Annual Financial Report 1998-99: 1
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Foreward by the Minister of Finance

For the fiscal year 1998-99, there was a budgetary surplus of $2.9 billion. Together with the $3.5-billion surplus recorded in 1997-98, this marks only the second surplus since 1969-70 and the first back-to-back surpluses since 1951-52. With these surpluses, the absolute stock of net public debt has declined by $6.4 billion in two years and net public debt as a percentage of the economy is on a permanent downward track. Market debt – the debt issued on credit markets – fell even faster than net public debt. Over the last two fiscal years, $16.4 billion of market debt has been retired.

This turnaround in federal government finances is a historic milestone and represents an achievement that all Canadians can truly be proud of, for without their efforts, it would not have been possible. This turnaround also underlines the soundness of the government's fiscal strategy – basing budget plans on prudent planning assumptions backed by a Contingency Reserve and adopting policies which have engendered economic growth and job creation. With the era of deficit financing now over, Canada is entering the new millennium with renewed financial credibility.

Actions to address the fiscal problem facing Canada were both balanced and measured. Even as the deficit was being eliminated, targeted investments were undertaken to enhance job creation and growth and address priorities in health care, knowledge and innovation. In the 1997 budget, the government announced the establishment of the Canada Foundation for Innovation, with an initial endowment of $800 million. In the 1998 budget, the Canadian Opportunities Strategy was launched. Central to that strategy was the establishment of the Canada Millennium Scholarship Foundation, with an endowment of $2.5 billion. Effective 1997-98, the cash floor under the Canada Health and Social Transfer (CHST) was increased from $11 billion to $12.5 billion. In the 1999 budget, a one-time supplement of $3.5 billion to the CHST was made from funds available in 1998-99. In addition, the 1998 and 1999 budgets began the process of providing affordable broad-based tax cuts to all Canadians. In the 1998 budget, personal income tax measures amounting to $1.1 billion were announced for 1998-99. The 1998 and 1999 budget tax measures will mean further savings of $16.5 billion for Canadians over the next three years. In addition, employment insurance premium rates for both 1998 and 1999 were cut, delivering savings of some $800 million in both 1998-99 and 1999-2000. These initiatives were financed within the available resources and not with borrowed money.

This is the sixth edition of the Annual Financial Report. Publication of the report responds to recommendations by the Auditor General and the House of Commons Standing Committee on Public Accounts. The government shares their view that providing Canadians with accurate, relevant, understandable and timely information on its financial activity enhances government accountability and enables Canadians to play a more active and effective role in guiding government decision-making. To make the report more useful and easier to understand, a survey form is attached to solicit users' views for further improvements.

The financial data in this report are based on the audited results, which will appear in more detail in the 1999 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, 1998-March 31, 1999), and detail the factors affecting these results. In addition, the Fiscal Reference Tables have been updated to incorporate the results for 1998-99 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

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. In 1997-98, a budgetary surplus of $3.5 billion was recorded, the first surplus in 28 years. This has now been followed by a surplus of $2.9 billion in 1998-99.

This turnaround in the budgetary balance reflected 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 1998-99, there was an improvement of 6.1 percentage points of GDP in the budgetary balance – from a deficit of 5.8 per cent of GDP to a surplus of 0.3 per cent. Over two-thirds of this improvement was attributable to the decline in program spending – from 16.6 per cent of GDP in 1993-94 to 12.4 per cent in 1998-99. Budgetary revenues increased by 1.4 percentage points of GDP – representing about 23 per cent of the overall improvement in the budgetary balance. Public debt charges declined by 0.6 percentage points, accounting for about 10 per cent of the improvement in the budgetary balance.

Net public debt

The 1998-99 surplus brought the federal government's net public debt – the accumulation of annual deficits and surpluses – down to $576.8 billion. As a share of GDP, the net public debt dropped to 64.4 per cent, down 6.8 percentage points from the peak of 71.2 per cent in 1995-96. This ratio is generally recognized as the most appropriate measure 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 third consecutive year in which the debt-to-GDP ratio has declined. The ratio is now back to where it was in the early 1990s, but still well above what it was in the 1970s. The net public debt at the end of 1998-99 was $18,923 for each Canadian, down from $19,184 a year earlier.

Table 1
Financial highlights

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 1998-99, interest-bearing debt was $595.0 billion, up $0.2 billion from 1997-98.

• However, of this, market debt declined by $6.9 billion to $460.5 billion. This reflected a lower stock of Treasury bills (down $15.4 billion) and Canada Savings Bonds (down $2.1 billion), offset in part by higher marketable bonds (up $10.0 billion) and bonds for the Canada Pension Plan (up $0.6 billion).

• This decline in market debt was offset by an increase of $7.1 billion in liabilities to public sector pensions and other accounts.

The financial balance

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

• There was a financial surplus (excluding foreign exchange transactions) of $11.5 billion in 1998-99. This is the third consecutive year in which a financial surplus has been recorded – the only G-7 country to do so.

During the course of the fiscal year, there was a net requirement of $5.7 billion relating to foreign exchange transactions, up from a net requirement of $2.2 billion in 1997-98. Including these amounts, the financial surplus in total was $5.8 billion. This compares to a financial surplus of $10.6 billion in 1997-98.

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