Evidence of meeting #40 for Government Operations and Estimates in the 41st Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was expenditure.

A recording is available from Parliament.

On the agenda

MPs speaking

Also speaking

Allen Schick  Distinguished Professor, School of Public Policy, University of Maryland, As an Individual
Jack Stilborn  Retired, Library of Parliament, As an Individual

April 25th, 2012 / 3:30 p.m.

NDP

The Chair NDP Pat Martin

Good afternoon, ladies and gentlemen.

Welcome to the 40th meeting of the Standing Committee on Government Operations and Estimates.

We'll continue with the study we have under way on estimates and supply—to consider the way our committee and our government analyzes our estimates process.

We're very pleased today to welcome, as a special guest witness, by teleconference, a very well-respected authority on this subject and someone whose name, I must say, has come up in the witness testimony of various other witnesses who we've had presenting before our committee.

I'd like to welcome to the committee Dr. Allen Schick from the School of Public Policy at the University of Maryland.

You are very welcome here, Professor Schick, and we will benefit from and very much value what you have to say to us.

This is an all-party parliamentary committee, as you know. It's one of the only committees chaired by the opposition members. My name is Pat Martin, and I'm a member of Parliament with the New Democratic Party, the official opposition. You'll be getting questions from members of the three different parties represented here.

Our normal practice is to ask you, sir, to make 10- or 15-minute opening remarks. We have one hour to share together, and then we divide ourselves into five-minute increments for question period.

Having said that, sir, welcome, and you have the floor.

3:30 p.m.

Dr. Allen Schick Distinguished Professor, School of Public Policy, University of Maryland, As an Individual

It's a pleasure to be a good neighbour and to discuss the Canadian practice, even though I'm not an expert on it.

I want to begin by indicating that good practice is not necessarily a precondition for good budget outcomes. My own country, the United States, is an example of this. We have perhaps the most widely respected legislative budget organization in the Congressional Budget Office. We also have the largest deficits in the world.

I don't want to correlate the two, but I do want to caution that often budget reform is a substitute for budget policy, and it should never be a substitute. Near the end of my remarks, I'll get back to the issue of parliamentary assistance or staff assistance for parliamentary budget work.

I do want to mention that anything that deals with a budget touches the constitutional framework of a country—the relationship between government and Parliament, between the parties and government, the electoral system. Therefore, one has to be guarded in importing from another country practices that may not be well suited in your own country. This is particularly the case because the Westminster system, of which Canada is a member, is at polar ends from the American congressional system. One has to be wary about exchanging techniques when they may ill fit a particular country.

Having said this, I do want to mention that from a distance, my own distance, there are a few matters of Canadian budgeting that I think deserve some attention. Perhaps the most obvious is the disconnect between the budget and the main estimates.

As a matter of fact, I'm kind of puzzled that what you call the main estimates are not what political leaders would regard as the main estimates. The main estimates should be a statement of policy, if they're truly the main ones, and yet here they deal more with the ongoing work of government, that which is being continued, rather than with revenue changes and with policy changes.

The timing issue is well known in Canada, and that is that the main estimates, I believe, precede the tabling of the budget, and consequently the additional estimates, or supplementary estimates, have to be tabled later in the year to incorporate the policy changes recommended by government.

It would be a reasonable step, not a difficult step, for government to change the timing to coordinate, indeed to consolidate, the estimates and the budget. At one time, in fact, the United Kingdom had a distinction between the estimates process, which they called the “spending process”, and the budget we talk of, particularly with revenues in the U.K. case. Now they have been brought together on the same page, as it were. I think that is something that your own country should well consider.

In doing so, I would urge that the fact that you have a divided process, with estimates coming at one time and the budget at another time, allows you to restructure your entire budget process—not only that they are timed together; that indeed the two different sets of actions occur at different times. This is something that I would urge you to consider. Sweden is among the countries that have successfully introduced the procedure: that is, dividing parliamentary budgetary work into two discrete stages, a framework stage followed much later by an estimates stage.

