Who Knows What The Government Is Spending?
There has been a great deal of speculation as to why federal spending in the last fiscal year (2012-13) was so much lower than expected. The Minister of Finance stated that it was due to the Government’s “tight control over spending”. But this claim of good expenditure management is not credible. The reality is that Minister Flaherty has been “overstating” his forecast of government spending for some time.
There are two measures of the extent of under spending in 2012-13, which makes it confusing to understand what is happening. Direct program expenses were $4.9 billion lower than forecast in the March 2013 Budget. This is the number quoted by the Minister of Finance. However, according to the President of the Treasury Board, departments and agencies spent $10.1 billion less than what they were authorized to spend by Parliament. How can this difference be reconciled?
First, let’s try and understand what is happening with spending in government departments. To do this, we need to understand what is referred to as a “lapse” in spending. The lapse for 2012-13 was over $10 billion, the number referred to above by Minister Clement.
Government departments and agencies are “appropriated” funds annually by Parliament through the Main and Supplementary Estimates process. The difference between what they were appropriated and what they actually spent is known as the “lapse”. In other words the “lapse” is what departments have the authority to spend but don’t.
There are many reasons why departments and agencies don’t spend their total appropriations. First, departments and agencies cannot exceed their appropriations, or spending limits, otherwise penalties will be imposed on their future year’s appropriations. Since they cannot exceed their appropriations, they tend to act cautiously and inevitably end up spending less. That’s just prudent financial management.
Second, Treasury Board guidelines allow departments and agencies to carry forward a certain portion of their current year’s appropriations into the following fiscal year. This is also good expenditure management as it avoids a run up in spending at the end of the year. Some of what is not spent this year can be spent next year. However, it contributes to the lapse in the current year.
A third reason for a lapse is that initial estimates of a new program’s take up and its costs could have been grossly over-estimated for a number of reasons. There may have been a lack of relative information to forecast the cost of the new program. The original amounts appropriated may have overestimated the actual take up, given the terms and conditions of the programs. There may be delays in signing contracts, and in the starting of projects from what was originally anticipated. In addition, there could have been delays due to labour disputes and weather conditions, among others. There may also have been a desire to show a large spending number to give credibility to the program when it was first announced.
Finally, appropriations granted during the year are rarely, if ever, adjusted downwards. For example, the spending restraint measures announced in the March 2012 Budget were never reflected in the 2012-13 appropriations. Instead, the Treasury Board simply “froze” those allotments in the departments/agencies approved reference levels, denying them access to those funds. As a result, the Treasury Board’s initial appropriations did not represent an accurate accounting of how much departments and agencies were actually allowed to spend. The Parliamentary Budget Officer (PBO) has requested this information from the Government, with little success to date, and with little likelihood that it will ever be forthcoming.
The Public Accounts of Canada shows a comparison of the appropriations approved by Parliament during the course of the fiscal year to actual spending for each department and agency, and the resulting lapse. Over the period 2003-04 to 2008-09, the lapse averaged about $6 billion per year. However, over the period 2009-10 to 2012-13, it increased significantly, averaging about $10 billion per year.
This increase in the lapse should not come as a surprise. During this period, the Government significantly increased spending, primarily through temporary stimulus measures announced as part of their Economic Action Plan. Much of the increase in the lapse can be associated with delays in signing contracts and starting infrastructure projects as originally envisaged. For example, the various infrastructure programs administrated by the Office of Infrastructure Canada lapsed nearly $3 billion in 2010-11, nearly $1.8 billion in 2011-12 and nearly $1.6 billion in 2012-13. With the ending of the stimulus programs, the lapse should be lower in future years.
In examining the lapse for 2012-13, five departments were responsible for $7.4 billion of the $10.1 billion lapse, or nearly 75%. These were: Foreign Affairs and International Trade (lapse of $0.8 billion), National Defence ($1.5 billion), Public Safety and Emergency Preparedness ($1.4 billion), Transport ($2.5 billion) and Treasury Board ($1.2 billion).
