In a recent report the University of Ottawa’s Institute of Fiscal Studies and Development (IFSD )argued that the October 2017 Fall Economic Statement (FES) understated the growth in direct program expenses and that as a result expenditure reductions would be required in the 2018 budget.  Professor Gordon of Laval University, in an article in the National Post, expressed a similar view.

In an article released on National News Watch and our blog 3dpolicy, we argued that a number of factors could influence the FES forecast, such as the profile of new spending initiatives, restraint measures, and the sun setting of programs, among others. Understating the level of direct expenses, if that is in fact true, would undermine the Government’s fiscal credibility.  In our experience, the Finance Department puts considerable time and effort into developing the direct program expense forecast.
We analyzed the difference between the 2015 Budget forecast for direct program expenses (the last Harper Budget) to the forecast presented in the FES. Projections of direct program expenses were presented for the period 2015-16 to 2019-20. In the 2015 Budget, direct program expenses were forecast to grow by 4.3% in 2016-17, 2.2% in 2017-18, 3% in 2019, and 2.3% in 2019-20.

These growth rates are in fact higher than those in the IFSD study, which would suggest that the IFSD would consider them as credible.  They are also much higher than those in the FES. The FES forecast growth rates of 9.0% in 2017-18, 0.7% in 2018-19 and 0.1% in 2019-20.

What accounts for these significant differences in spending growth rates?

The budgets and fall updated presented since the 2015 Budget provide details on new policy initiatives and restraint measures. These amounted to $7.8 billion in 2016-17, $10.4 billion in 2017-18, $13.8 billion in 2018-19 and $$12.5 billion in 2019-20. Other unexplained “adjustments” amounted to a reduction of $1.0 billion in 2016-17, an increase of $5.2 billion in 2017-18, a reduction of $900 million in 2018-19 and a reduction of $2.4 billion in 2019-20. Since the 2015 budget, the Trudeau Government has increased direct program expenses by a total of $6.8 billion in 2016-17, $15.6 billion in 2017-18, $12.9 billion in 2018-19 and $10.1 billion in 2019-20.

Clearly this profile of the new initiatives and the restraint measures account for much of the change in the annual growth rates since the April 2015 Budget.  Some of these funds may not be realized as currently planned.  However, in those cases the funds lapsed will likely be reprofiled to future years.  This also would affect the annual growth rates, but the federal debt over time would not be affected.

Based on current financial results to date, it appears that direct program expenses in 2017-18 will again be lower than forecast. This component of spending traditionally lapses funds (total Parliamentary authority less what was actually spent).  Some of this higher-than-expected lapse could affect the outer years as well, lowering the level of direct program expenses and affecting the annual growth rates.

There is also a residual (total difference less impact of new policy initiatives and restraint measures).  In 2017-18, this amounted to an increase of $5.2 billion, a decrease of $0.9 billion in 2018-19 and a decrease of $2.4 billion in 2019-20.
The large one-time adjustment in 2017-18 accounts for the low rate of growth in 2018-19.  No explanation in the budget/update documents was provided to explain these adjustments. The Department of Finance should provide more information on the changes in its program expenses forecasts. The Fiscal Monitor provides a breakout of transfers and subsidies by department as well expenses for defence, Crown corporations and other operating expenses. It would be useful if such details, as well as more information regarding operating expenses by major department could be provided. Commentators could then assess the expense forecasts in more detail to assess their credibility.

However, on balance, the FES forecast of direct program expenses appears credible, and the growth profile broadly consistent to those forecast in the 2015 Budget.

Nevertheless, the spending forecast in the upcoming 2018 budget should be examined carefully.

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