The framework stage is a matter of policy, of strategy, of changes to revenues and to programs, of major changes to the estimates, and, most importantly, looking ahead to the macroeconomic environment, not only for the year for which estimates are being voted but also three to five years or more ahead.

If you combine strategy and estimates, the big picture and the detail, the likelihood is that one or both of them will be neglected. More often than not, it's the strategy, the policy, that is subordinated to the specifics of the budget.

So what a number of countries have introduced is a divided process in which at the first stage, which I label the framework stage, they do not delve into the details of the estimates. Instead, what they do is look at the economic environment, projections over the medium term, major policy changes by government, particularly with respect to the deficit, the debt, and other key fiscal variables.

While spending details are not tabled during this first framework stage, the government does provide, to use a famous or infamous Canadian term, the “spending envelope” that would be available during the estimates stage—in other words, what will be total expenditure, and that's divided by key sectors or policy arenas.

That's the first stage, and in some countries it's actually voted by parliament; in other countries it's merely discussed by parliament. It's presented by government, and depending on the role of the legislative branch, it either would be recognized by parliament or agreed by parliament. After this occurs, government ministries prepare their budgets consistent with the voted or tabled framework.

This leads to the second stage, which deals with the estimates and appropriation of authorized expenditure. The obvious rule in this case is that the estimates have to be consistent in two ways with the framework that was previously established. The first is with respect to the totals—the details cannot exceed the amount of money voted in a framework. Secondly, with respect to policy initiatives or changes taken by government, those should also be reflected in the estimates.

This would be a significant departure from the situation that currently prevails in Ottawa, but it would be consistent, however, with the fact that you have a divided system, and it would engage Parliament at two different times in the year on budgetary matters, one dealing with strategy and the big picture, the other with the specifics of expenditure.

Now, there's another aspect of Canadian practice that to my distant eye was once quite common around the world. It's still common in many developing countries, but it has virtually disappeared from advanced countries such as Canada. That is the distinction between operating and capital expenditure. At one time it was common around the world that there were actually two separate budgets. We often called them divided budgets: one dealing with the investments of government and the other with current or operating recurring expenditure.

The historical basis for this distinction is that the two sets of expenditure had different sources of funding. One was out of current revenue, and the other was often out of borrowed funds—a kind of golden rule that government can borrow only for finance investment. And to ensure compliance with this rule, they divided the budget and the expenditure into these two categories. For two main reasons, this practice has disappeared from developed countries.

The first reason is that to the extent that government is concerned about its fiscal position, the key aggregates—total revenue, total expenditure, total debt and deficit—you have to have a consolidated picture that does not separate between capital expenditure and operating expenditure.

The second reason is that capital and operating expenditures often are not distinct but are interchangeable with one another. In so many areas of government policy they're actually substitutes. One can proceed down a policy course of action through investment—for example, building clinics in rural areas. That would be in the capital budget. On the other hand, government can seek the same aim to improve health services in rural areas by subventing physicians to practise in rural areas. One is in the capital budget, one is in the operating budget.

The more you do one, for example, building clinics, the less you may need of the other, or vice versa. Consequently, if you want to have a robust analysis of the policy options of government and the connections among them, it makes a lot of sense to merge the two types of budgets, keeping in mind that you still must have sufficient data on the investment position of government.

This doesn't mean that you remove investment and capital information from the budget. It means, however, that they are within one umbrella of the budget. The question then becomes what should that umbrella be. What should be the classification or the framework within which you see both investment and operating expenditure?

There are two main possibilities. One is widely practised. The other is widely recommended. The widely practised one is by organizational units. To the extent that an organization bears both operating and capital costs, they should be combined in that entity's budget.

The alternative is what we call a program budget, or program structure. To the extent that operating and capital expenditure contribute to the same objective, they should be located within the same budgetary program, regardless of organizational location. In other words, a program budget, in some cases, will ignore organizational or ministerial boundaries. This is precisely why the program budget approach is highly recommended but is rarely practised, because to the extent that government, in addition to wanting to make robust policy, which would require that you see capital and operating expenditure contributing to the same objective...government has another purpose in managing its finances, and that is maintaining accountability.

