Public Accounts Committee on Oct. 17th, 2017

[Alex Nuttall, Conservative, Barrie—Springwater—Oro-Medonte, ON]

Is there a 10-year average that we can get to understand the trends?

The reason I ask this question is that this one specifically is an interesting program for underwriting debt directly to small business owners, and I would like to understand where it fits in comparison with other underwriting we do. It has much more risk associated with it compared with, let's say, GEMCO or CMHC and the underwriting of debt associated to those departments.

[Bill Matthews]

Mr. Chair, I think we'll do a take-away to give the member a bit of a history on the writeoffs versus the program spend, and we'll go back 10 years. Does that work?

[A voice]

Yes.

[The Chair, Conservative, Kevin Sorenson]

On the other point, Mr. Matthews referenced the fact that Finance Canada had the publication of the discount. Was that with regard to the discount rates?

[Bill Matthews]

The debt management strategy.

[The Chair, Conservative, Kevin Sorenson]

Is that online, Mr. Rochon? Is that on the Finance website?

[Paul Rochon]

It is, and it's published as part of the budget now.

[The Chair, Conservative, Kevin Sorenson]

All right, thank you.

We'll now go to Ms. Shanahan, please.

You have five minutes.

[Brenda Shanahan, Liberal, Châteauguay—Lacolle, QC]

Thank you very much, Mr. Chair.

Thank you, everyone, for being here.

I think this is very illuminating for us parliamentarians to better understand what I think we will all agree is a pretty singular set of financial statements, even though I agree with my colleague Mr. Christopherson that Canada is up there as a gold standard as far as the integrity of its financial reporting goes, and I thank you all for that. One of the challenges is not only referring to the different statements but also the fact that the estimates process is on this sort of modified cash basis. That's what we, as parliamentarians, have to vote on, on a regular basis, whereas of course the financial statements themselves are on an accrual basis, and you guys have to do all of that adjustment between the two.

I want to refer to two parts of the statement. One is the balance sheet. I want to tackle the value of non-financial assets a little bit more. I also want to address cash flow. Where do we see in the financial statements the fact that there's money that comes in and goes out on a month-to-month basis? It's kind of arbitrary, is it not? It has to do with business cycles and collection cycles, if we think of the CRA.

As a parliamentarian, when I hear reference to the monthly fiscal update and this number comes out and that number comes out, what does it really mean? Are these meaningful numbers for us? Is a 12-month period even a meaningful number for us? What are we looking at?

[Bill Matthews]

Maybe I'll start and turn to my friends from Finance for a little bit of help, Mr. Chair.

In volume I, on page 2.8 you will see the government's statement of cash flow for the whole year. That gives you a sense of the ins and outs, and that is required disclosure by accounting standards.

In French, it is on the exact same page.

You do get a sense of where the government's cash came in from and what it has spent its cash on. Was it to pay down debt? Was it to pay salaries? That sort of breakdown is there. That's the annual bit.

On a month-to-month basis, the member is quite right in that for Finance to properly manage the debt, they have to have a sense of what's coming in and what's going out. It's easier to project our own expenditures, what we're going to pay, versus what tax revenue Canada Revenue Agency is going to bring in, because they don't really know when corporations might file, etc.

The forecasting is part science and part art, but there has been improvement in our ability to forecast cash flows, and the fiscal monitor does give you a sense of how things are during the year. Is it an exact indicator of what's going to happen at year-end? No. We make some year-end adjustments for things like whether or not debts are going to be collected, accrual adjustments, and tax return processing. But the fiscal monitor throughout the year is monthly, and it is a reasonable indicator of how things are going, once you understand that there are some adjustments made at the end of the year.

I'm not sure if my friends at Finance want to add anything.

[Paul Rochon]

Perhaps the only things to add are, one, that the department and the Bank of Canada devote some resources to forecasting both the inflows and the outflows so that the timing of our options for treasury bills and bonds is set up with a view of when in the calendar year cycle the government is going to require liquidity, and two, that the government maintains a reasonable liquidity buffer such that anything unforeseen can be managed.

[Brenda Shanahan, Liberal, Châteauguay—Lacolle, QC]

Excellent. Thank you very much.

