Annual Financial Report 2000-2001: 1
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Fiscal Year 2000–2001

A budgetary surplus of $17.1 billion was recorded in 2000-01. This marks the fourth consecutive year in which the federal government has recorded a surplus – the last time this occurred was in the period up to 1951-52. The outcome for 2000-01 was significantly higher than what was expected in the February 2000 budget and October 2000 Economic Statement and Budget Update, reflecting substantially stronger economic growth than had been anticipated. Nominal income – the applicable tax base for revenues – advanced by 8.3 per cent in 2000, following a gain of 6.5 per cent in the previous year. With much slower economic growth expected in 2001, surpluses will be correspondingly lower.

As a result of the budgetary surpluses recorded to date, net public debt stood at $547.4 billion on March 31, 2001, down $35.8 billion from its peak of $583.2 billion in 1996-97. This large paydown in net public debt is important for a variety of reasons. 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 framework to economic shocks, especially an increase in interest rates or prolonged slowdowns in economic activity. And a lower debt burden reduces the amount that younger Canadians have to pay for servicing debt incurred by the generations that preceded them. The reduction in debt has resulted in ongoing net interest savings of about $2.5 billion each and every year. This is the real fiscal dividend.

Net public debt as a percentage of the economy is now 51.8 per cent, a reduction of almost 19 percentage points from its peak of 70.7 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.

The financial data in this report are based on the audited results, which will appear in more detail in the 2001 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, 2000 to March 31, 2001) and detail the factors affecting these results. In addition, the Fiscal Reference Tables have been updated to incorporate the results for 2000-01 and historical revisions to the National Economic and Financial Accounts published by Statistics Canada. These tables are an integral part of this report.

This is the final year in which the federal government’s financial statements will be presented on a modified accrual basis of accounting. For 2001-02 the financial statements will be presented on a full accrual basis of accounting at year-end.

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

Report Highlights

The Budgetary Balance

Economic growth was exceptionally strong in 2000, extending the rapid gains made in 1999. Nominal income – a proxy for the federal tax base – rose by 8.3 per cent, following an increase of 6.5 per cent in 1999. As part of planning for the February 2000 budget, private sector economists had expected nominal income to advance by only 5.7 per cent in 2000. This was revised up to 8.0 per cent in the October 2000 Economic Statement and Budget Update.

In the October 2000 Economic Statement and Budget Update, the underlying surplus for 2000-01 was revised up to $15.2 billion, reflecting the impact of the much stronger than forecast economic growth on federal revenues. This was after accounting for the costs associated with the September 2000 Agreements on Health Renewal and Early Childhood Development and proposed enhancements to the employment insurance program. These costs amounted to $1.8 billion in 2000-01.

In the October 2000 Economic Statement and Budget Update, the Government added a new element to its Debt Repayment Plan. In addition to the practice of setting aside $3 billion as a Contingency Reserve (which, if not needed, is applied to reducing the debt), it indicated that, each fall, it would announce whether a greater amount should be dedicated to that year’s debt paydown. With an underlying surplus of $15.2 billion, the Government committed a minimum of $10 billion to debt reduction.

Table 1
Financial Highlights

The remaining balance of $5.2 billion was allocated as follows: $1.3 billion for relief for higher heating expenses, $1.4 billion for tax reductions effective on January 1, 2001, and $500 million for the Canada Foundation for Innovation, leaving $1.9 billion unallocated, to be used for either further debt reduction, tax cuts or increased spending in priority areas.

In the May 2001 Economic Update the Government indicated that the surplus for 2000-01 would be at least $15 billion, based on the financial results available at that time. This outcome included the impact of a number of initiatives undertaken between the October 2000 Economic Statement and Budget Update and the end of the 2000-01 fiscal year. These initiatives totalled $2.1 billion and included incremental funding of $750 million for the Canada Foundation for Innovation, $500 million for agricultural assistance, $140 million for Genome Canada and $624 million for defence.

The final budgetary surplus for 2000-01 was $17.1 billion. All of this has been applied to reducing the net public debt. This represents an improvement of $4.8 billion from the surplus recorded in 1999-2000.

Over the period 1993-94 to 2000-01, the budgetary balance as a percentage of gross domestic product (GDP) went from a deficit of 5.8 per cent of GDP in 1993-94 ($42 billion) to a surplus of 1.6 per cent of GDP in 2000-01 ($17.1 billion). Nearly 70 per cent of this improvement is attributable to the decline in program spending – from 16.4 per cent of GDP in 1993-94 to 11.3 per cent of GDP in 2000-01. Of the remaining improvement, public debt charges declined by 1.2 percentage points, while budgetary revenues increased by 1.0 percentage point. Program spending in 2000-01, at $119.3 billion, was $0.7 billion lower than its level of $120.0 billion in 1993-94.

Net Public Debt

The 2000-01 surplus of $17.1 billion brings the federal government’s net public debt – the accumulation of annual deficits and surpluses – down to $547.4 billion from its peak of $583.2 billion in 1996-97. As a share of GDP, the net public debt dropped to 51.8 per cent, down 18.9 percentage points from the peak of 70.7 per cent in 1995-96. 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 fifth consecutive year in which the debt-to-GDP ratio has declined and this is the lowest the ratio has been since 1985-86.

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 2000-01 market debt declined by $10.0 billion to $446.4 billion, primarily reflecting lower holdings of Treasury bills. This brings the decline in market debt since 1996-97 to $30.4 billion. Total interest-bearing debt was $589.2 billion, down $8.7 billion from 1999-2000, as the decline in market debt was dampened by an increase of $1.3 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 use a measure comparable to the financial requirements/source as their main measure of the budgetary balance. There was a financial source (excluding foreign exchange transactions) of $19.0 billion in 2000-01 – the fifth consecutive year Canada has recorded a financial source – the only G-7 country to do so.

During the course of the fiscal year, there was a net requirement of $8.8 billion relating to foreign exchange transactions, up from a net requirement of $6.8 billion in 1999-2000. Including this amount, the financial source in total was $10.2 billion, up from a source of $7.7 billion in 1999-2000.