According to the Main Estimates, tabled by the President of the Treasury Board, on June 3^rd, along with Supplementary Estimates A, spending by the federal government for 2011-12 is forecast to be $252.8 billion representing a DECLINE of $14.1 billion from spending in 2010-11. But hang on a minute. Tthe Minister of Finance tabled a budget on June 6th which showed program expenses of  $281.4 billion in 2011-12, $28.6 billion higher than the forecast of his colleague the President of the Treasury Board. Moreover the Budget forecast an INCREASE of $9.7 billion over the previous year.

The reality is that Parliamentarians and Canadians in general are in the dark about what the Government is planning to spend this year. Even worse, the Government is making no effort to clear up the confusion and provide greater transparency and ultimately greater accountability.

Background

The spending estimates, which are tabled by the President of the Treasury Board on behalf of the Government, consist of the Main Estimates, tabled usually a month before  the upcoming fiscal year, and a number of Supplementary Estimates tabled during the course of that fiscal year. Supplementary Estimates include spending requirements included in the Budget which were not sufficiently developed in time for inclusion in the Main Estimates or have been subsequently refined to reflect current developments. 

The Estimates provide a breakdown by department and agency of proposed government spending for the upcoming fiscal year.  The Estimates contain both “statutory” spending – spending for which legislative authority already exists and as such are presented for information purposes only – and “voted” spending – spending for which Parliamentary approval is being sought through the Appropriation Acts.

Approximately 60 per cent of current government spending is statutory.  Therefore, for any one fiscal year, Parliament is only being asked to approve 40 per cent of total spending. Once tabled, the Appropriation Acts and applicable Estimates are referred to standing committees for review and approval before being debated and voted on by the House of Commons and the Senate. 

Under current House rules, Main Estimates must be tabled on or before March 1^st in order for the Government to receive interim supply (a spending authority) for the period from the beginning of the fiscal year to late June, when the Main Estimates are formally approved by Parliament.  This provides the applicable standing committees with sufficient time to consider the Main Estimates in detail and the Government funds to pay its bills.

The Parliamentary Budget Office (PBO) has recently begun to provide analytical notes on the Main and Supplementary Estimates to assist parliamentarians in their scrutiny of the government spending.  These notes primarily highlight the major changes in the Estimates from year-to-year.  The PBO has also recently created an “Integrated Monitoring Database” to allow legislators to identify non-routine variances in appropriations and spending[1].  This should assist parliamentarians and others in assessing departmental/agency monthly spending in relation to their appropriations.      

However, in order to properly assess government spending, it is important to understand the link between spending in the Estimates and expenses in the Budget. Unfortunately, this information is lacking in government documents and as a result no one really knows what the government expects to spend this year... This note examines the various issues and problems in attempting to do this link.   

Why is spending in the Estimates different from spending in the Budget?

The latest Budget should form the basis for the spending forecast contained in the Estimates. The Budget provides the economic and fiscal assumptions upon which the Estimates should be based. The Budget also contains the latest economic projections, to which many of the statutory programs are linked.  For example, the employment and unemployment forecasts are used to forecast employment insurance premium revenue and benefits.  The interest rate forecasts primarily affect public debt charges. The Government also sets out its policy priorities and new spending initiatives in the  budget, many of which ultimately come into effect through the Estimates process. 

The Budget has undergone many changes since the early 1980s to improve both accountability and transparency.  Over time, the Government has adopted generally accepted accounting principles for both the Budget and its audited financial statements are based on the standards issued by the Public Sector Accounting Board (PSAB) in Canada.  Unfortunately, these improvements were not mirrored by changes in the way spending in the Estimates is presented and this has made  comparisons to the Budget more and more difficult and the relationship between the two less relevant. The following sections highlight the major differences between the Budget and Estimates.