Just to tackle non-financial assets—the capital assets that the government owns—how is their value estimated?

Also, Auditor General, I know that in your commentary, which we haven't addressed here directly but we have as a reference, you talk about some of the problems with reporting on capital assets. This would have been in the commentary on last year's financial audit.

[Bill Matthews]

Maybe I'll start with the accounting policy, Mr. Chair, and then leave it to the Auditor General to address his observation.

The way the assets are recorded is with their purchase price, so it's cash and what we actually paid to acquire or build it. Then, once the asset is in service, it is depreciated over what we estimate its useful life to be. If, during its useful life, we get a sense that our estimate is wrong, we will do a writedown of that asset to write it down to what we think its real value is. You will not see us revaluing assets for fair value, as you would with your real estate to see what's it really worth. This is historical cost. If it's a building or a tangible asset, we depreciate it. With land, obviously, we don't depreciate land—land does not depreciate—but it's based on what we paid for it, not what it's actually worth.

I'll let the Auditor General add any comments on his observation.

[Michael Ferguson]

Thank you.

In the observation, we were specifically talking about the financial statement discussion and analysis and the type of information that could help readers get a little bit below the numbers and a little bit into what the numbers mean. As you said, on the balance sheet there's a number for tangible capital assets of $69 billion. That number on its own doesn't tell you a lot. You can go back into the notes to the financial statements, and the notes will tell you what the original cost of all those tangible capital assets were and how much they have depreciated.

One of the measures that you see on this type of thing from time to time looks at that, what percentage of assets has been depreciated. That tells you, relative to their original capital cost, if the government's assets are almost at the end of their useful life or if they are at the beginning of their useful life. The figure $69 billion doesn't really tell you whether it's 69 billion dollars' worth of old assets or 69 billion dollars' worth of new assets, so this indicator helps people understand where the assets are in terms of their useful life.

The other thing is a comparison between how much the government spends on capital assets in a year compared to how much depreciation they record on the assets they already own, which, again, helps you understand whether the government is replenishing its assets at least as quickly as they are depreciating, knowing that you'd have to take into account that it costs more to replace an asset than it would have cost 10 or 20 years ago.

Those types of indicators are what we're talking about in that report. They can help people understand a little better the state of tangible capital assets just using the numbers that are already in the financial statements and not necessarily just the net book value.

[The Chair, Conservative, Kevin Sorenson]

Thank you very much.

I don't see any other answers at the table, so we'll now go to Mr. Christopherson, please.

[David Christopherson, NDP, Hamilton Centre, ON]

Thank you, Chair.

I have two questions. One is on the financial results. This is the deck from the Treasury Board, on page 7. The annual deficit in budget 2016-17 was 29.4 and the actual was 17.8. Even adjusted, for the budget it was 29.4, and the actual was 15.9. Not that it's a bad thing at all that there's less debt than anticipated, but for the longest time, there has been discussion, allegations, and accusations against governments that they deliberately inflate projected deficits and then, lo and behold, by magical, wonderful management, they cut that down by half. The PBO was created in large part to try to offset that to give some sense of numbers that people can rely on.

My first question is for both the Auditor General and the comptroller. The difference between 29.4 and 17 or 15 still seems like a pretty big discrepancy. Also, do you have any thoughts on the PBO? Is it being used in a way that is most effective? I want to give both of you an opportunity to comment on the PBO because there is some concern about whether or not we've got that right.

The other question is a follow-up on what you raised earlier, Auditor General, on the reserve force pension plan and your spring 2017 report on that. I'm going to read the paragraph, and then I'm done, Chair.

It reads:

National Defence’s slow progress in resolving this matter is unacceptable.

This is the Auditor General speaking. He said it's “unacceptable”. The paragraph continues:

In the nine years since the Reserve Force Pension Plan’s creation, the Office has been unable to provide parliamentarians and plan members with assurance that the Plan’s financial statements, which include a reported pension liability of—

—wait for it—

—$650 million, are free of significant error. This situation leaves parliamentarians and Plan members without assurance that the Plan’s financial statements present credible information about the Plan’s finances.

