The federal deficit will be less than predicted -

The federal deficit will be less than predicted

Possibly much less, writes Stephen Gordon


The last federal budget projected a deficit of $21.1 billion for the fiscal year 2013, an estimate the government revised up to $26 billion in November’s Fiscal Update. But it seems to me as though the actual number is going to come in much lower than that.

Every month, the Department of Finance provides some summary statistics on the flows in and out of the public coffers in the Fiscal Monitor. These data are noisy and have significant seasonal patterns: personal income tax revenues jump in April and expenditures jump in March as managers go on a spend-what’s-left-in-the-budget spree. (They know that the reward for not spending all the money allotted to them in a given year is a budget cut for the next year.) But if you take twelve-month moving sums, you can get get a reasonably good idea of the state of federal finances. In principle, the sum of the twelve months to a given March should be the same as for that fiscal year, though there are always end-of-year adjustments in which certain items are budgeted to the entire year and not to any particular month.

Nonetheless, the monthly numbers are close enough to the fiscal year data to justify keeping track of them:

According to the November 2102 Fiscal Monitor, the deficit for the the first eight months of fiscal 2013 fiscal was $12.4 billion, compared to $15.5 billion for the first eight months of 2011-12.

Let’s look at what the numbers are likely to be in the last four months of 2012-2013. The deficit for the period of December 2011 to March 2012 was $6.2 billion, which included a $2.2 billion one-time charge in March 2012 for compensating the Quebec government for harmonizing QST with the GST. If the last four months of 2012-13 track  the last four months of 2011-12 (even including the payment to Quebec City), the 2012-13 deficit would be $18.5 billion. Take out that one-time payment, and the deficit would be $16.3 billion — almost $10 billion less than the deficit projected in the government’s November update.

It may be that there are end-of-year expenditure items that Finance is including in its projection and I don’t know about — but that raises the question of what they are and how much they will cost. It could also be that revenues will be weaker than projected — but not that much. Federal government revenues between December 2008 and March 2009 — in the worst of the recession — were $6.1 billion less than in the same period the preceding year. It would take an even larger shortfall to get us from where we are now to the $26 billion deficit the government forecasts.

Right now, I’m looking at a base-case scenario in which the the deficit for the last four months of 2012-13 is the same as the last four months of 2011-12, minus the GST/QST harmonization payment. That shows a 2012-13 deficit of $16.3 billion. This projection will be wrong, but less so, I believe, than the Department of Finance’s November projection of a $26 billion deficit.