Accountability in almost every case requires that the organization responsible for the expenditure and the activity financed by the expenditure should be in the dock, so to speak. It should be the accountable party. This is deeply embedded in Westminster tradition, and it's something that may be very difficult to surrender.

In fact, many countries call it a program budget, but the program is simply a veneer for organizational entities. To give an example that comes immediately to mind, you may have a bureau of water resources, which is an organizational unit, but instead you label it as a water quality program. The boundaries of the program and the boundaries of the bureau are identical, so in effect you've labelled it a program budget, but it really is an administrative, organizational budget.

Regardless of the way you go, I would think it is worth reconsidering the connection between the operating and the capital budget.

That leads to the third issue that I would like to discuss, which is what should parliament's role be, and more important, how should parliament be assisted to carry out that role responsibly and in an informed manner?

There is a mock trend around the world, not in every country, and certainly less so in Westminster countries than elsewhere, to enlarge the capacity of parliament to review and even to amend the government's budget. Keep in mind what I said at the outset, that the extent to which you want parliament to be able to amend the budget rises to a constitutional issue.

The practice in a growing number of non-Westminster countries is for a vast increase in the volume of amendments tabled in parliament and some subset of them being adopted, but most of the amendments are specific, detailed. They are within the government's fiscal envelope. This is very important.

To the extent that a country enlarges parliamentary discretion with respect to the budget, it is urgent that Parliament be subject to some fiscal constraint in terms of what it does. The combination of an open-ended parliamentary work on the budget without a constraint is something that can lead to fiscal damage to the country.

My own sense is that this is not where Canada is right now. Canada is not going to break away in a fundamental way from its Westminster legacy. Consequently, the issue becomes one of informing parliament rather than empowering parliament. Empowering parliament would mean that parliament can make significant changes to the government's budget. Informing parliament means that what parliament does is to hold government to account by having a robust debate on the options in the budget, the estimates tabled, the economic and programmatic assumptions that underlie those estimates, and the longer-term sustainability of the government's position. This clearly is consistent with the role that your committee has.

In fact, in your opening remarks, Mr. Chairman, when you indicated that you are a member of the opposition, it brought to mind the historical role of public accounts committees, in which that was the basic mechanism for well over a century, perhaps two centuries, for holding government to account: that opposition would chair the public accounts committee, the committee would operate on a non-partisan basis, take evidence from government, and thereby hold government to account.

Perhaps this system is sufficient. It's certainly survived a long time. But the fact that Canada a number of years ago established a Parliamentary Budget Officer tells me, hundreds of kilometres away from Ottawa, that at least there was unease in Ottawa about whether simply having a committee chaired by the opposition was sufficient to hold government to account and to allow for informed debate. After all, if it was sufficient, there would be no need to establish a Parliamentary Budget Officer.

Canada, in so doing, was following a trend that is quite widespread around the world, and that is staffing up parliament to be able to better perform its budget-related responsibilities. In most countries, however, I should note that the staffing occurs at the committee level, so that the additional staffing that is available to parliament to review the estimates, to offer options, to challenge the assumptions when it's appropriate—these are committee staffings, and therefore it has a low profile and is subordinate to the committee process in parliament.

In a small number of countries, including the United States, Mexico, and Korea, rather than relying on the committee structure as the main means for improving parliamentary budgetary work, a separate and independent office has been established. This has been done in Britain. In Britain it's not formally attached to Parliament, but it advises Parliament.

The role often is to review the estimates to see whether they are reliable. The key budget work today around the world is not simply whether the money should be spent, but are the assumptions underlying the estimates robust? Are they reliable?

Now keep in mind what assumptions are. If the table over here is the waterline, everything above the table is the budget and the estimates. They are open and transparent. They can be reviewed and published. Everything below the table line is assumptions. The assumptions are not transparent. They are not visible. But the numbers above the table are dependent on the assumptions below the table, and there's very little sunlight in government around those assumptions. This becomes the difficult task—and perhaps the most important modern task for Parliament—in dealing with a budget.