I'd like to hear a bit more about that, please.

Thank you, Chair.

[The Chair, Conservative, Kevin Sorenson]

Both Mr. Matthews and Mr. Ferguson can go on the first question, and I think Mr. Rochon as well, dealing with why the deficit was less, and maybe even why revenues were less.

Mr. Matthews.

[Bill Matthews]

There are maybe two things.

The forecasting ability has improved over the years. The economy does change, and I'll leave it to my colleagues from Finance to explain what has happened on the economic side. If the theory is that there's deliberate pessimism in the forecast—there is a bit of that—for risk, Finance will speak to that, but is there any systematic deliberate under-forecasting? No, there's not. It is challenging, based on all the economic results and what's happening globally today.

The only thing I will say on the PBO is that they're takers. Yes, they have some things they have to do, and the members of Parliament make individual requests. I think a fair question to them is on how you make sure they allocate their resources to the right priorities. Is it useful for them to challenge the government's forecasts given that you have all of these private sector forecasts out there as well, or is that just duplicative? I think that's a good question.

I'll leave it at that.

[The Chair, Conservative, Kevin Sorenson]

Mr. Ferguson.

[Michael Ferguson]

Thank you, Mr. Chair.

Maybe what I will do is refer you to the consolidated statement of operations, which is on page 2.5 of volume I.

[The Chair, Conservative, Kevin Sorenson]

Members may want to flip to page 2.5, volume I.

[Michael Ferguson]

This is the statement of revenue and expenses.

If you look at the line about halfway down the page called “Total revenues”, you will see that the actual revenues were about $6 billion higher than the budget. If you go down towards the end, the line that says, “Total expenses”, you will see that the expenses were about $6 billion lower than budget. The difference between the $29 billion and the $17 billion was $12 billion. Half of it, $6 billion, was on the revenue side and half of it was on the expense side. When you look at the revenue side, you see particularly that corporate taxes make up most of it. Corporate taxes were $42.216 billion compared to a budget of $37.877 billion. Most of the difference is in corporate taxes.

If you go down to the “Goods and services tax”, you'll see that that was about $1 billion above budget as well. Finance can tell you the economics behind why there may have been more corporate taxes, more goods and services taxes.

If you go down to the expense side, again, expenses were $6 billion below budget. There was $4 billion on what is called the “Total program expenses”, and $2 billion of it is in the “Public debt charges”. There was a $2-billion positive on the public debt charges.

Again, I think we had the conversation earlier about the fact that the government spent less on interest on its debt than it originally thought. Remember, sometimes that debt may have been issued in one year many years ago at a certain interest rate, and now it is refinanced at a lower rate than it originally was issued at. Even though it was in the year that interest rates may have gone up, if you're refinancing debt from a higher rate to a lower rate, then that can affect the interest expense. Again, a couple of billion dollars is in the public debt charges, and most of the rest of it, I think, is primarily in the other expenses, the departmental spending.

If you go through those numbers, it gives you the idea of where those differences are, and then I think the reasons for that. Whether those estimates are appropriate I think Mr. Matthews has addressed, and perhaps Finance can address that.

[Paul Rochon]

I would add that if you're comparing the $29 billion to the $17 billion, it's roughly a $12-billion difference. There is $6 billion of that which actually relates to a contingency reserve that was included in the $29 billion. That was a forecast that was done in March 2016, at a time when the economy was weak. Oil prices were around $25, if I go from memory. Of course, the economy recovered quite nicely, and has recovered quite nicely, so the combination of not needing that amount of contingency, plus a stronger economy as things evolved, meant that the overall deficit came in much lower than projected.

[The Chair, Conservative, Kevin Sorenson]

On the contingency fund, can you explain to us and Canadians what method was used to determine the contingency size, the actual $6 billion?

[Paul Rochon]

We've traditionally included a contingency fund of about $3 billion, which in relation to combined expenses and revenues of about $600 billion is actually quite a small buffer in the grand scheme of things. At different points in time, the department and the government have chosen a contingency reserve of different amounts. In some years, the contingency has increased over time. Frankly, it was a subjective assessment, given the weakness in the economy, that a larger contingency was appropriate at that time.