Within Foreign Affairs and International Affairs, appropriations for grants and contributions for the department and the Canadian International Development Agency lapsed by $0.4 billion, about double the amount in previous years. Most of the lapse within National Defence was due to lower operating spending, which amounted to over $1 billion. Within Public Safety and Emergency Preparedness, the lapse was concentrated in Correctional Service of Canada and the RCMP. Within Transport, large lapses were recorded in Transport’s grants and contributions, especially for the Gateway and Border Crossing Fund and in the Office of Infrastructure Canada.
Finally, the Treasury Board’s appropriations include a $750 million Contingency Reserve, to manage contingencies during the course of the year prior to receiving official approval from Parliament. Once that approval is received, the fund is reimbursed. As such, this fund is expected to lapse totally at the end of the year. In addition, amounts approved for employee benefits and capital carry forwards were not required.
More complete explanations for why these, as well as the other departments and agencies, lapsed funds in 2012-13 should be readily available from the departments and agencies.
Since the President of the Treasury Board tables the Estimates on behalf of the departments and agencies and is responsible for the overall management of government spending, he should be in a position to provide a detailed and credible explanation as to the difference between what was approved by Parliament and what was actually spent by the individual departments and agencies.
So far he has refused to do so. Most recently, he was unwilling to provide reasons as to why $3.1 billion of funds, identified by the Auditor General of Canada, allocated to public security and anti-terrorism initiatives, was not spent.
Recently, the President of the Treasury Board tabled Supplementary Estimates (B) for 2013-14, requesting an additional $5.4 billion. The PBO suggested that since the Government lapsed $10.1 billion in 2012-13, Parliamentarians should seek clarification as to why departments and agencies under spent by this amount and whether, given this, all of the $5.4 billion in Supplementary Estimates (B) is actually required. Committees reviewing Supplementary Estimates (B) should seriously consider the PBO’s recommendation.
However, explanations regarding the lapse, although necessary, will not explain why the Minister of Finance was so far off in forecasting direct program expenses in 2012-13. There are major classification and accounting differences between the Estimates tabled by the President of the Treasury Board and the direct program expense forecasts in the Minister of Finance’s budgets and updates. Since the 2007 Budget, the Government has not provided a reconciliation of these differences. We have raised this lack of accountability between the Estimates and the budget/update on numerous occasions, with no response from the Government.
In the March 2013 Budget and again in the November 2013 Update of Economic and Fiscal Projections, the Minister of Finance attempted to attribute the lapse as the reason for the errors in his forecasts. This would suggest that a detailed reconciliation of the differences between the lapse and direct program expenses has been done.
However, the Estimates lapse does not explain fully why he was so far off.
To do so would require the Minister of Finance to provide details of his direct program expense forecast and a reconciliation of his forecasts to those of the President of the Treasury Board. He has been unwilling to provide a reconciliation.
There are two possible explanations. First, it appears that the Department of Finance does not use the spending Estimates to build up their forecast of direct program expenses. In recent years, the Estimates have been tabled before the budget. As a result, the Estimates are based on the economic projections in the previous Economic and Fiscal Update and not the budget. There are signification accounting and coverage differences between the Estimates and budget forecast of expenses. As such, there is no direct link between the Estimates and direct program expenses, with the result that important information in the Estimates is not reflected in the Department of Finance’s forecast of expenses...
The second possible explanation is that the Finance Minister is including additional “prudence” into his spending forecast to ensure that he can meet or better his deficit/surplus targets. This is a practice both he and the Prime Minister criticised the Liberal government for while in opposition. However, given the Government’s commitment to balance the budget in 2015-16, Minister Flaherty may feel that he needs this extra prudence to ensure that this commitment will be met. The political risks of not meeting this commitment are too large.
The budget forecast already includes an annual “risk adjustment factor” of $3 billion beginning in 2014-15. This is “buried” in the revenue forecast, reducing revenues and increasing the deficit/lowering the surplus by comparable amounts. Burying prudence was criticized in the past by private sector forecasters, financial commentators and the media. As we have argued in the past, the risks associated with economic and fiscal forecasting increase over time. Rather than hiding the prudence, it would be easy and indeed credible if Minister Flaherty simply increased his “risk adjustment factor” rather than hiding the extra prudence in his forecast of direct program expenses.