On the revenue side, clearly, the revenues are driven. They are a function of the economic performance of government. The future economic performance of government can never be known; it can only be assumed. That is the assumption; that is something parliament has to invest in.

What about the sustainability of the budget over a long term? That's critical to the future course and the future fiscal and economic health of your country. That rests on a bed of assumptions.

What about a government introducing a policy change? You want to know over the medium term what would be the budget implications of that policy change. After all, the first-year cost of a policy change usually is quite minimal, quite modest, but it cascades and enlarges in the future. Has the government been forthcoming? Is it using reliable estimates?

One of the reasons why assumptions lie below the waterline, below the table, is that they do not do well in sunlight. Very often, assumptions.... How do we describe them? The back of an envelope, right? Guesswork, okay? Sometimes they're politically massaged, but even when they're not politically massaged, the best thing you can do about assumptions is just to say this: let's assume a different set of assumptions, let's do a critical sensitivity analysis, and let's—to use a modern term—stress-test the assumptions to see whether they can stand the light of day.

I think this is something that parliament can benefit from. I think this is likely to be something that I would urge your committee to consider, whether in the context of the PBO, the Parliamentary Budget Officer, or in a larger framework—I don't know enough about the situation.

But I do think that you have an organization already, the PBO, which in international quarters is widely regarded, and building on it I think would be helpful. My understanding is that while it's a parliamentary budget office, it works closely with committees so that it's not a completely adrift entity. I would think that's something your committee might wish to consider.

These are some of the thoughts I have. I would invite questions or venturing into other areas where you think I might be of assistance.

Thank you.

3:55 p.m.

NDP

The Chair NDP Pat Martin

Thank you very much, Professor Schick, for your opening remarks. They were very helpful, very interesting, and very useful. We will all benefit from also looking at your paper, the publication called “Can National Legislatures Regain an Effective Voice in Budget Policy?” As well, we've been finding the comparative analyses with different countries very helpful.

We have about half an hour. Without any further delay, we're going to open it up to questions from the floor.

We begin with the official opposition and, new to the committee, Linda Duncan.

Welcome. You have five minutes.

3:55 p.m.

NDP

Linda Duncan NDP Edmonton Strathcona, AB

Thank you very much, Mr. Chair.

Thank you very much, Professor Schick. It's very interesting.

I am the new official opposition critic and new to the committee, but I've had an opportunity to go through the proceedings of previous witnesses. I have to say I'm reassured that all the esteemed experts who have testified seem to be on the same page. Dr. Joachim Wehner, you probably know, an assistant professor from LSE, recently gave very similar testimony about changing the timing of the estimates, the budgets, and so forth—and certainly on openness and transparency.

We have a Parliamentary Budget Officer, who actually presented one of his reports today. He expressed again his frustration with the lack of transparency and timely provision of information from the government to his office. He has pointed out that a good deal of that information is collected, readily available, and reported to the Treasury Board, but it is not passed on to Parliament in order to do the scrutiny of the budgets and estimates. It's not necessarily passed on to the PBO.

Dr. Wehner recommended that there should be stronger protections and an enhanced role of the Parliamentary Budget Officer to ensure access to relevant information, and that the Parliamentary Budget Officer be made a full officer of Parliament.

I wonder if you would like to comment on that. Do you have a similar kind of officer in the United States?

3:55 p.m.

Distinguished Professor, School of Public Policy, University of Maryland, As an Individual

Dr. Allen Schick

First of all, I'm a little wary, when two experts agree, that it isn't a conspiracy of sorts. I can't tell you whether the Parliamentary Budget Officer simply has what I'll call growing pains—the new kid on the block, and Treasury Board and other mandarins in Ottawa kind of circling the wagons and denying essential information—or it's something more deeply embedded.

I think it would be welcome for the committee to indicate in a report an expectation that the government be more forthcoming with the information. I know it is a weasel term, “government be more forthcoming”, but at this stage it would be premature to go beyond that and give the PBO some quasi-legal authority to pursue information.

At some time in the future that might be appropriate, but perhaps there should something to indicate that the standing of the PBO with respect to requested information should be roughly similar to that of the Auditor General. The same way the Auditor General is entitled to the information, the PBO would be entitled to it.

