The President of the Treasury Board has recently released a four-pillar approach for Estimates reform to address issues raised by Parliamentarians concerning their inability to properly scrutinize government spending.  They also respond to the 2015 election commitment to better align the appropriations detailed in the Estimates to those in the Budget and Public Accounts.

The four pillars are: timing of the tabling of the Estimates; the scope and accounting methods used in the Estimates and the Budget; changes to the current vote structure; and changes to the Reports on Plans and Priorities and the Departmental Performance Reports.   This note looks at the second pillar: scope and accounting methods.

A major source of confusion between the spending numbers included in the Estimates and those in the Budget relates to the differences in the scope and accounting methods used in the two series.   For 2016-17, the Budget forecast total expenses of $317.1 billion, while the Main Estimates projected total spending of $250.1 billion, $67 billion lower.
Differences in the scope accounted for $60.7 billion of this difference. This difference relates primarily to the treatment of Employment Insurance benefits and refundable tax benefits, such as the Canada Child Benefit. The Budget includes all expenses related to the Employment Insurance Operating Account on the basis that the government sets the premium rate, the eligibility criteria and the amount of the benefit. It has full control over the operations of this account. The Estimates, on the other hand, excludes these expenditures, arguing that because they are reported through the Employment Insurance Operating Account, they are separate from any of the appropriated organizations listed in the Estimates.

The Estimates also exclude expenditures related to programs where the eligibility and the amount of the benefit are determined through the Income Tax system, such as the Canada Child Benefit and other refundable tax benefits. The Budget, on the other hand, includes such refundable tax benefits as expenses as these benefits do not affect an individual’s tax liability. Even so, there is an inconsistency in the Estimates since benefits under the Guaranteed Income Supplement are classified as spending even though the eligibility and amount of the benefit are determined through the Income Tax system.

The Estimates only include direct government assistance to Crown-dependent corporations. In contrast, the Budget includes the total expenses of all Crown corporations. In addition, the Budget records expenses on a gross basis, whereas the Estimates net out any third party revenues associated with these expenditures.

The bottom line is that Parliamentarians do not have a complete picture of government spending when reviewing the Estimates.

The Budget and Estimates also use different accounting concepts.  The Estimates are largely presented on a modified cash basis of accounting, i.e. transactions are recorded when the cash is paid out.  The Budget, however, is on a full accrual basis of accounting, recognizing expenditures when they are incurred rather than when cash is transferred.  This accounts for about $5 billion of the difference between the two measures of spending.

As noted in other blogs, the Main Estimates do not include many of the new initiatives proposed in the Budget, given the difference in timing.  For 2016-17, the cost of the initiatives excluded amounted to about $5 billion. Finally, based on historical experience, not all of the appropriated funds will be spent during the course of the fiscal year. The Budget includes an estimate of this “lapse”.  For 2016-17, it was estimated at $6.1 billion.

In the tabling of Supplementary Estimates A for 2016-17, the Government provided a summary reconciliation table, highlighting the differences between the Budget and Estimates to date. This was the first time such a reconciliation has been provided since the 2007 Budget. Under the proposed new format, such a reconciliation table would be provided with the tabling of the Main Estimates.

As noted above, most of the difference between the Budget and the Estimates relates to differences in scope. As a first step, the scope of the Estimates should be consistent with that used in the Budget. The Estimates should adopt the accounting standards recommended by the Public Sector Accounting Board (PSAB), with respect to scope. This would eliminate almost 90 per cent of the difference between the Estimates and the Budget.  

   
The adoption of accrual accounting for the Estimates is much more complex.  TBS argues that if accrual-based appropriations were to be approved, care must be taken to ensure that it is understandable and meaningful to Parliament. They note that Australia did adopt accrual-based appropriations.  However, after eight years, they reverted back to largely cash-based appropriations, given concerns raised by both Parliamentarians and department heads. TBS is proposing that more study be conducted in examining an appropriate accrual-based model for the Estimates.

At the federal level, accrual accounting does not represent a major component of the differences between the two sources, as capital spending is a relatively small part of total federal spending.  It is much larger for provinces and territories, as they are responsible for the majority of capital spending. Furthermore, provisions related to certain liabilities should not be made public until they have been resolved. This would suggest that the Estimates remain on a modified cash basis of accounting rather than adopting full accruals. However, Ontario and British Columbia have successfully moved to accrual-based appropriations.  Their experiences with accrual-based appropriations should be examined to determine whether their systems are applicable at the federal level.  

The main difference between the Budget and the Estimates relates to the scope. The scope of the Estimates should be made consistent with that used in the Budget, based on the accounting standards recommended by the PSAB.  This would eliminate most of the confusion between the Estimates and the Budget. The adoption of accrual-based appropriations should be considered after more study by TBS, including consultations with the applicable Parliamentary committees.