1. Timing is Everythiing

The Main Estimates must be tabled on or before March 1^st.  This implies that the Budget should be tabled prior to that date, allowing for sufficient time for the Treasury Board Secretariat (TBS) to reconcile the Budget expense projections for the upcoming fiscal year to the Main Estimates.  In the early 1980s, discussion papers released by the Department of Finance recommended that the Budget be tabled in early- to mid-February. This was the case until 2003  Beginning in 2004 the Main Estimates were tabled before the Budget in five of the six years – 2004, 2006, 2007, 2010, and 2011.  In all five years, however, it is difficult to justify why the Budget was not tabled in advance of the Main Estimates.

In years where the Main Estimates were tabled prior to the Budget, the Main Estimates were based on  the economic and fiscal assumptions in the last Economic and Fiscal Statement, which is usually released in the fall of the preceding year.  However, there are always changes in economic assumptions and spending forecasts between the Economic and Fiscal Statements and the most up-to-date Budget. For example, total expenses for 2011-12 were revised from $276.1 billion in the October 2010 Update to $278.7 billion in the March 22, 2011 Budget and to $281.4 billion in the June 6, 2011 Budget[2] - an increase  of $5.3 billion. 

The Main Estimates for 2011-12, which were first tabled on March 1, 2011, were based on the October 2010 Update.  The Main Estimates were re-tabled on June 3rd before the June 6th Budget.  They continued to be linked to October 2010 Update, although the Minister of Finance had tabled a budget on March 22, 2011.

Although the Minister of Finance saw fit to update his March 22, 2011 Budget expense projections in the June 2011 Budget, the Main Estimates for 2011-12 continued to be based on the out-of-date October 2010 Update, although it would not have been a major exercise to change the Main Estimates accordingly.  Furthermore, there is no reason (except political) that would have precluded the Main Estimates from being tabled shortly after the June 6, 2011 Budget. The spending estimates issued by the Treasury Board were misleading and completely useless. They were nonetheless approved by Parliament with little discussion.

Table 1 shows that most of the $5.3 billion difference between the October 2010 Update and the June 2011 Budget  related to the introduction of new policy initiatives and the re-profiling of Economic Action Plan spending on infrastructure.

In 2008, legislative changes to the Financial Administration Act no longer required the Government to seek Parliamentary approval for the borrowing of money.  However, the Government is required to table in Parliament, prior to the start of the fiscal year, a report on the anticipated borrowing to be undertaken in the year ahead.  To justify its anticipated borrowings, this report would require the latest budget projections on the deficit/surplus and financial requirements/sources.  This implies that the Budget would have to be tabled no later than March 31^st.  To date, these reports have been included as part of the budget documents, since the Budget has been tabled no later than March 22^nd, since these changes were introduced.  With this new deadline, it is difficult to understand why the Budget can not be tabled in February, in advance of the tabling of the Main Estimates.

 In our view, tabling the Budget after the Main Estimates undermines the usefulness and credibility of the spending forecasts in the Main Estimates.

2. Gross vs. Net Reporting

In the 2006 Budget, the Government introduced a number of accounting policy changes, one of which was to present budgetary revenues and expenses on a gross rather than a net basis.  This was done in response to a recommendation by the Auditor General of Canada who had argued, consistent with PSAB accounting standards, that presenting the financial statements on a gross basis more properly reflected the nature and size of the Government’s revenues and expenses. 

The major impact of this change was to included the Canada Child Tax Benefit as a “major transfer to individuals” rather than being netted against personal income tax revenues.The income tax system is used to determine eligibility for the benefit and the amount but one does not have to pay personal income taxes to be eligible nor does it reduce the amount of tax otherwise payable.

In addition, departmental revenues that were levied for specific services, such as the contract costs of RCMP policing services in provinces, which were netted against program costs, are now part of “Other revenues”.  Finally, revenues of consolidated Crown corporations (VIA Rail, CBC, etc), which were netted against their total expenses as payments to Crown corporations, are now also part of “Other revenues”.

The impact of these changes has been to raise both revenues and expenses by about $17 billion (2010-11 estimates), with no impact on the budgetary balance. 