There is, of course, a big difference between the two. The Auditor General is looking at what happened in the past, and the PBO is looking at what's on the table today, which is why it's much more sensitive.

As for making the PBO a parliamentary officer, I have to admit I do not know enough about what that would entail in terms of the legal and constitutional structure of Canada. Perhaps speaking a little indiscreetly, I have sensed at international meetings that the PBO is sometimes a man without a country, if I can put it that way, without an organizational home. You have to build that home for the PBO. Whether it's as an officer of Parliament or as an independent group, the notion that the PBO is on a short string, so to speak, doesn't bode well for Parliament getting the advice it's entitled to.

4 p.m.

NDP

Linda Duncan NDP Edmonton Strathcona, AB

Thank you.

4 p.m.

NDP

The Chair NDP Pat Martin

You have time for a brief supplementary, Linda. You have about 45 seconds left in your time.

4 p.m.

NDP

Linda Duncan NDP Edmonton Strathcona, AB

No, thank you.

4 p.m.

NDP

The Chair NDP Pat Martin

Denis Blanchette.

4 p.m.

NDP

Denis Blanchette NDP Louis-Hébert, QC

Good afternoon, professor. In the same context, we are in the process of examining the position of Parliamentary Budget Officer. He could be an officer of Parliament, as has been mentioned. We are also looking at the possibility of his providing a little more support to the committees in being able to get them the information they require.

In the light of your observations of what happens in other Parliaments, what do you feel would be the most promising approach in that respect?

4 p.m.

Distinguished Professor, School of Public Policy, University of Maryland, As an Individual

Dr. Allen Schick

The parliamentary budget office is inherently a hybrid. It cannot attach to a committee, and it's not a completely independent organization along the lines of the national budget office in Korea or the Congressional Budget Office in the United States.

I do think the Parliamentary Budget Officer should be doing more routine work for Parliament. I want to stress what I mean by this. I have a sense, which may be misplaced, that one of the issues is that the Parliamentary Budget Officer is put in a position of reporting only when troubles arise: when the government seems to be acting in an uninformed manner, where the numbers don't add up, so to speak.

I think it would be helpful for the Parliamentary Budget Officer to routinely report to Parliament its advice on the macroeconomic condition; various other economic variables that affect the budget, like prices and unemployment and interest rates; and projections of future revenue and expenditure. These come to mind as examples where the PBO would not be in a situation only of second-guessing the government, but rather also providing ongoing essential advice and data for Parliament.

4 p.m.

NDP

The Chair NDP Pat Martin

Thank you, Denis. Thank you, Professor.

Next, for the Conservative Party, Peter Braid.

You have roughly five minutes, Peter.

4 p.m.

Conservative

Peter Braid Conservative Kitchener—Waterloo, ON

Thank you, Mr. Chair.

Thank you very much, Professor Schick, for being with us this afternoon.

I want to circle back to some of the points you made in your opening remarks for purposes of elaboration and clarification.

You started off by talking about a two-stage process, the first stage being a framework and the second stage being the estimates. I want to clarify what the timeframes would look like in this two-step process, both the timing of each event during the fiscal year and then the gap in time between the two events. Have you any thoughts on that?

Where I'm coming from with my line of questioning is understanding how your proposal is different from what we do today. For all intents and purposes, we have this two-stage process now, with the framework being the budget.

4:05 p.m.

Distinguished Professor, School of Public Policy, University of Maryland, As an Individual

Dr. Allen Schick

The problem is that if the framework follows the main estimates it's kind of backwards. The timing is reversed. A framework doesn't do much good in framing issues if it comes after the estimates, so to my mind the key issue is that....

Let's work backwards. When do the estimates have to be tabled in order for Parliament to complete its work before the start of the financial year? That's the key marker.

Working back from that, you ask the second question: how much time is needed between the framework and the estimates for government to complete its budget work? I would estimate that is approximately one to two months, because a lot of the work will already have been done during the framework stage. Then, building back from that, you would have the framework.

4:05 p.m.

