"TORIES CUT SPENDING BY $8 BILLION" WHAT IS REALLY GOING ON?
The Opposition and media claimed that the federal government “quietly”/”by stealth” cut program expenses by $8.0 billion in 2011-12. This was based on a table that appeared in Volume I of the Public Accounts of Canada 2012 that compared the final audited outcome for 2011-12 to the June 2011 Budget forecast of program expenses. In response, Minister Flaherty stated, “the numbers show the government is doing all it can to control spending”.
Neither claim is correct.
Most of the decline in program spending was reported in the November 2011 Economic and Fiscal Update. Contrary to Mr. Flaherty’s claim that the decline was due to better control of spending, it was in fact the result a consistent overestimate of direct program expenses in the budget.
The following table shows the evolution of the fiscal forecast by major component for 2011-12 from the June 2011 Budget to the final outcome released in the Public Accounts of Canada 2012.
Evoluation of Fiscal Forecast for 2011-12: $ billions
|June 2011||Nov 2011||March 2012||Public||Net||Final|
|Transfers to persons|
|Transfers to OLG (1)|
|Direct program expenses|
|Total program expenses||248.4||-5.4||-1.2||-1.5||-8.0||240.4|
|Public debt charges||33.0||-1.5||-0.5||0.1||-1.9||31.0|
Note: Totals may not add due to rounding.
1. Reclassification of the Youth Allowance Recovery from Fiscal arrangements to Alternative payments for standing programs explain most of the differences in these components at year end.
In the June 2011 Budget, the Government forecast a deficit of $32.3 billion. This forecast was reduced by $1.3 billion to a deficit of $31.0 billion in the November 2011 Update of Economic and Fiscal Projections and by a further $6.1 billion to a deficit of $24.9 billion in the March 2012 Budget. The final deficit outcome was $26.2 billion, $1.4 billion higher than the March 2012 Budget forecast but $6.0 billion lower than June 2011 Budget deficit forecast.
Lower-than-expected program expenses ($8.0 billion) and public debt charges ($1.9 billion), partially dampened by lower budgetary revenues ($3.9 billion) explain the $6.0 billion improvement in the deficit since the June 2011 Budget.
What caught the attention of the Opposition and media was the $8.0 billion decline in program expenses. However, most of this decline occurred not at the end of the year but in the November 2011 Update of the Economic and Fiscal Projections. Program expenses were lowered by $5.4 billion in that Update, with all three major components contributing to the decline: major transfers to persons down $1.8 billion, primarily due to lower employment insurance benefits; major transfers to other levels of government, down $1.4 billion, primarily reflecting the recovery of the sales tax harmonization transitional payment from British Columbia; and direct program expenses, down $2.2 billion, due to lower other transfers. Program expenses were reduced by an additional $1.2 billion in the March 2012 Budget, primarily due to lower direct program expenses. The final outcome was $1.5 billion lower than forecast in the March 2012 Budget, with most of the decline again attributable to lower-than-projected direct program expenses.
In an earlier blog “Improving Budget Accountability and Transparency: The Government Needs to Explain the Deficit Outcome” www.3dpolicy.ca, October 2012, , which examined the Government’s fiscal forecasting record over the period 2006-07 to 2011-12, we argued that there is a bias in the forecasting of direct program expenses. This component of program expenses has been consistently over estimated in the budgets and updates, by the Department of Finance. Part of the reason, we believe, is due to lack of consistency and reconciliation between the Estimates, prepared by the Treasury Board and the forecast of direct program expenses, prepared by the Department of Finance.
The fact that program expenses, and in particular direct program expenses, were lower than expected should not have come as a surprise to anyone who follows federal financial affairs. Direct program expenses have consistently been over estimated. In 2011-12, most of the decline occurred at the time of the November 2011 Update. In addition, monitoring of the monthly financial results published in the Fiscal Monitor indicated that this component would come in lower than forecast. For the Opposition and media to claim surprise at the lower outcome demonstrates a lack of understanding.
For the Minister to claim that the lower outcome demonstrates control over spending is extremely misleading. Instead, it shows either incompetence in forecasting or inflating the forecast to ensure that the deficit will be lower than expected.