Fiscal Year 2003–2004

The Government of Canada posted a budgetary surplus of $9.1 billion in 2003–04, marking the seventh consecutive year in which it has recorded a surplus— the first time this has occurred since Confederation.

Consistent with generally accepted accounting principles, the entire $9.1 billion has been applied to reduce the federal debt. The better-than-expected outcome is primarily due to much higher-than-expected budgetary revenues in the final quarter of the fiscal year, in part reflecting stronger-than-expected nominal income growth in that quarter. As well, the revenue yield—that is, the amount of tax revenue collected per dollar of income—was significantly higher than anticipated, particularly in light of the incremental tax reductions that came into effect as part of the Five-Year Tax Reduction Plan.

As a result of the budgetary surpluses recorded since 1997–98, the federal debt (accumulated deficit) has been reduced by $61.4 billion to $501.5 billion from its peak of $562.9 billion in 1996–97. Taking all levels of government together (federal, provincial and local governments and the Canada and Quebec Pension Plan), the Organisation for Economic Co-operation and Development estimates that Canada was the only Group of Seven (G-7) country to post a surplus in 2003.

Federal debt as a percentage of the economy was 41.1 per cent in 2003–04, a reduction of 27.3 percentage points from its peak of 68.4 per cent in 1995–96. On an international basis, for the total government sector Canada has made more progress in reducing its debt burden than any other G-7 country. From having the second highest debt burden in the mid-1990s, Canada’s net debt burden was below the G-7 average and below those in the United States, France, Germany, Italy and Japan in 2003. The United Kingdom had a marginally lower debt burden than Canada in 2003. 

The reduction in the federal debt burden is important for a variety of reasons. A lower debt burden, resulting from a reduction in interest-bearing debt, means that a smaller portion of the revenue the Government collects from taxpayers must go towards debt-servicing payments, thereby leaving more resources for reducing taxes and funding valued programs and services. The savings to the Canadian taxpayer from lower debt servicing costs stand at over $3 billion per year. A lower debt burden also lessens the exposure of Canada’s fiscal situation to economic shocks, especially an increase in interest rates or a prolonged slowdown in economic activity. Sustained balanced budgets and putting the debt on a steady downward track have also restored Canada’s Triple-A credit rating in financial markets. Since this effectively sets the standard for the whole country, everyone benefits—from provinces and municipalities to individuals wanting to buy a home, start a business or run a farm.

Simple fairness also demands that future generations not be saddled with a debt they did not incur. Right now, even after the progress we’ve made in eliminating the deficit and reducing debt, annual debt-servicing costs (at some $35 billion) are still the largest single expense of the Government of Canada. Unless we continue to reduce the debt burden, the inheritance we leave to our children and grandchildren will be a heavy mortgage on their futures.

We also have to begin to prepare now for an aging population. In Canada the real force of this demographic trend will hit when the baby boomers begin to retire around 2010—a little over six years from now. As the largest generation ever leaves the workforce, a much smaller one will be left to take its place. This will have at least two profound effects on our society: first, there will be greater demand for the social programs we value, particularly health care; and second, there will be fewer people working to support those programs. This again speaks to why it is so important to pay down debt, year after year. The less debt we carry, the more flexibility we have to meet emerging demographic pressures.

In the March 2004 budget, we set an objective of reducing Canada’s debt-to-GDP (gross domestic product) ratio from about 41 per cent today to 25 per cent within 10 years. Achieving the 25-per-cent debt-to-GDP ratio will mean that less government revenue will have to go to pay interest on public debt and that billions of dollars more will be available to help make up for fewer Canadians in the workplace of the future.

Good fiscal management requires that the Government equip itself with the best possible economic and fiscal projections. To that end, I have launched a comprehensive review of how we do our economic and fiscal forecasting. Such a review was last done in 1994 and much has changed since then—including the elimination of the deficit, the Government’s commitment to maintaining a balanced budget or better each year, and the shift to full accrual accounting for the presentation of the Government’s financial statements. The time has again come to test our assumptions and make sure that we are still using best practices—benchmarking ourselves against the best in the world. The Government of Canada is grateful to Mr. Tim O’Neill, a distinguished private sector economist, for leading this important analysis. It is my hope that such a review could be completed in time for the next federal budget.

