The single largest “restraint” measure “not” announced in Budget 2013 was an increase in the “lapse”, which resulted in an estimated “savings” of between $2 to $3 billion (1)  per year.  This, along with an overly rosy economic forecast and increased enforcement and compliance by the Canada Revenue Agency were the main factors underlying the government’s forecast of a balanced budget in 2015-16.

What is the “lapse”?  Government departments and agencies are “appropriated” funds annually by Parliament through the Main and Supplementary Estimates.  They cannot exceed these appropriations, or spending limits, otherwise penalties are imposed on their future year appropriations.  Since they cannot spend more, they inevitably end up spending less.  The difference between what they were appropriated and what they actually spent is known as the “lapse”.    

The Public Accounts of Canada (2) compares appropriations received during the course of the fiscal year to actual spending, with the difference being the lapse.  Based on the results for the past few years, especially for the period 2009-10 to 2011-12, the lapse averaged about $10 billion per year.  . On that basis, the Finance Department increased the estimate of the lapse included in Budget 2013 over the forecast period. This led to an equivalent reduction in program spending, which became the single, most important “restraint “ measure in the budget.  A “restraint” measure unnoticed by nearly everyone.
 

This would be a good trick if it were justified. Unfortunately, there are a number of reasons why this assumption of a higher spending lapse is not justified and should not have been used to reduce program spending.
 

First, the period 2009-10 to 2011-12 was unusual, characterized by massive increases in spending due to the temporary stimulus measures introduced as part of the Economic Action Plan.  Much of the increase in the lapse during these years was attributable to delays in signing contracts and starting projects as originally envisaged in the budgets for those years.  For example, the various infrastructure programs administered by the Office of Infrastructure Canada lapsed over $3 billion in 2010-12 and close to $2 billion in 2011-12.  With the ending of the stimulus programs, such large lapses are not expected in the future.
 

Second, capital expenditures by departments lapsed by over $2 billion in 2010-11 and $1.5 billion in 2011-12.  These numbers are from the Estimates and are on a cash basis of accounting, whereas in the budget, capital is on an accrual basis of accounting, spreading the costs over the economic life of asset.  As a result, the impact of lapsing capital is considerably less on an accrual basis.      
 

Third, the justification for the increase in the lapse is done using the Estimates spending data.  However as we have argued on numerous occasions in the past (3),  one cannot directly compare the Estimates spending numbers to those in the Budget.  There are significant difference in concepts and coverage.  The Estimates are on a cash basis whereas the Budget is on an accrual basis of accounting.  The Main Estimates are tabled before the Budget, such that the spending estimates are not consistent to those in the Budget.  The Estimates are for one-year only, whereas the Budget projects out five years.  We, along with others, have argued for more consistency between the Estimates and the Budget, but to no avail.  The Government used to publish a reconciliation between the Estimates and Budget.  However, the last time such a reconciliation was provided was in Budget 2007.
 

Fourth, the Estimates do not play a major role in the forecasting of the Budget spending projections.  The components of the major transfers to persons and to other levels of government are forecast by the Department of Finance.  For direct program expenses, the Department of Finance primarily relies on the audited financial results for the most recent fiscal year as the base for forecasting into the future.  These results are used to forecast major components of direct program expenses, independent of what is in the Estimates.  Therefore the lapse, on an Estimates basis, is not relevant in setting the lapse on a Budget basis.
 

Fifth, to meet the commitment to balance the budget over the medium term, the Government implemented various spending restraint measures. Budget 2010 froze departmental operating budgets for two years, forced departments to absorb the 1.5% increase in annual wages and salaries for 2010-11, and reduced the rate of growth in defence spending. Budget 2012 implemented further spending reductions, which were supposed to be achieved primarily through gains in efficiency and effectiveness.  These measures have forced departments to operate closer to their appropriated reference levels, which should, over time, result in a lower lapse.   
 

Over the period 2013-14 to 2016-17, the operating costs of the government are projected to decline at an annual average rate of 0.3%.  This is in an environment of 2% inflation, wages and salary increases of at least 1.5% and wage bracket creep (moving up within the wage scale).  Departments will need to find additional savings if this forecast is to be achieved.
 

The rationale for increasing the lapse, and reducing program spending, over the forecast period cannot justified.  Minister Flaherty’s commitment to balance the budget in 2015-16 is seriously at risk because of this adjustment.
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Footnotes:

1. This is the authors' calculation.  Budget 2013 did not provide an estimate on how much the lapse had been increased.

2. Public Accounts of Canada 2012; Volume II Table 5 "sources and Disposition of Budgetray Authorities by Ministry" page I.35

3. "Once Again Main Estimates Are Misleading" March 3, 2013 www.3dpolicy.ca