Annual Financial Report 2001-2002: 5
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Comparison of Actual Budgetary Outcomes to Budget Estimates

This section compares the actual outcome for the major components of the budgetary balance for 2001-02 to the original estimates presented in the October 2000 Economic Statement and Budget Update, as well as to the updated estimates presented in the December 2001 budget.

The Government targeted a balanced budget for 2001-02 in both the October 2000 Economic Statement and Budget Update and December 2001 budget. Under the Debt Repayment Plan, the fiscal target for each year is based on:

• Using the average of private sector economic forecasts for budget-planning purposes.

• Including an annual Contingency Reserve to cover risks arising from unpredictable events and unavoidable inaccuracies in the economic and fiscal models used to translate the economic assumptions into detailed budget forecasts. It is not a source of funding for new policy initiatives. If not needed, it is used to reduce the public debt. For 2001-02 the Contingency Reserve was originally set at $3.0 billion. In the December 2001 budget, it was reduced to $1.5 billion to help cover some of the costs associated with the unforeseen circumstances of the global economic slowdown and the terrorist attacks of September 11th.

• Adding an extra degree of economic prudence to provide further assurance against falling back into deficit. In 2001-02 this economic prudence was originally set at $1 billion. In the December 2001 budget the Government used the economic prudence to manage the exceptional fiscal pressures resulting from the global economic slowdown and terrorist attacks.

Comparison to October 2000 Economic Statement and Budget Update

Economic growth for 2001 was significantly weaker than expected at the time of the October 2000 Economic Statement and Budget Update. Nominal income growth, based on the average of private sector forecasts, was projected at 5.5 per cent for 2001. However, the effects of the global economic slowdown in 2001 restrained the growth to 2.6 per cent, down considerably from the increase of 8.6 per cent reported for 2000.

In the October 2000 Economic Statement and Budget Update, before adjusting for the Contingency Reserve and economic prudence, there was an underlying surplus of $8.3 billion. After adjusting for the Contingency Reserve and economic prudence, there remained an unallocated balance of $4.3 billion, which the Government indicated could be directed to further debt reduction, increasing the prudence, further tax cuts or increased spending in priority areas.

The final outcome for 2001-02 was $8.9 billion, $0.6 billion higher than the underlying balance estimated in the October 2000 Economic Statement and Budget Update, as lower-than-expected public debt charges offset the impact of lower budgetary revenues and higher program spending (see Table 8). As a result, the prudence of $4.0 billion set aside in the Economic Statement and Budget Update was not required.

Table 8
Comparison of Actual Outcomes to October 2000 Economic Statement and Budget Update

Budgetary revenues were $1.2 billion lower than estimated in the October 2000 Economic Statement and Budget Update, primarily due to lower-than-expected corporate income tax revenues, which offset higher-than-expected personal income tax revenues. Personal income tax revenues were $3.3 billion higher, with about two-thirds due to higher payments on filing relating to the strong growth in net capital gains realizations in 2000, and the remainder due to prior-year adjustments. Corporate income taxes were $4.6 billion lower than forecast due to the weakness in global economic activity and its effect on corporate profits. Largely offsetting differences were reported among the other major components.

Program spending was $2.1 billion higher than estimated in the October 2000 Economic Statement and Budget Update. This primarily reflected higher EI benefits, due to the deterioration in the labour market in 2001, and increased direct program spending due to the new initiatives announced in the May 2001 Economic Update and December 2001 budget. In contrast, entitlements under fiscal arrangements were lower, reflecting the weakness in economic growth.

Public debt charges were $3.9 billion lower than forecast, reflecting the dramatic decline in short-term interest rates during 2001.

Comparison to December 2001 Budget

At the time of the December 2001 budget estimates indicated that the Canadian economy had contracted in the third quarter of 2001, and most forecasters were expecting further weakness in the fourth quarter, with only modest growth in the first half of 2002. Based on these economic planning assumptions and incorporating the impact of the budget initiatives, an underlying surplus of $1.5 billion was estimated. This amount was allocated to the Contingency Reserve.

However, stronger growth was recorded in the final quarter of 2001, and the recovery in the first half of 2002 was much faster and stronger than had been projected. As a result, budgetary revenues were higher than expected (up $2 billion – see Table 9). Most of this increase in budgetary revenues resulted from continued strength in personal income tax revenues (up $3.5 billion), as strong employment gains were recorded in the first quarter of 2002, and prior-year adjustments related to overpayments to the tax collection accounts.

Program spending was $3.9 billion lower than expected, reflecting lower-than-expected liabilities at year-end and a higher-than-assumed lapse in spending authority. The decline in public debt charges (down $1.5 billion) was attributable to lower-than-expected interest accrued on Canada Savings Bonds and pension account liabilities, reflecting the large declines in market interest rates.

Table 9
Comparison of Actual Outcomes to December 2001 Budget