The financial data in this report are based on the audited results, which will appear in more detail in the Public Accounts of Canada 2004, 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, 2003 to March 31, 2004) and detail the factors affecting these results. In addition, the Fiscal Reference Tables publication has been updated to incorporate the results for 2003–04 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 Ralph Goodale, P.C., M.P.
Minister of Finance

Note to Readers

The figures contained in this report are presented on a net basis, consistent with the presentations in the budgets and in the Appropriation Acts, as approved by Parliament. In contrast, the figures in the Public Accounts of Canada 2004 are presented on a gross basis. The differences in classification affect both budgetary revenues and program expenses by a corresponding amount and, as such, have no impact on the budgetary balance. The impact of these classification differences on budgetary revenues and program expenses is explained in this report.

The Government reports all revenues and expenses on an accrual basis. Further details on the Government’s accounting policies can be found in the section entitled "Notes to the Condensed Financial Statements" and in the Public Accounts of Canada 2004.

Report Highlights

The Budgetary Balance

A budgetary surplus of $9.1 billion was recorded in 2003–04, up $2.1 billion from the surplus of $7.0 billion in 2002–03. The increase in the surplus is primarily due to strong growth in nominal income—the applicable tax base for budgetary revenues—up 5.3 per cent, and a decline in public debt charges, reflecting the decline in short-term interest rates. Budgetary revenues increased by $8.4 billion, or 4.7 per cent, reflecting strong growth in corporate (up $5.2 billion or 23.4 per cent) and personal (up $3.2 billion or 3.9 per cent) income tax revenues. Public debt charges declined by $1.5 billion, or 4.0 per cent. Program expenses increased by $7.8 billion, or 5.8 per cent, primarily reflecting the impact of previous budget measures.

In the March 2004 budget, the Government estimated the budgetary surplus at $1.9 billion for 2003–04. This amount was allocated to the Contingency Reserve. This was after responding to a number of shocks that hit the economy in 2003—the bovine spongiform encephalopathy (BSE) crisis, the severe acute respiratory syndrome (SARS) outbreak, Hurricane Juan across Atlantic Canada, and forest fires in British Columbia. It was also after providing an additional $2.4 billion to the provinces and territories for health care. The better-than-expected outcome for 2003–04 compared to the March 2004 budget estimate is primarily attributable to much higher-than-expected budgetary revenues in the final quarter of the fiscal year, in part reflecting much stronger-than-expected income growth in the first quarter of 2004. In addition, the revenue yield—that is, the amount of tax revenue collected per dollar of income—was significantly higher than anticipated. A decline in the ratio had been expected, given the scheduled $4.5-billion tax decrease in 2003–04 as part of the $100-billion Five-Year Tax Reduction Plan.

Budgetary revenues were $5.1 billion higher, due primarily to stronger-than-expected growth in personal and corporate income tax revenues and in other revenues. Program expenses were $2.0 billion lower than expected, in part reflecting higher-than-expected lapses resulting from the year-end spending freeze and delays in implementing initiatives from previous budgets.

The budgetary surplus of $9.1 billion, or 0.7 per cent of GDP, in 2003–04 represents a substantial improvement from the deficit of $38.5 billion, or 5.3 per cent of GDP, in 1993–94. As a percentage of GDP, all of this fiscal improvement since 1993–94 is attributable to the decline in total expenses. Program expenses as a percentage of GDP declined from 15.7 per cent in 1993–94 to 11.6 per cent in 2003–04, while public debt charges fell from 5.5 per cent in 1993–94 to 2.9 per cent in 2003–04. In contrast, budgetary revenues fell from 16.0 per cent in 1993–94 to 15.3 per cent in 2003–04.

