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.
NDP
Denis Blanchette NDP Louis-Hébert, QC
I would like to continue with the same topic as my colleague: the operating and the capital budgets. It must be said that it is always easier for a government to announce new measures than to fix existing ones. It is a better sell politically.
Mr. Schick, does the fact that we tend to put capital and operating budgets together not rather encourage new investments of various kinds and discourage investment in maintenance, which is never politically attractive in the short term?
Distinguished Professor, School of Public Policy, University of Maryland, As an Individual
Well, I don't know how investment expenditure is treated in Canada, but in most countries it's in the operating budget unless it's a very major project. In other words, filling in potholes in a highway is something that is regarded as an operating expenditure, typically, rather than a capital expenditure.
But I want to briefly note the following. There are multiple options for the relationship between capital and operating expenditure. What we've discussed are the extreme cases: two separate budgets on the one hand, or an integrated consolidated budget on the other hand.
Between these two extremes there are many ways of presenting, displaying, and voting on capital and operating expenditure. You don't have to completely lose sight of capital investment in order to consolidate them in a budget.
NDP
Denis Blanchette NDP Louis-Hébert, QC
Thank you very much.
I would like to move to another topic, the budget and the estimates. In Canada, we give the budget final approval after the financial year has started.
Could you tell us what happens in other countries, to your knowledge? How could ensuring that we table a budget before the start of the financial year help us to a greater extent than what we do currently?
Distinguished Professor, School of Public Policy, University of Maryland, As an Individual
Well, if you're asking for the timing or if it should be approved before the start of the fiscal year, there was an old tradition in Westminster countries—one of the most bizarre practices—which was that at one time all Westminster countries routinely approved the budget after the fiscal year had started. That is fading away. Logically, to the extent that a budget authorizes expenditure, it should authorize expenditure in advance of the fiscal year, rather than after the commencement of the fiscal year.
NDP
Denis Blanchette NDP Louis-Hébert, QC
Thank you very much.
Your idea of considering things in two stages, the strategy and the complete picture, is interesting. I imagine that it comes from your knowledge of practices elsewhere in the world. What has been the result of dividing the budget process into two, with a strategy on the one hand and the estimates on the other?
Distinguished Professor, School of Public Policy, University of Maryland, As an Individual
It's generally favourable. Sweden, which I mentioned earlier, adopted this divided system in the 1990s in response to an economic crisis it had. Since then, Sweden has done remarkably well. The reason is.... It's not simply that you have a strategy in the first stage. I called it a framework. A framework becomes the boundaries for the estimates, for revenues, and for expenditure.
In other words, government, before it examines the details of expenditure, is taking an explicit decision: what can we afford by way of total expenditure? This is favourable to the fiscal health of a country.
The alternative often is that the totals become the sum of the parts. You have pressure to spend on this and pressure to spend on that. Consequently, there's an inflation in the totals and in the deficit. This is the argument for establishing the framework before you get into the details.
NDP
The Chair NDP Pat Martin
Thank you, Denis. Your five minutes have expired.
Next, for the Conservatives, we have Scott Armstrong.
Five minutes, Scott.
Conservative
Scott Armstrong Conservative Cumberland—Colchester—Musquodoboit Valley, NS
Thank you, Mr. Chair.
Thank you, Dr. Schick, for your presentation.
I'm going to start my questions by going back to timing again. We've had several recommendations made by witnesses who have come before us. Sometimes they conflict. You've touched on them, but I just want to clarify your position.
I believe that in the United States the budget comes down some time in the fall, well before the fiscal year. Am I correct in saying that? That's if you can get a budget passed. Am I correct in saying that it comes down in the fall, well ahead of the fiscal year? Is that accurate?
Distinguished Professor, School of Public Policy, University of Maryland, As an Individual
Not in the fall, but in February. But that's nine months, yes.
Let me respond with the following. The United States is not a role model in budgeting for any country in the world and should not be regarded as a role model.
Conservative
Scott Armstrong Conservative Cumberland—Colchester—Musquodoboit Valley, NS
I'm definitely not suggesting that. What I am suggesting is that space and timing provide the opportunity to have the estimates fall underneath the framework that was presented before. Am I accurate in saying that?
Distinguished Professor, School of Public Policy, University of Maryland, As an Individual
Yes.
Conservative
Scott Armstrong Conservative Cumberland—Colchester—Musquodoboit Valley, NS
That's if the system works as it's supposed to work, but it doesn't always do that.
Would you suggest that one change, one recommendation, we maybe look at is to move the timing of the budget—earlier?
Distinguished Professor, School of Public Policy, University of Maryland, As an Individual
The answer to that question lies with you, not me. Ask yourself the following question: Do we as parliamentarians have sufficient time to undertake a responsible review of the government tabled by government? If the answer is yes, then don't change the timing. Only if the answer is no, and you can explain that no, should you consider moving it.
As a colleague of yours said earlier about human nature, giving Parliament two more months does not mean that Parliament will actually have two more months to discuss the budget.
Conservative
Scott Armstrong Conservative Cumberland—Colchester—Musquodoboit Valley, NS
I want you to clarify one other thing. You mentioned that sometimes, when you look at a consolidated budget, where you combine operating expenses and capital, capital becomes a poor stepchild. You look at the operating expenses and fund those first, because they're more immediate, and then capital tends to be brought to the side.