Unfortunately, even though the Department of Finance changed to a gross basis, the Treasury Board continued to base their spending estimates on a net basis. This means that the Estimates would have to be increased by  about $17 billion  to reconcile with Budget expense estimate.  As noted by the Auditor General, the netting of these revenues understates the “nature and size” of the Government’s activities.  As a result, Parliament is not given fulfill information in the Estimates when examining these programs. Furthermore, there are other programs (Guaranteed Income Supplement, Old Age Security benefits) that are included in the Main Estimates, although eligibility and the amount of the benefit are determined through the Income Tax system.  There are, therefore, inconsistencies in how these programs are treated in the Main Estimates.  It is time that this was corrected.

3. Pay now (Accrual) or Pay Later (Cash) Accounting 

The Budget and the Government’s audited financial statements have moved  over time from a cash basis of accounting to full accruals[3].  As a result, the Budget and the audited financial statements are more reflective of what actually happens in that year. PSAB accounting standards recommend the use of full accruals.

Unfortunately, the Estimates remain on a cash basis.  The Auditor General, in her Observations on the financial statements, stated that “having accrual-based budgeting results in improved financial oversight as the plans and related results are on the same basis of accounting and therefore result in better transparency and accounting.  Appropriations prepared on an accrual basis would provide Parliament with information for control and approval of spending that is the same as the overall government financial plan and summary financial statements”[4] . This issue has been under review by officials of the Treasury Board Secretariat for a number of years, but the Treasury Board has failed to act on the recommendation of the Auditor General.

The net impact of incorporating the Budget’s accrual estimates in the Main Estimates is not known, as most of details of the accrual adjustments are not publicly available. Nevertheless,, Table 3 attempts to qualify some of these potential impacts.  For 2011-12, we estimate the Estimates would be reduced by $1.3 billion. Depending upon the fiscal year, there can be wide swings in this estimate.

Putting public debt charges on an accrual basis would raise the Main Estimates by $2.7 billion.  It is interesting to note that Supplementary Estimates B for 2010-11 included a downward adjustment of $2.9 billion.  The explanation provided was that as a  “result of accounting changes due to the Jobs and Economic Action Plan, public debt charge forecasts from the Federal Budget are no longer a reasonable estimate of cash-basis expenditures for reporting in the Estimates”[5].  We were unable to find any accounting changes in the Jobs and Economic Action Plan, which would justify this change.   It appears that in previous Estimates, public debt charges were presented on an accrual basis and that a “correction” was made in 2010-11 to put them on a cash basis.  In our view, a step in the wrong direction.

The Estimates include the current costs of disability benefits for veterans.  However, under accrual accounting, the present value of all expected future payments as a result of past service provided by veterans has already been recorded in the financial statements and in previous years’ budgets.  Only future benefits accruing to new recipients and changes to previous years’ estimates are included in current year’s budgets and financial statements.  This results in a difference of about $2.5 billion between the accrual budget projections and the cash-based Estimates.

On an accrual basis, tangible capital assets are based on the amortization of the stock over its “economic” life.  The Estimates currently only include the cash outlays for newly acquired or renovated capital assets. A net accounting adjustment of -$0.2 billion is required to change capital from cash to an accrual basis of accounting.  Under current procedures, Parliament approves cash outlays for capital construction and acquisition on an annual basis.  Yet, once the initial cash payment is approved, it becomes extremely difficult to refuse the required funding in future years to complete project.  Parliament should have the full cost upfront of the project, along with all future costs to ensure that the capital is properly maintained over its economic life. 

The Budget and audited financial statements include liabilities for which no payment was made during the year.  Estimates only include expected cash disbursements made during the fiscal year.  Supplementary Estimates A for 2011-12 included $1.3 billion due the expected disbursements of accumulated severance pay benefits, as the Government announced in the 2011 Budget that it would eliminate the severance benefits for resignations and retirements.  However, on an accrual basis, there are annual adjustments to the expenses in the Budget and audited financial statements for the liability for severance disbursements.  The potential payout in 2010-12 has already been reflected in previous years’ budget and audited financial statements and therefore will have no impact on these results.

Finally, the Budget projections may include current year liabilities, such as adjustments to the various allowances for loans and loan guarantees, court cases, employee future benefits, tax receivables, etc.  Details of these adjustments are not provided in the Budget.