Sound financial management has been at the core of the Government’s economic strategy over the past 10 years. This strategy has put an end to almost three decades of chronic deficits and replaced them with seven consecutive surpluses—an achievement unparalleled since Confederation. The commitment to sound financial management allowed Canada to post a total government sector budgetary surplus in 2003, while all other G-7 countries recorded deficits. It has brought Canada’s total government sector debt-to-GDP ratio from the second highest in the G-7 in the mid-1990s to the second lowest level in 2003. Since posting its first budgetary surplus in 1997–98, Canada has led the G-7 in job creation and real GDP growth. The Government’s fiscal credibility allowed monetary policy to support the economy during the global slowdown in 2001 and to cope with a series of significant shocks that hit the Canadian economy in 2003.

Federal Debt

The 2003–04 surplus of $9.1 billion brings the federal debt—the accumulation of annual deficits and surpluses—down to $501.5 billion. From its peak of $562.9 billion in 1996–97, federal debt has declined by $61.4 billion. As a share of GDP, federal debt dropped to 41.1 per cent in 2003–04, down 27.3 percentage points from the peak of 68.4 per cent in 1995–96. This is the eighth consecutive year in which the federal debt-to-GDP ratio has declined, bringing it to its lowest level since 1983–84. Federal debt at the end of 2003–04 was $15,758 for each Canadian, down from $16,188 a year earlier and down from $18,876 at the end of 1996–97, the last year the federal government recorded a deficit.

Table 1
Financial Highlights

Federal debt consists of interest-bearing debt and other liabilities, net of financial and non-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. All of the decrease in the federal debt of $9.1 billion in 2003–04 is attributable to an increase of $9.5 billion in financial assets—cash and accounts receivable and loans, investments and advances. Market debt declined by $2.2 billion while obligations to pension and other accounts increased by $2.6 billion. Both other liabilities and non-financial assets increased by $0.6 billion.

Financial Source/Requirement

The financial source/requirement measures the difference between cash coming in to the Government and cash going out. There was a financial source of $6.2 billion in 2003–04, compared to a financial source of $7.6 billion in 2002–03. This lower source is primarily attributable to higher cash requirements for investing activities, in part due to increased direct financing to students.

Budgetary Revenues

Budgetary revenues were reported at $186.2 billion, an increase of $8.4 billion, or 4.7 per cent, from 2002–03. Nominal income—the applicable tax base for revenues—advanced by 5.3 per cent in 2003, up from the increase of 4.5 per cent in 2002. The net impact of stronger nominal income growth in 2003 on revenues was somewhat dampened by the incremental impact of the tax reductions introduced in previous budgets, especially the restoration of full indexation of the personal income tax system, increases in the Canada Child Tax Benefit (which are netted against personal income tax revenues) and reductions in the corporate income tax rate. However, the revenue yield, at 15.3 per cent, was significantly higher than expected, given the legislated tax reductions. Most of the increase in budgetary revenues resulted from higher personal and corporate income taxes.

Table 2
Revenues

Budgetary revenues were $5.1 billion higher than estimated in the March 2004 budget. The higher revenues are attributable to the stronger-than-expected economic growth in the final quarter of the 2003–04 fiscal year and to a higher-than-estimated revenue yield. Notwithstanding a scheduled $4.5-billion tax decrease in 2003–04 as part of the $100-billion Five-Year Tax Reduction Plan, the revenue yield was roughly unchanged, whereas a decline had been expected. For example, corporate income tax revenues were up 23.4 per cent, significantly stronger than the 10.0-per-cent increase in corporate profits, despite a 2-percentage-point reduction in the general tax rate. Similarly, personal income tax revenues increased 3.9 per cent, stronger than the 3.0-per-cent increase in the applicable tax base, despite increases to the various thresholds and the Canada Child Tax Benefit.