I would argue that in many cases, particularly in the area of infrastructure, municipal infrastructure, for example, you tend to let things go, and at some point in the future, when the infrastructure is about to collapse, you have to make massive investments. Would that accurately encapsulate what you were trying to get through to us?
Distinguished Professor, School of Public Policy, University of Maryland, As an Individual
No, but your point is well taken. That leads to something I did not discuss in my testimony, and that is that whether you have a consolidated budget or not, major infrastructure projects roll across two or more or sometimes even more than five fiscal years. One of the problems we have identified in advanced countries is that they are quite capable of undertaking short-term infrastructure projects, projects that can be completed within a year or two. But beyond that point, there's another parliament, another set of estimates, another appropriations act, etc., and you have stop/go financing, which adds to costs and diminishes results.
Even more important is to make sure that Parliament and government have the capacity to consider, vote on, and finance long-term, major infrastructure.
Conservative
Scott Armstrong Conservative Cumberland—Colchester—Musquodoboit Valley, NS
Great.
The last question I have concerns the cash versus accrual debate. We've had witnesses come to the committee to talk on both sides of that. You touched on that in an earlier answer. Can you elaborate on that a bit? If we're going to move to more of an accrual basis, do you think that's a good direction to move in? Or again, is that something we have to decide for ourselves?
Distinguished Professor, School of Public Policy, University of Maryland, As an Individual
If you're talking about accrual budgeting in contrast to accrual accounting, then I would raise a number of cautionary flags.
Financial reporting in Canada, I believe, as in most of the developed countries, is done on a modified accrual basis already. If you move the budget to an accrual basis, you have to be very careful about how you do it. Australia did it wrong, with disastrous results. The budget gets to be more complex. There's a lot more misunderstanding about it, particularly with respect to depreciation accounts. To tell you the truth, there are only about half a dozen countries that really have what we'd call an accrual budgeting system. The fact that so few countries have it would indicate that it's not something I would put on the top of the list in terms of urgency.
Conservative
Scott Armstrong Conservative Cumberland—Colchester—Musquodoboit Valley, NS
One thing we could say for sure, though, is that if we moved in that direction and went away from a cash system, it would definitely be more difficult to provide proper oversight because of the complications that would incur. Am I accurate in saying that?
Distinguished Professor, School of Public Policy, University of Maryland, As an Individual
Without adequate staffing of Parliament, that would be correct. In other words, if you move to an accrual basis, as you indicated, you escalate the complexity of the budget statements. Assumptions become even more important. If, for example, you are provisioning funds for future liabilities in government, you have to know what the assumptions are. So if you move from a cash basis to an accrual basis, you have significantly increased the prominence of assumptions in budget work.
NDP
The Chair NDP Pat Martin
Thank you, Scott.
The way things are going, we'll just have time for one more round, I believe, and happily that's the representative of the Liberal Party, John McCallum. So all three parties' representatives will at least have an opportunity.
The floor is yours, John.
Liberal
John McCallum Liberal Markham—Unionville, ON
Thank you, and thank you, Professor Schick.
I had one question about the capital operating distinction, to have capital operating separate or just combine the two. I don't quite understand why that's so important, because when you have the two separately, you also have the total, so if you don't want to make the capital operating distinction, just look at the total. I'm not sure much would change if we got rid of the two separate categories. Am I missing something?
Distinguished Professor, School of Public Policy, University of Maryland, As an Individual
If you're looking at the total, then you're right, but if you're looking at the interchangeability between capital and operating, the story might be different. We recall that one of the arguments that presented in favour of integration is that capital and operating expenditure, rather than being discrete, often are substitutes for one another. More of one can mean less of the other. More of one can be more of the other. So however you do it, sir, it is important to view capital and operating expenditure in tandem with one another. You are building the road, you're opening a hospital, you are expanding the school network, and that entails operating costs downstream. It is important to see the connections between the two budgets. The connections are what I'm worried about, rather than simply the averages.
Liberal
John McCallum Liberal Markham—Unionville, ON
Thank you.
I wanted to clarify one point about what you meant by assumptions under the table, as you put it. I'm an economist, so I make assumptions. Are you talking about assumptions on matters like the economic growth next year, the demographics, the growth of seniors, for example, all of those ingredients that make up the likely revenue streams and the expenditures on old age security, those kinds of things?
Distinguished Professor, School of Public Policy, University of Maryland, As an Individual
Exactly. And economists live by assumptions all the time. You know the old joke about “assume a ladder”, and that's what economists do.
But seriously, if you look at appropriations estimates, divide them into two categories. One I'll call fixed appropriations—you're appropriating a sum to an administrative unit for its running costs. Assumptions are not important there. The other thing, our open-ended programs, mostly in standing or permanent legislation, constitute by far the largest share of the government's budget in Ottawa. Those are driven almost entirely by assumptions. What will the price level be? What will the employment rate be? What will the participation in a program be? Government announces a new program with respect to assisting low-income people with nutritional needs. You put an entry in the budget. But what matters is the assumptions you make as to who will participate, to what extent, etc.
So in the fixed budget, assumptions are not important. In the much larger, open-ended budget, and of course for revenues as well, assumptions are critical.