MAKING GOVERNMENT BUDGET AND FINANCIAL PLANNING MORE UNDERSTANDABLE: THE TRIUMPH OF OPTIMISM OVER EXPERIENCE
Once again we have entered the pre-budget speculation period.
The media and pundits will be busy over the next several weeks speculating about what the Minister of Finance will do in his budget. Will the government be able to eliminate the deficit in 2015-16, without more spending cuts? How will the government respond in the budget to the uncertainty created by the short- and long-term fiscal crisis in the U.S., the on-going uncertainty over the recession in the EU and the continuing uncertainty over the future of the EURO area? How will the government respond to slowing economic growth and stubbornly high unemployment in Canada? Will the government address the growing fiscal divide between the federal and provincial governments? Will the government continue to abdicate leadership in key policy issues of health care, pension reform, education, and modernizing Canada’s infrastructure?
These are only some of the important policy questions the government must address. But there are some other important questions about the budget that the media and pundits should take the time to understand. What can the government do to improve the transparency and accountability of the budget process; the effectiveness of Parliament in reviewing the budget and government spending; and, the understanding of Canadians, as to what the government is actually doing in its budget and financial planning?
The Parliamentary Budget Officer (PBO), the Auditor General, Standing Committees of Parliament, and other experts have been addressing these questions for some time. They have been urging the government to reform the budget planning process so that Canadians could better understand the government’s budgets and their financial implications. The government has steadfastly refused to consider any of their recommendations. It would appear that the government does not want greater accountability, transparency or understanding.
Notwithstanding this reluctance, here are our suggestions to the government on how to improve budget and financial planning.
Fix the Timing of the Budget
For a Budget to be relevant, it should be presented before the beginning of the fiscal year (i.e., before April 1st). It should not be tabled two or three months after the start of the fiscal year, unless the House of Commons is not sitting.
In addition, the Budget should be tabled before the Main Estimates. Under current “supply” rules, Main Estimates for the upcoming fiscal year must be referred to the standing committees before March 1st. Otherwise, separate Appropriation Bills are required for each spending request.
The Budget, however, should provide the economic and fiscal assumptions for the Main Estimates in order for the Main Estimates to be relevant. This implies that the Budget should be tabled in late January or in early- to mid-February in order to give the Treasury Board Secretariat time to make the Main Estimates consistent with those presented in the Budget.
Provide a Reconciliation of the Budget and Main Estimates Spending Estimates
No one in Parliament or in government can tell you what the government is actually planning to spend. If you were to ask the Minister of Finance, who is responsible for the budget, and the President of the Treasury Board, who is responsible for the Main Estimates, you would get two different answers. They have no idea what government spending will actually be.
In previous blogs, we have detailed the differences in concepts and coverage between Budget expenses and Main Estimates spending. Budget expenses are on an accrual basis of accounting while the Main Estimates are on a cash basis. The Auditor General of Canada has raised this issue on numerous occasions. The Standing Committees of the Public Accounts and on Government Operations and Estimates have also recommended that the “Office of the Comptroller General complete its study of accrual-based budgeting and appropriations and report back by March 31, 2013 its recommendations on whether the Government of Canada should pursue accrual-based budgeting in departments and accrual-based appropriations in in its financial reporting system” .
Pending resolution of the accrual issue, there is no reason why the Main Estimates cannot be made more compatible to the Budget, by eliminating other differences. The Main Estimates exclude a number of spending components included in the Budget. For example, refundable tax credits such as the Canada Child Tax Benefit, the Working Income Tax Benefit, the Scientific Research and Experiment Development Tax Credit, among others, are classified as expenses in the Budget, but are not included as spending in the Main Estimates.
In addition the Budge forecast of expenses are presented on a gross basis. This means that all revenues received from parties outside the government are included as part of budgetary revenues. This is not the case of the Main Estimates where some revenues are netted against related spending. For example, the Royal Canadian Mounted Police provide policing services to a number of provinces. Charges for these services are netted against spending in the Main Estimate, but classified as part of “other revenues” in the Budget.
The latter two accounting differences explain about $30 billion of the difference between the Budget estimates of expenses and those in the Main Estimates. They also mean that the appropriate Standing Committees are unable to review a large part of government spending.
There is no reason why the Main Estimates of government spending cannot be on the same basis as the Budget estimates of expenses.
New spending initiatives proposed in the Budget are not incorporated in the Main Estimates until the Treasury Board has officially approved them. Usually, these initiatives will be included in the Supplementary Estimates, tabled during the course of the fiscal year. This is legitimate, so there will always be some difference between the Budget and the Main Estimates.
However, this argues for a detailed reconciliation of any difference between the Budget and the Main Estimates in the Main Estimates.. The last time such reconciliation was provided was in the March 19, 2007 Budget.
Provide Consistency in Accounting Standards Among the Government Financial Publications
The government publishes a number of important documents providing financial information on government operations. These include the information presented in the Budget, the monthly Fiscal Monitor, the Annual Financial Report and the Public Accounts of Canada. One might hope that the information in these documents would be consistent, comparable, and understandable. Unfortunately this is not the case. There are many differences in how the information is calculated and provided.
The Public Accounts of Canada and the Annual Financial Report include the recoveries under the Youth Allowance Program and the federal tax abated under the Alternative Payments for Standing Programs as part of the Quebec Abatement since 2010-11. However, the Budget and Fiscal Monitor include the recoveries under the Youth Allowance Program as part of Fiscal Transfers.
Up until the March 2012 Budget the Canada Health Transfer and Canada Social Transfer were combined under “Federal transfers in support of health and other programs”, whereas the Canada Health Transfer and Canada Social Transfer are shown separately in the Fiscal Monitor and the Public Accounts of Canada.