Personal income tax revenues, the largest component at over 45 per cent of budgetary revenues, increased by $3.2 billion, or 3.9 per cent, in 2003–04. This is stronger than the growth of 3.0 per cent in personal income, which is somewhat surprising in light of the impact of the tax reduction measures introduced in previous budgets. As part of the $100-billion Five-Year Tax Reduction Plan, first announced in the February 2000 budget, tax rates were reduced, thresholds at which the tax rates are effective were increased, and the Canada Child Tax Benefit was enhanced. The impact of these measures was to reduce personal income tax revenues by an incremental $2.7 billion in 2003–04. The Canada Child Tax Benefit was also increased in the February 2003 budget.

Corporate income tax revenues increased by $5.2 billion, or 23.4 per cent, in 2003–04, following two consecutive years of decline. The increase in 2003–04 well exceeded the 10.0-per-cent growth in corporate profits. The much stronger growth in corporate income tax revenues compared to corporate profits is somewhat surprising, given the reduction in the federal tax rate from 25 per cent effective January 1, 2002 to 23 per cent effective January 1, 2003. In 2000 the tax rate was 28 per cent. The increase in corporate income tax revenues is in part attributable to the application of loss carry-forwards in 2002–03 due to the decline in profits in 2001, which reduced tax revenues in 2002–03, and strong growth in profits in the financial sector, in part reflecting valuation gains associated with the appreciation of the Canadian dollar.

Other taxes and duties were virtually unchanged from 2002–03, after recording a gain of $4.2 billion, or 11.4 per cent, in 2002–03.

• Goods and services tax (GST) revenues increased by $38 million, or 0.1 per cent, following a gain of $3.0 billion in 2002–03. Weakness in consumer expenditures, especially durable goods, and a decline in the Canadian-dollar value of imports, in part reflecting the appreciation of the Canadian dollar, restrained the growth in GST revenues in 2003–04. In addition, rebates were up, reflecting the March 2004 budget decision to provide a full rebate of GST and the federal portion of the harmonized sales tax (from 57.14 per cent to 100 per cent) paid by municipalities, effective February 1, 2004.

• Customs import duties declined $0.4 billion, or 11.9 per cent, primarily reflecting the impact of the appreciation in the value of the Canadian dollar.

• Energy taxes were virtually unchanged, while the impact of tobacco excise tax increases in 2002 accounted for most of the increase of $0.4 billion, or 7.9 per cent, in other excise taxes and duties. The Air Travellers Security Charge, which came into effect April 1, 2002, was down slightly, reflecting lower demand for air travel, in part due to the outbreak of SARS and the conflict in Iraq. The revenues from this charge are used to fund the new air security initiatives announced in the 2001 budget.

Employment insurance premium revenues declined $0.3 billion, or 1.8 per cent, as the reduction in premium rates more than offset the impact of the increase in the number of people employed and therefore paying premiums. The employee premium rate (per $100 of insurable earnings) was reduced from $2.20 for 2002 to $2.10 for 2003 and $1.98 for 2004 (with a corresponding decline in the employer rate).

Other revenues consist of net gains/losses from Crown corporations such as the Bank of Canada, Export Development Canada and Canada Mortgage and Housing Corporation; foreign exchange revenues; and other revenues, primarily from the sale of goods and services. Other revenues were up $0.4 billion, or 3.9 per cent, primarily reflecting higher profits from Crown corporations (up $1.0 billion) and other revenues (up $0.8 billion). In contrast, foreign exchange revenues were down $1.3 billion due to the appreciation in the value of the Canadian dollar, as the assets in the Exchange Fund Account are denominated in foreign currencies.

The revenue ratio—budgetary revenues as a percentage of GDP—represents an approximate measure of the overall federal "tax burden" in that it compares the total of all federal revenues collected to the size of the economy. The revenue ratio stood at 15.3 per cent in 2003–04, down slightly from 2002–03. A significant decline had been expected, suggesting that the tax yield was higher than assumed at the time of the March 2004 budget.

It should be noted that some components of income subject to taxation are excluded from the Statistics Canada measure of GDP, such as capital gains and income from trusteed pension plans. As a result, this ratio overstates the effective tax burden. In addition, the nominal income estimates are subject to annual revision by Statistics Canada, which has resulted in changes in this ratio once revised data are incorporated. Therefore, caution should be exercised in interpreting this ratio.

