Hypothetical Interview:

Interviewer: Minister Flaherty, according to your 2012 Budget, how much money is the government expected to spend in 2012-13?

Minister Flaherty: $276.1 billion.

Interviewer: Minister Clement, as President of the Treasury Board overseeing government spending, how much do you expect the government to spend in 2012-13?

Minister Clement: $254.2 billion.

Interviewer: That’s a difference of nearly $22 billion.  How do you explain this?

Ministers Flaherty and Clement: We don’t know, but does it matter?

Interviewer: It should because the difference is about to get even larger.

In the April-May 2012 Fiscal Monitor, the Department of Finance made an important accounting change in the way various components of revenues are classified.  Refundable tax credits, most of which were previously netted against budgetary revenues, are now classified as program expenses.  This change increases both budgetary revenues and program expenses by comparable amounts, leaving the budgetary balance unchanged. This change was made in response to new standards for the accounting of government revenues recommended by the Public Sector Accounting Board (PSAB).

The tax expenditures reclassified were the Working Income Tax Benefit, the Refundable Medical Expense Supplement, the Canadian Film or Video Production Tax Credit, the Canadian Film or Video Production Services Tax Credit, the Scientific Research and Experimental Development Tax Credit for Canadian-Controlled Private Corporations and the refundable portion of the Atlantic Investment Tax Credit. The value of these tax credits is estimated at over $5 billion for 2011-12, an amount roughly equal to the cuts introduced in the budget.

The rationale for these changes is that the tax system is used solely to determine eligibility and the amount of benefit but it has no effect on taxes payable. The tax system is simply being used to deliver a spending program. There are also other “tax expenditures” which have been classified as program expenses for some time.  These include the Canada Child Tax Benefit and the Guaranteed Income Supplement.

This change means that the Fiscal Monitor, the Budget and Volume I of the Public Accounts will all be on the same basis, thereby providing consistency among these three publications. 

The Budget provides a forecast of federal government expenses by major component.  The Fiscal Monitor provides current monthly information on expenses, by major component (usually consistent with the details provided in the Budget).  Volume 1 of the Public Accounts of Canada provides final audited results for the fiscal year just ended, thereby permitting a comparison of the Budget forecast to the actual outcome. 

There is a fourth source of spending information – The Main and Supplementary Estimates, which provide detailed spending information by departments and agencies.  The Main Estimates must be tabled on or before March 1st, prior to the start of the new fiscal year.  Supplementary Estimates, which incorporate new spending approved during the year, are tabled usually three times during the course of the fiscal year.

However, there is a disconnect between the Estimates and the Budget and its related documents.  The accounting basis is not the same – the Estimates are on a cash basis of accounting while the Budget is on an accrual basis; the coverage is not the same – with the exception of the Guaranteed Income Supplement, tax expenditures are not included in the Estimates; and the Estimates are on a net basis, netting off revenues against applicable spending, while the Budget is on a gross basis, recording such charges/fees as revenues. Although the Estimates should be tabled after the Budget, in recent years the reverse has happened.  As a result, the Estimates are now usually based on the previous fall Update and not on the updated and revised Budget projections. We have commented on these differences in previous blogs .

It is doubtful that the recent classification changes announced by the Department of Finance will be reflected in the Main Estimates, thereby increasing the confusion between spending in the Main Estimates and in the Budget and related documents.

Parliament and Canadians deserve better.

The Estimates are used by Parliamentary Committees to review the spending of departments and agencies. However, the Estimates bare no resemblance to other estimates of government spending - the Budget, Volume I of the Public Accounts, and the Fiscal Monitor. As noted, there are significant differences in both accounting and coverage between the Estimates and the other three sources of spending information, making comparisons among the data sources virtually impossible.  And, since the 2007 Budget, no reconciliation between the Estimates and Budget numbers has been provided.

This needs to be corrected. The “tax expenditures” reclassified are just program spending by any other name.  There is no rational as to why they are not classified as spending in the Main and Supplementary Estimates. There is already inconsistency in the treatment of tax expenditures. For example, eligibility and the amount paid under the Guaranteed Income Supplement are determined through the tax system, in a manner to similar to the other “refundable tax expenditures”.  Yet, the Estimates include the Guaranteed Income Supplement as a spending program, but ignores the others, thereby resulting in an inconsistency in treatment.

By including these “tax expenditures” as spending, they would be subject to more scrutiny and review by applicable Parliamentary Committees . 

We continue to urge the Government to put the Estimates on the same accounting basis as the Budget. This issue has been studied to death by the Treasury Board, with no decision to date.  The Auditor General of Canada has repeatedly urged “the government to complete its studies of accrual-based budgeting and appropriations and determine whether or not it will implement accrual appropriations in the future” . The same recommendation was recently made by the House of Commons Standing Committee on Government Operations and Estimates .

Pending its decision on accrual-based appropriations, there are no reasons why the government cannot move ahead on the other differences.  It should adopt the recommendations of PSAB and classify all tax expenditures as program spending and put spending on a gross basis.  It should also table the Budget before March 1st, so that the Estimates can be linked to the latest budget.  And the Estimates should provide a detailed reconciliation of spending between the Budget and Estimates.
 

Without these changes, Parliamentarians and Canadians will continue to remain in the dark about the federal government’s spending plans.

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