The Budget breaks out direct program expenses into “Operating expenses subject to freeze”; “Other operating expenses” “transfers payments” and “ capital amortization”. The other publications, on the other hand, break out direct program expenses into “transfer payments” and “other direct program expenses for Crown corporations”, “National Defence” and “All other departments and agencies”.
The financial information in these various documents should be on the same basis of accounting and coverage in order to be understandable and credible. There is no reason for these differences.
Use the Department of Finance’s Economic Projections for Budget Planning
Since 1995, budget planning has been based on the average of the private sector economic forecasts for a few selective major aggregate. This has been justified by a recommendation in an Ernst & Young study on the federal economic and fiscal forecasting record. In the Ernst & Young study, the Department of Finance consistently was ranked as one of the top economic forecasters. The recommendation stated that the government should compare its economic forecast to those of the private sector economists. It did not recommend that the government explicitly adopt the average of private sector forecasts.
The Department of Finance has the largest group of professionals analyzing current economic developments, both in Canada and in its major trading partners. It has the most comprehensive econometric model to forecast economic developments, over both the short and long term, among any of the private sector economists surveyed.
Currently, the Department of Finance only using the major aggregates of economic activity – real and nominal gross domestic product (GDP), short and long-term interest rates, etc. However, it is the components of nominal GDP that determine forecasts of the major components of budgetary revenues. These are determined by the Department of Finance, not the private sector economists. Changes in these components can have major impacts on the overall forecast of budgetary revenues. In addition, only a few forecasts provide projections of medium term economic forecasts, resulting a break and potential bias between the short and medium-term projections.
The Department of Finance economic forecasts should be compared to those in the private sector. The Department of Finance should also provide details of its economic forecasts, rather than just the major aggregates. This would allow for a more comprehensive assessment of the forecasts.
Include A More Realistic “Adjustment to Risk” in the Budget Fiscal Forecast
For the last few budgets, the Minister of Finance has included an “adjustment for risk”, in order to ensure that the annual fiscal targets are met. However, after year one of the Budget Plan, this adjustment has remained constant over the remaining years of the Plan. We feel that this adjustment should increase over time, in order to better reflect the greater degree of uncertainty in the economic and fiscal projections in the outer years of the forecast. The government does not want to do this because if it did the year of deficit elimination would be pushed farther out in the future.
In addition, we feel that such an adjustment should not be explicitly incorporated and “buried” in the revenue forecasts, but rather it should be shown as a separate line item in the calculation of the budgetary balance.
Prior to 2006, budgets and budget updates explicitly presented the amount of the adjustment for risk (Contingency Reserve and Economic Prudence) as separate line items. This was done upon the advice of the private sector economists. We would strongly encourage the Minister to once again show the risk adjustments and not bury them in revenues.
Provide Greater Transparency and Accountability
For years, we have been urging the government to be more transparent in its budget planning. After all, the government promised greater transparency and accountability in its Federal Accountability Act. Unfortunately, this has not turned out to be the case.
The government has consistently refused requests by the Parliamentary Budget Officer for data. Only recently did the Department of Finance release a study on the long-term sustainability of federal government finances – a study that had been promised in 2007. And it did so only after the Auditor General of Canada brought this issue to light.However, it only released information relating to the federal government, even though it promised in 2007 to present analyses on the total government sector. The Auditor General has also recommended that the federal government provided long-term sustainability analyses for the total government sector. The International Monetary Fund in its November 2012 report to the Minister also recommended that the Department of Finance publish sustainability analysis for the total government sector. To date, the Minister has refused to do so. The government seems more intent with not providing the public with information, rather than engaging Canadians in discussion on critical policy issues.
Stop Trowing Parliament under the Budget “Omnibus”
The government appears intent on including everything but the “kitchen sink” in its budget bills. References to many of these policy initiatives have been very vague, if not non-existent, thereby allowing the government to escape the scrutiny of Parliamentarians. Little information is provided in the Budget, so it has become impossible in reading the budget documents to fully understand what the government is actually proposing to do. In addition, by including many major policy initiatives, it precludes substantive policy reviews by the appropriate Parliamentary Committee and by Parliament itself.
The use of Budget Omnibus Bills has grown to the point that they seriously undermine the credibility of the budget process and the authority of Parliament. There is a clear lack of transparency and accountability. There is an urgent need to restore the role of Parliament and its committees in assessing, reviewing and approving proposed legislation. Without sufficient information and clear intention of the proposed initiatives, Parliament and its Committees cannot properly assess the budget. Parliamentary debate is stifled, public involvement ignored and the implementation of good public policy prevented.
The budget needs to be much more explicit on the proposed policy initiatives, providing sufficient details and background information on the proposed initiatives for Parliamentary assessment and for a better understanding by the public at large. Budget Omnibus Bills should be restricted to proposed tax changes only and all proposed spending initiatives should be presented either through the Main Estimates or through separate legislation, submitted to the applicable Parliamentary Committee for review.
Save The Parliamentary Budget Office
Given the lack of transparency by the current Government, the Parliamentary Budget Officer (PBO) has proved to be a credible resource to Parliament and Canadians. The term of the current PBO expires in March 2013. The appointment of the next PBO will need to be someone who understands the budgetary and estimates processes and is willing to stand up to his/her major critics – the Government.
In the 2006 election campaign, the Conservatives promised an independent office, reporting to Parliament with virtually full access to all relevant information. The government has consistently opposed this; the legislation creating the PBO fell far short of that commitment. It is time that the 2006 election commitment is honoured and that the PBO become an officer of Parliament.