The figures in Table 2 are presented on a "net" basis, reflecting the way in which revenues and expenses are presented to Parliament in the Government’s annual budget. As a result, the Canada Child Tax Benefit is netted against personal income tax revenues. Departmental revenues that are levied for specific services, such as the contract costs of policing services in provinces, are netted against expenses, as such revenues are credited to the department in accordance with parliamentary authority. Expenses of consolidated Crown corporations in excess of their appropriations are netted against their total revenues. This classification has the effect of reducing both revenues and expenses but has no impact on the budgetary balance. Table 3 shows the impact of "grossing up" budgetary revenues for these adjustments. In 2003–04, they amounted to $12.3 billion, virtually unchanged from the previous fiscal year. The largest component is the Canada Child Tax Benefit, amounting to $8.1 billion in 2003–04, up 3.1 per cent from 2002–03. As a result, gross budgetary revenues were $198.5 billion in 2003–04, up 4.4 per cent from 2002–03.

Table 3
Reconciliation Between Net and Gross Budgetary Revenues

Total Expenses

Total expenses consist of two components—public debt charges and program expenses. In 2003–04 total expenses amounted to $177.1 billion, up $6.3 billion, or 3.7 per cent, from 2002–03 (see Table 4). Public debt charges declined by $1.5 billion, or 4.0 per cent, while program expenses advanced $7.8 billion, or 5.8 per cent. Program expenses were $2.0 billion lower than estimated in the 2004 budget. This underestimation is considerably lower than in each of the two previous fiscal years.

The expense ratio—total expenses as a percentage of budgetary revenues—stood at 95.1 per cent in 2003–04, down a full percentage point from 2002–03. In 1993–94 the expense ratio stood at 133.2 per cent. This meant that revenues were insufficient to cover total expenses and the Government incurred a deficit.

Public debt charges declined by $1.5 billion, or 4.0 per cent, to $35.8 billion in 2003–04, primarily attributable to a decline in the average effective interest rates on interest-bearing debt.

• The average effective interest rate on the Government’s interest-bearing debt (unmatured debt and pension liabilities) was 5.8 per cent in 2003–04, compared to 6.0 per cent in 2002–03. The average effective interest rate was 5.3 per cent on unmatured debt, compared to 5.7 per cent in 2002–03. In contrast, the average effective interest rate was 6.8 per cent on pension and other accounts, unchanged from 2002–03.

• The stock of total interest-bearing debt increased by $0.4 billion, from $620.7 billion in 2002–03 to $621.1 billion in 2003–04. The stock of market debt declined by $2.2 billion to $440.2 billion, while liabilities to pension and other accounts increased by $2.6 billion to $180.9 billion.

The interest ratio—public debt charges as a percentage of budgetary revenues—declined from 21.0 per cent in 2002–03 to 19.2 per cent in 2003–04. This ratio means that, in 2003–04, the Government spent just over 19 cents of every revenue dollar on interest on the public debt. This is down from the peak of about 39 cents in 1990–91 and is the lowest this ratio has been since the late 1970s. This is money that must be paid to meet the Government’s ongoing obligations on its debt. The lower the ratio, the more flexibility the Government has to address the key priorities of Canadians.

Table 4
Total Expenses

Program expenses amounted to $141.4 billion in 2003–04, an increase of $7.8 billion, or 5.8 per cent, from 2002–03. Increases were recorded in all major components with the exception of major transfers to other levels of government. The decline in this component is attributable to the inclusion of larger one-time payments to provinces and territories for health care in 2002–03 than in 2003–04 and lower equalization entitlements due to prior-year adjustments. The increases in the other components primarily reflect the impact of previous budget measures as well as one-time adjustments that lowered expenses in 2002–03.

Major transfer payments to persons increased by $1.8 billion, or 4.4 per cent.