4. Don’t let spending lapse.

The Main Estimates include a reserve of $750 million (TB Vote 5) to manage urgent spending requirements during the course of the year, which have not yet received Parliamentary approval.  Once that approval is received, the reserve is replenished.  This reserve is not included in the Budget projections, as most of funds allocated will not be spent by year-end. 

Departments/agencies are not allowed to exceed their appropriations.  As a result, they traditionally spend less than what they were approved to spend.  In addition, there may be delays in getting certain projects up and running on schedule, due to the weather, labour disputes, etc.  Officials of the Department of Finance make an estimate of this potential under spending or “lapse” in preparing their projections of total expenses, based on historical experience.  No such adjustments are made to the Estimates. 

The Department of Finance no longer publishes an estimate of the lapse in the budget, although they did only a few years ago.  The lapse has increased significantly in recent years , primarily as a result of delays in implementing new programs under the Economic Action Plan.  It is estimated that the lapse for 2010-11 amounted to close to $6 billion.  A smaller lapse would be expected for 2011-12, given that most funding under the Economic Action Plan ended in 2010-11 and restraint measures introduced in the 2010 Budget will require departments/agencies to manage closer to their appropriations in order to deliver on their programs.  Using the historical average prior to the implementation of the Economic Action Plan would suggest a lapse of about $3 billion for 2011-12.

5. What a Difference in spending.

Table 4 summarizes the differences between the Estimates for 2010-11 and those for 2011-12 tabled to date and the June 2011 Budget expense projections for the same years.  For 2010-11, Budget expenses are $4.8 billion higher than the Estimates presented for 2010-11.  After accounting for the differences noted above, there is an unexplained residual of only $0.3 billion.

For 2011-12, the difference between the Estimates tabled to date and the June 2011 Budget projections for total expenses is $28.6 billion, an extremely large difference in historical terms.  Adjusting for the factors explained above, there is still an unexplained $11.4 billion. This could imply that the June 2011 Budget estimate for 2011-12 is grossly overstated, as they turned out to be for 2010-11, and/or that the Estimates tabled to date are grossly understated.  Regardless, the credibility of both measures is seriously undermined..    

By not reconciling the Estimates to the June 2011 Budget, Parliamentarians are left in the dark about the relationship between these two estimates for spending for 2011-12.   For accountability and transparency, it is vital that such reconciliations be provided on an ongoing basis and to the latest Budget projections, not to Update estimates, which would be seriously out-of-date.

Table 4 also shows the lack of comparability between the Estimates.  Comparing Main Estimates to Main Estimates, one would think that spending is to decline by $10.4 billion between 2010-11 and 2011-12.  In fact, the Government used this figure to claim how effectively it was controlling spending.  However, the Main Estimates for 2011-12 include the impact of the ongoing spending approved in the 2010-11 Supplementary Estimates.  So the year-over-year Main Estimates comparison is not valid.  If the Supplementary Estimates for 2010-11 and the Supplementary Estimates A for 2011-11 are included, there is a decline of $14.1 billion.  Yet one knows how much future Supplementary Estimates for 2011-12 will increased the Estimates for 2011-12, especially given the large difference in the relationship between the Estimates and the Budget for 2011-12.  So that comparison is not valid either.

 What is even more puzzling is that while the President of the Treasury Board claims control over spending by pointing to the decline in the Estimates of $10.4 billion, or 4 per cent, the June 2011 Budget shows an increase of $9.7 billion, or 3.6 per cent, in expenses between 2010-11 and 2011-12.  This is an extremely large increase, given that the Economic Action Plan stimulus spending was not expected to have a major impact in 2011-12 (remember it was originally supposed to be a two-year program only - 2009-10 and 2010-11) and that departmental/agency budgets were to be frozen in 2011-12 at their 2010-11 levels.  In looking at these sets of numbers, something just doesn’t add up.   As was the case in 2010-11, it is expected that the June 2011 Budget estimate of total expenses for 2011-12 is grossly overstated, thereby questioning the credibility of the budget projections.

