Hardly a week goes by without a major media network breaking news that the federal government is deliberately underspending in order to meet its budget targets.  It has been claimed that Indian Affairs and Northern Development underspent its spending appropriations by $1 billion over the period 2009-10 to 2013-14.  Prior to that, it was claimed that Veterans Affairs had underspent its budget by $1.1 billion over a number of years.

These are shocking numbers if they were in fact true? Fortunately, none of this is true.

Each year, federal departments and agencies are appropriated funds by Parliament to spend, and each year, they spend less than what they were appropriated.  This underspending is called “the lapse”. This has been happening for years. It is a natural phenomenon.

Under the Financial Administration Act (FAA), departments and agencies cannot exceed their appropriations; otherwise penalties will be imposed on their future year’s spending. Not surprisingly, departments are careful not to exceed their appropriations.

This prudent approach to spending management inevitably leads to a lapse at year-end. There are also developments over the course of the year over which departments have little or no control. Labour disputes and adverse weather conditions can lead to delays in the best-planned projects. Take up on new programs in the first year may well turn out less than originally anticipated. Furthermore, the costs of new programs may be inflated for political reasons.

However, just because departments lapse funds, does not mean that those funds are “lost” forever.  In fact, a significant portion of the current year’s lapse is automatically carried forward into the next fiscal year.  For, example, most of lapse associated with capital appropriations is carried forward in order to ensure that the project is successfully completed. 

Departments are also allowed to carry forward a certain percentage of their operating budgets, up to the amount of the lapse. These rules were put in place to reduce what used to be called “March Madness”. 

Previously, knowing that they would permanently lose funding if it was not spent, departments would bring forward into March spending on just about anything in order to use up their forecast lapse. This would provide them with additional flexibility in the next year to undertake or complete spending that they were not able to undertake in the current year.

Adding up the annual lapses is the same type of math that Tim Hudak employed during the 2014 Ontario provincial election. In his  election platform he claimed his policies would create one million jobs over eight years. That claim turned out to be completely bogus. Mr. Hudak counted a job that was created in the first year, eight times, thereby grossly overestimating the job creation impact of their initiatives. 

Those that claim that the government has underspent by $1 billion over five years in Indian Affairs and Northern Development or Veterans Affairs are using “Hudak” math.  They are counting the average annual lapse five times.  This is a mistake.

What is actually happening is that the lapse that is carried forward from the first year must be spent in the second year before spending any of the appropriations for that year. Likewise, whatever is reprofiled in the second year must be spent in the third year before drawing on that year’s appropriations. This goes on for every subsequent year. In other words, all or a large portion of the lapse in any year is always spent in the following year.

Indian Affairs and Northern Development has underspent its annual appropriations by just over $200 million over the period 2009-10 to 2013-14, not by $1 billion. You cannot adopt Hudak math and multiply the annual average by five.

What is interesting is that the total annual lapse in federal direct program spending has been declining for some time. In 2013-14, the last year for which information is available, the federal government “lapsed” $7.3 billion.  This is significantly less than the lapse of $10.1 billion in 2012-13 and from the all-time high of $11.3 billion in 2010-11. The increase in 2010-11 was due to the stimulus measures introduced in the 2009 Budget. With the stimulus measures now gone, the lapse is now back to a more normal level.

Contrary to the government’s, the government seems to be managing the spending lapse quite well.