• Elderly benefits consist of Old Age Security, Guaranteed Income Supplement and Allowance payments. Total benefits were up $1.2 billion, or 4.7 per cent, in 2003–04, reflecting both higher average benefits, which are indexed to inflation, and an increase in the number of recipients.

• Employment insurance benefits consist of regular benefits, special benefits (sickness, maternity, paternity, adoption and fishing) and labour market adjustment benefits. Total benefits increased by $0.6 billion in 2003–04, reflecting both an increase in the number of beneficiaries and an increase in average weekly benefits. The increase in benefit payments was about equally split between regular benefit payments and special benefits, in particular the increase in parental benefits.

Major transfer payments to other levels of government include the Canada Health and Social Transfer (CHST), fiscal arrangements (equalization, transfers to the territories, as well as a number of smaller transfer programs) and Alternative Payments for Standing Programs. Transfers declined by $1.3 billion, or 4.1 per cent, in 2003–04, following an increase of $4.0 billion in 2002–03, or 15.1 per cent. This decline is attributable to lower one-time special transfers for health care and lower equalization entitlements due to prior-year adjustments.

• The CHST—a block-funded transfer—supports health care, post-secondary education, social assistance and social services, including early childhood development. It provides support in the form of cash and tax transfers to the provinces and territories. As part of the September 2000 and February 2003 health accords, the federal government legislated an incremental $1.7 billion to be paid in 2003–04. However, one-time transfers in 2003–04 were less than in 2002–03. In 2002–03, an incremental $2.5 billion was transferred in the form of a special supplement and an additional $1.5-billion investment was provided to the Diagnostic/Medical Equipment Fund to be used by the provinces and territories in support of specialized staff training and equipment, to improve access to publicly funded diagnostic services. In 2003–04, an incremental $2.0 billion was transferred in the form of a special supplement and $0.4 billion to support a national immunization strategy and to assist provinces and territories in enhancing their public health capacities.

• Total entitlements under fiscal arrangements decreased by $1.0 billion to $9.4 billion, primarily reflecting lower equalization entitlements. Under the equalization program, the federal government transfers funds to the less prosperous provinces so that they can provide their residents with public services reasonably comparable to those in other provinces without having to resort to higher-than-average taxation. The decline in equalization entitlements reflects stronger-than-expected economic growth in 2002 in the equalization-receiving provinces relative to the non-equalization-receiving provinces and, hence, a convergence in the estimated provincial fiscal capacity of the equalization-receiving provinces relative to the equalization standard. This has been carried forward into 2003–04. The decline in 2003–04 is primarily attributable to the recording of a receivable for recoveries related to the overpayments in 2002–03.

• The Alternative Payments for Standing Programs represent recoveries of federal tax point abatements under contracting-out arrangements. These arrangements allow provinces to assume the administrative and financial authority for certain federal-provincial programs. In turn, the federal government provides provinces with tax points, the value of which are netted against total entitlements and accordingly recovered from cash transfers. These recoveries reflect the growth in the value of the tax points.

Subsidies and other transfers advanced by $3.0 billion, or 14.9 per cent (see Table 5). About half of this increase ($1.4 billion) is attributable to special assistance to the Canadian cattle industry following the discovery in May 2003 of a case of BSE and the resulting closure of export markets to Canadian beef and cattle. An additional $330 million was provided to the province of Ontario in recognition of its extraordinary effort to protect public health during the SARS outbreak. Most of the remaining increase in this component is attributable to previous budget measures. These include a commitment to increase Canada’s international assistance by 8 per cent per year; the establishment of the Primary Health Care Transition Fund as part of the September 2000 health accord; increased assistance to students; increased funding to the granting councils (Canadian Institutes of Health Research, Natural Sciences and Engineering Research Council [NSERC] and Social Sciences and Humanities Research Council [SSHRC]); and endowments of $250 million to Sustainable Development Technology Canada and $85 million to the Canadian Council on Learning.