Conservative

Peter Braid Conservative Kitchener—Waterloo, ON

Okay. Do you see the need for the timing of the fiscal year to change at all, or not necessarily?

4:05 p.m.

Distinguished Professor, School of Public Policy, University of Maryland, As an Individual

Dr. Allen Schick

Not necessarily. I've lived through changes in the fiscal year that didn't make a difference. In other words, at the time you change a fiscal year you say that will solve all sorts of problems, and then you don't really change anything.

There may be good reasons to change the fiscal year, but they are independent of the issue we're discussing now: framework and the estimates.

4:05 p.m.

Conservative

Peter Braid Conservative Kitchener—Waterloo, ON

Okay.

4:05 p.m.

Distinguished Professor, School of Public Policy, University of Maryland, As an Individual

Dr. Allen Schick

Let me add a footnote to that.

4:05 p.m.

Conservative

Peter Braid Conservative Kitchener—Waterloo, ON

Absolutely.

4:05 p.m.

Distinguished Professor, School of Public Policy, University of Maryland, As an Individual

Dr. Allen Schick

A generation ago, the fiscal year in the United States was changed. It was advanced forward three months, from July 1 to October 1, the rationale being that this would give the United States Congress three additional months to complete its work on the budget.

What we've learned since then is that the U.S. Congress has a great capacity to wait to the last minute and beyond. The three months did not buy any additional time. Instead, it brought additional delay.

4:05 p.m.

Conservative

Peter Braid Conservative Kitchener—Waterloo, ON

That's called human nature, I think, Professor.

4:05 p.m.

Distinguished Professor, School of Public Policy, University of Maryland, As an Individual

Dr. Allen Schick

You're right.

4:05 p.m.

Conservative

Peter Braid Conservative Kitchener—Waterloo, ON

We work within the timeframes we have.

Second, and I found this interesting, you indicated that in the vast majority of developed countries, this notion of separating operating expenses and capital expenses has disappeared—with the exception of Canada, it seems.

Can you elaborate on that? Can you explain why Canada has been a bit of a holdout in that respect? Why have our partner countries, if you will, made that change, and what benefits have come?

4:05 p.m.

Distinguished Professor, School of Public Policy, University of Maryland, As an Individual

Dr. Allen Schick

I'm sorry, I didn't mean to say that Canada is the only holdout, but clearly it's in the minority. Most countries overwhelmingly have moved toward a consolidated budget.

I don't know enough about Canada to explain why it has persisted with the old system. It might simply be inertia.

Several things happened to make the consolidation of a budget logical. I mentioned the rise in prominence of fiscal policy, which requires that you look at the aggregates in the budget rather than the parts of the budget.

Another thing, which I did not mention earlier, is the decline in the investment component. To be a developed country is to be a country where investment expenditure recedes as a portion of the total budget. That's another factor.

Still another factor is what I mentioned earlier, the substitutability between operating and capital expenditure.

Finally, there's the growth of government debt financing of the budget. If government is financing both operating and capital expenditure, then the logic of separating the two diminishes.

Having said all this, I'd like to raise the following cautions.

One, you still need information in the budget on capital investment.

Two, you still may want to maintain a golden rule with respect to government indebtedness, to limit it.

Three, to the extent that you develop an accrual budget system or accrual accounting system, as a number of the Commonwealth countries—Britain, Australia, and New Zealand—have done, then what you need is a capacity to estimate the value of the capital stock of a country, which means that you need depreciation accounts as well. That's a fairly complex matter that you may want to consider.

The final point I want to make is that some have argued that with the consolidation of the budget, advanced countries, including Canada, are underinvesting in infrastructure. Since it recedes in importance, it doesn't have its separate budget, it's not separately protected, and consequently, in the competition for funds, capital investment, which can be very costly, can be deferred in order to pay the current expenditure.

So that's something you should be mindful of.

4:10 p.m.

NDP

The Chair NDP Pat Martin

Thank you, Peter. Thank you, Professor.

We are well over time. We are going to try to keep these blocks of time as close to five minutes as we can.

Next, Denis, I believe you would like to pick up where you left off.