Account

In June 1991, legislation to establish the Debt Servicing and Reduction Account (DSRA) received Royal Assent. As a result, effective April 1, 1991, all GST revenues net of the applicable input tax credits, rebates and the low-income credit, along with the net proceeds from the sale of Crown corporations and gifts to the Crown identified for debt reduction, must, by law, go directly to the DSRA. The funds in this Account can only be used to pay the cost of servicing the public debt and ultimately to reduce the debt. The Account is audited on an annual basis by the Auditor General of Canada.

Table 1
Summary statement of transactions

Table 2
Budgetary revenues

Table 3
Budgetary expenditures

Table 4
The budgetary balance and financial requirements/surplus

Table 5
Net financial balance and net borrowings

Table 6
Condensed statement of assets and liabilities

Table 7
Debt Servicing and Reduction Account (DSRA)