Table 5
Subsidies and Other Transfers

Other program expenses—total program expenses less transfers—consist of expenses related to Crown corporations, and operating expenses of departments and agencies, including National Defence. These expenses amounted to $47.0 billion in 2003–04, up $4.3 billion, or 10.0 per cent, from 2002–03. Part of this increase is attributable to special adjustments which lowered expenses in 2002–03 and were not repeated in 2003–04. Within this component:

• Expenses related to Crown corporations increased $0.4 billion to $5.4 billion in 2003–04. This component includes appropriations to consolidated Crown corporations (those Crown corporations that rely on government funding as their principal source of revenue).

• Defence expenses increased $1.1 billion, or 9.9 per cent, primarily reflecting incremental funding of $800 million provided in the 2003 budget to strengthen Canada’s military. Incremental funding was also provided for mission costs to support Canada’s international commitments.

• All other departmental and agency expenses increased by $2.8 billion, or 10.5 per cent, following a slight decline in 2002–03 due to downward adjustments to allowances for loans and other liabilities.

The program share—program expenses as a percentage of budgetary revenues—amounted to 75.9 per cent in 2003–04, up slightly from 75.1 per cent in 2002–03. In 1993–94 the program share was 98.6 per cent.

The above numbers are presented on a "net" basis, as discussed in the previous section, "Budgetary Revenues." Gross expenses are $12.3 billion higher than net expenses, as shown in Table 6.

Table 6
Reconciliation Between Net and Gross Expenses

The Budgetary Balance, Financial Source/Requirement and Debt

The budgetary balance is the most comprehensive measure of the federal government’s fiscal results. It is presented on a full accrual basis of accounting, recording government liabilities when they are incurred, regardless of when the cash payment is made, and recording tax revenues when earned, regardless of when the cash is received.

In contrast, the financial source/requirement measures the difference between cash coming in to the Government and cash going out. It differs from the budgetary balance in that it includes cash transactions in loans, investments and advances, federal employees’ pension accounts, other specified purpose accounts, foreign exchange activities, and changes in other financial assets, liabilities and non-financial assets. These activities are included as part of non-budgetary transactions. The conversion from full accrual to cash accounting is also reflected in non-budgetary transactions.

As shown in Table 7, non-budgetary transactions in 2003–04 resulted in a net requirement of funds amounting to $2.8 billion, compared to a source of $0.6 billion in 2002–03. This decline reflects increased requirements for other investing activities, primarily for increased borrowings related to the Canada Student Loans Program, and for accounts payable, receivable, accruals and allowances.

With a budgetary surplus of $9.1 billion and a net requirement from non-budgetary transactions of $2.8 billion, there was a financial source of $6.2 billion in 2003–04, compared to a source of $7.6 billion in 2002–03.

With this financial source, the Government retired $2.2 billion of its market debt and increased its cash balances by $4.1 billion. Cash balances at March 31, 2004, stood at $20.5 billion.

Total liabilities consist of interest-bearing debt and other liabilities. Interest-bearing debt includes market debt and liabilities for pension and other accounts. At March 31, 2004, interest-bearing debt amounted to $621.1 billion, up $0.4 billion from a year earlier (see Table 8). Other liabilities, which include accounts payable and accrued liabilities, amounted to $80.0 billion, up $0.6 billion from 2002–03. As a result, total liabilities at March 31, 2004, stood at $701.1 billion, up $1 billion from the previous year.

Financial assets consist of cash and accounts receivable, including tax receivables, foreign exchange accounts and loans, investments and advances. Financial assets totalled $144.8 billion at March 31, 2004, up $9.5 billion from March 31, 2003. Increases were recorded in cash and accounts receivable (up $8.3 billion) and in loans, investments and advances (up $5.8 billion), while net assets in foreign exchange accounts declined by $4.6 billion. The latter primarily reflects a decline in foreign currency borrowings. As a result, net debt stood at $556.3 billion at March 31, 2004, down $8.5 billion from March 31, 2003, and $52.7 billion below the peak of $609 billion at March 31, 1997. As a per cent of GDP, net debt dropped to 45.6 per cent in 2003–04, down 28.2 percentage points from its peak of 73.9 per cent in 1995–96. This is the eighth consecutive year in which the net debt-to-GDP ratio has declined.

