Our Take:

A better-than-expected bottom line in fiscal year 2016/17, as released by the Department of Finance this morning, alongside surprisingly strong economic growth in Canada suggests there is scope for the government to beat its target again in the current 2017/18 fiscal year. The posted shortfall of $17.8 billion in 2016/17 came in well below the earlier budget estimate of $23.0 billion and was led by modestly lower expenditure growth and a smaller dip in total revenues than had been projected in the budget.

Over the twelve months ending March 2017, the government was on track to post a deficit of nearly $22 billion for the 2016/17 fiscal year. The inclusion of final year revenue and expenditure adjustments (commonly referred to as the 13th month) can swing the final balance in either direction. In the event, these adjustments this year saw the overall figure improve to below $18 billion, providing upside risk for a better-than-expected outcome in 2017/18 and possibly throughout the projection period should this realized improvement be carried forward into the coming years.

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The potential for a $5 billion ‘cushion’ to reduce the projected $28.5 billion shortfall in 2017/18 is further enhanced by the surprisingly robust economic growth environment. Canadian economic growth in 2017 is surpassing earlier growth estimates, those which underpinned the fiscal projections in the March budget. RBC’s forecast for 2017 nominal GDP growth, the broadest indicator of the tax base, is 5.5% and well above the consensus estimate of 4.1% back in the spring. This alone implies an overall $6 billion lift to the government’s bottom line in 2017/18. The inclusion of a $3 billion adjustment for risk provides a further boost as this is unlikely to be needed given the current growth environment. All in, there is scope for the 2017/18 budget shortfall to come in below $15 billion. Whether or not this materializes remains to be seen, however, with the government potentially opting to broadly maintain the current deficit profile and boost expenditures. They have scope to do this so long as they maintain their commitment to seeing the revised fiscal anchor—the debt to GDP measure— decline modestly through the projection period relative to the lower starting point for fiscal 2016/17 of 31.2% (was 31.5%).


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