1. Excludes $0.4 billion re multi-year appropriations for Special Operating Agencies.

2. Estimate for 2010-11 based on difference between September 2009 Update and June 2011 Budget forecast for total expenses less reprofiling of Economic Action Plan.  Estimate for 2011-12 is based on 4% of voted expenses, in line with historical average.

Conclusion  

Parliamentarians and the public are currently in the dark about the relationship between the Estimates and the Budget expense projections.  This note has attempted to reconcile the differences between the Estimates and June 2011 Budget projections for both 2010-11 and 2011-12. 

There are significant differences between the two sets of projections, which are not explained in detail by either the Treasury Board Secretariat or the Department of Finance.  The two series give widely different interpretations about the change in spending for 2011-12.  One claims restraint, the other shows a significant increase.

For consistency and transparency reasons, the Budget should be presented before the Main Estimates, thereby providing the proper context for the Main Estimates.  With the requirement to release the Debt Management Strategy before the beginning of the new fiscal year, there is no reason (except political) why this can not happen. 

The Auditor General has repeatedly raised the issue of comparability of the Estimates to the Budget and the summary financial statements.  Treasury Board has undertaken many studies but demonstrated little progress to date.  In the interim, a detailed reconciliation along the lines presented above should be presented with the Main Estimates.  This will remove much of the confusion surrounding the two sets of projections and put the Estimates in a proper context, thereby eliminating differing and confusing stories.

The above reconciliation shows that there is still a major difference in projections for 2011-12.  Unless this is fully explained, the credibility of both sets of projections is under question.

What is even more puzzling is that while the President of the Treasury Board claims control over spending by pointing to the decline in the Estimates of $10.4 billion, or 4 per cent, the June 2011 Budget shows an increase of $9.7 billion, or 3.6 per cent, in expenses between 2010-11 and 2011-12.  This is an extremely large increase, given that the Economic Action Plan stimulus spending was not expected to have a major impact in 2011-12 (remember it was originally supposed to be a two-year program only - 2009-10 and 2010-11) and that departmental/agency budgets were to be frozen in 2011-12 at their 2010-11 levels.  In looking at these sets of numbers, something just doesn’t add up.   As was the case in 2010-11, it is expected that the June 2011 Budget estimate of total expenses for 2011-12 is grossly overstated, thereby questioning the credibility of the budget projections.

Conclusion  

Parliamentarians and the public are currently in the dark about the relationship between the Estimates and the Budget spending/expense projections.  This note has attempted to reconcile the differences between the Estimates and June 2011 Budget projections for both 2010-11 and 2011-12. 

There are significant accounting differences between the two sets of projections, which are not explained in detail by either the Treasury Board Secretariat or the Department of Finance.  The two series give widely different interpretations about the change in spending for 2011-12.  One claims restraint, the other shows a significant increase.

For consistency and transparency reasons, the Budget should be presented before the Main Estimates, thereby providing the proper context for the Main Estimates.  With requirement to release the Debt Management Strategy before the beginning of the new fiscal year, there is no reason (except political) why this can not happen. 

The Auditor General has repeatedly raised the issue of comparability of the Estimates to the Budget and the summary financial statements.  Treasury Board has undertaken many studies but demonstrated little progress to date.  In the interim, a detailed reconciliation along the lines presented above should be presented with the Main Estimates.  This will remove much of the confusion surrounding the two sets of projections and put the Estimates in a proper context, thereby eliminating differing and confusing stories.

[1] Supporting Parliamentary Scrutiny of the Estimates: The Integrated Monitoring Database (IMD) Office of Parliamentary Budget Officer, Ottawa, Canada March 2011.

[2] The March 22, 2011 budget  was not passed due to the election.  It was re-introduced with some change on June 6, 2011.

[3] Under accrual accounting, revenues are recognized when earned (economic event takes place giving rise to the revenues) not necessarily when it is received.  Spending is recognized when the economic event results in a liability to the government, not when cash is actually disbursed.  

[4] Page 2.35: Public Accounts of Canada 2008 Volume 1.

[5] Page 11: Supplementary Estimates (B), 2010-11 for the fiscal year ending March 31, 2011.