Non-financial assets, consisting of tangible capital assets, inventories and prepaid expenses, amounted to $54.8 billion at March 31, 2004, up $0.6 billion from March 31, 2003.

Table 7
Budgetary Balance, Financial Source/Requirement and Net Financing Activities

With total liabilities of $701.1 billion, financial assets of $144.8 billion and non-financial assets of $54.8 billion, the federal debt (accumulated deficit) stood at $501.5 billion at March 31, 2004, down a total of $9.1 billion from 2002–03 and $61.4 billion from its peak in 1996–97. All of the decline in federal debt between 2002–03 and 2003–04 is attributable to the increase in financial assets.

Foreign holdings of the Government of Canada’s outstanding market debt are estimated at $60.0 billion at the end of March 2004, representing 13.6 per cent of the Government’s total market debt.

Table 8
Outstanding Debt at Year-End

Comparison of Actual Budgetary Outcomes to Budget Estimates

This section compares the actual outcome for the major components of the budgetary balance for 2003–04 to the estimates presented in the March 2004 budget. The Government targeted a balanced budget or better for 2003–04 in the March 2004 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 federal debt.

• Adding an extra degree of economic prudence to provide further assurance against falling back into deficit. As is normal practice, no additional prudence was added in the March 2004 budget for 2003–04, given that the fiscal year was nearly over.

After accounting for the fiscal impact of the new spending initiatives, the March 2004 budget estimated a surplus of $1.9 billion for 2003–04. This amount was allocated to the Contingency Reserve. The final audited budgetary surplus for 2003–04 was $9.1 billion.

Most of this improvement is attributable to higher budgetary revenues, up $5.1 billion from that estimated in the March 2004 budget. The higher revenues primarily relate to stronger-than-expected economic performance in the final quarter of the 2003–04 fiscal year and a higher-than-estimated tax yield from that expected at the time of the March 2004 budget.

Information received after the March 2004 budget indicated that tax liabilities with respect to the 2003 taxation year were higher than expected and that income growth in the final quarter of 2003–04 was stronger than forecast at the time of the March 2004 budget. Personal income tax revenues were $1.4 billion higher, attributable to higher-than-expected taxes paid on filing in April 2004 with respect to the 2003 taxation year. Corporate income tax revenues were $1.5 billion higher, reflecting higher settlement payments with respect to the 2003 taxation year. Corporations with a December 31 taxation year-end have 60 days to remit any taxes owing with respect to the taxation year. The stronger growth in corporate income tax revenues (up 23.4 per cent over the previous year) was surprising, given the growth in corporate profits in 2003 (up 10 per cent) and the 2-percentage-point reduction in the corporate tax rate in 2003. Excise taxes and duties were up $0.6 billion, primarily attributable to stronger GST receipts at year-end. Employment insurance premium revenues were up $0.4 billion, reflecting stronger employment gains in the final quarter of 2003–04. Higher net gains from Crown corporations explain most of the $1.3-billion increase in other revenues. The final outcome for 2003–04 indicates that the revenue yield was higher than expected at the time of the March 2004 budget, and this should carry forward into future years.

Program expenses were $2.0 billion lower than estimated in the March 2004 budget. This is considerably lower than the differences reported in each of the previous two fiscal years. Employment insurance benefits were $0.4 billion lower than expected, reflecting stronger employment gains in the final quarter of 2003–04, while elderly benefits were $0.1 billion lower. Major transfers to other levels of government were $0.3 billion higher than expected due to a lower estimated value of receivables relating to the equalization recoveries. The lower outcome for direct program expenses primarily relates to higher-than-expected lapses, in part due to the year-end freeze on discretionary spending and delays in implementing some of the previous budget initiatives.

Public debt charges were unchanged.

Table 9
Comparison of Actual Outcomes to March 2004 Budget

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