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Budget Spending Blackbox: Building a Bottom-Up Federal Expense Forecast

by Randall Bartlett and Alex Reeves

Much like the moment when the wizard is discovered in the classic movie The Wizard of OZ, the Government of Canada is asking Canadians and parliamentarians to ignore what’s going on behind the curtain of its spending forecast. Specifically, Direct Program Expenses (DPE) – the discretionary part of federal government spending – is an impenetrable black box when presented in budget documents. Indeed, the budget forecasts are so high-level that elected representatives don’t know with certainty what the government plans to spend on personnel, how many employees it expects to have in a couple of years’ time, what it plans to invest in capital, among many other unknowns.

The problem is multifold. First, numbers around federal government spending are broken down in different ways – such as by department, program activity, and/or standard object (e.g., personnel, repair and maintenance, utilities, etc.) – depending on which document you’re looking at. And these differences often make reconciling various forecasts and estimates difficult. Second, the multitude of federal documents around discretionary spending are determined on different accounting bases (cash versus accrual), again making it challenging to translate one set of estimates and forecasts to another. Third, some of the forward-looking information parliamentarians vote on is based on budgets, while actual future spending numbers that Parliament approves (appropriations) provide only a partial picture of the expenditures that lay ahead. Finally, when the Institute of Fiscal Studies and Democracy (IFSD) reached out to central agencies, as well as the Receiver General and Parliamentary Budget Officer (PBO), for non-confidential, non-public information that would help to shed light on some of this spending, we were either ignored or told that the requested information would not be provided. This only changed when we chose to include media on the request, at which time the Receiver General provided the requested historical information (in this case related to spending on personnel).

For these reasons related to a lack of transparency in fiscal reporting, among others, it is extremely difficult for independent experts to assess how realistic the Government of Canada’s fiscal forecast is. And, according to former Deputy Minister of Finance Scott Clark, “Without transparency there can be no accountability.” This alone should make the federal government’s fiscal forecast of questionable credibility. And this question of credibility becomes even that much more acute when comparing the DPE forecasts of the first eight years of the current federal government (assuming they win the 2019 election and discretionary spending comes in line with their latest forecast) and the last eight years of the prior regime. This is because they look uncannily similar, despite these being administrations with entirely different messages and fiscal targets (Chart A).

Despite the dearth of information made available by the Government of Canada to allow independent experts to evaluate the outlook for discretionary spending, the IFSD has produced a bottom-up DPE forecast. To do so, the IFSD has employed two approaches.  

The first approach is based on the federal government’s monthly financial statement, the Fiscal Monitor, which provides fiscal information up to and including November 2017. This is then married with information from the Main and Supplementary Estimates – the spending approved by parliament for the current fiscal year. Together, this results in a DPE forecast of $133.7 billion in the 2017-18 fiscal year. This is well below the DPE forecast of $139.1 billion published in the Fall Economic Statement 2017 (FES 2017) for the current fiscal year, the difference being a function of both lower operating expenses and transfer payments (Chart B). And since the IFSD used the federal government’s DPE forecast from the FES 2017 for the 2017-18 fiscal year in its January 2018 federal fiscal forecast, the starting point for the IFSD’s DPE forecast at the time was also much higher than that suggested by the Fiscal-Monitor-derived DPE forecast.

But like so many other things in life, there is more than one way to do a fiscal forecast. The second bottom-up DPE forecast undertaken by the IFSD is based standard objects, which include personnel, non-personnel operating expenses, and capital spending. The forecast for personnel begins with the federal government’s outlook for full-time equivalent employees (FTEs) and reasonable assumptions for future growth in total compensation linked to detailed information received from the Receiver General. When combined with forecasts of capital spending and other non-personnel operating expenses, the result is an operating expense forecast. This operating expense forecast is then combined with forecasts of transfer payments and capital amortization from the IFSD and other federal fiscal documents. For the 2017-18 fiscal year, this leads to an outlook for DPE which is similar to that derived from the November 2017 Fiscal Monitor and Main and Supplementary Estimates, at $132.7 billion (Chart C). Due to this lower DPE forecast alone, the budget deficit for the 2017-18 fiscal year is likely to come in well below that forecasted by the federal government in the FES 2017 and the IFSD in January 2018 (Chart D). But, going forward, DPE is expected to increase considerably, as operating expenses continue to rise and lapsed infrastructure spending finally gets out the door. This supports an outlook for ever increasing budget deficits through the 2019-20 fiscal year that are larger than those forecasted by the federal government in the FES 2017 but lower than in the IFSD’s January 2018 forecast.

This piecemeal approach to understanding the federal government’s future spending plans should leave parliamentarians with a handful of fundamental questions: Why does the Government of Canada not produce spending forecasts that can be easily scrutinized by parliamentarians and independent experts? Why does the federal government prevent independent experts from having access to non-confidential, non-public information, so as to evaluate where projected spending restraint will come from? Why does Parliament vote on two sets of spending plans that are determined on different accounting bases (cash versus accrual)? If the federal government is planning to cut FTEs in the near future (as is the case in the latest spending numbers sent to Parliament), have they had those discussions with public-sector unions so as to ensure they will happen?

At the IFSD, we don’t know the answers to these questions. We just ask them. Instead, it is up to parliamentarians to demand the answers.

This blogpost accompanies IFSD's Report Budget Spending Blackbox: Building a Bottom-Up Federal Expense Forecast, published on February 22, 2018. This report was prepared by Randall Bartlett, Chief Economist, and Alex Reeves, Research Assistant, at the Institute of Fiscal Studies and Democracy, under the direction of Kevin Page. Read it here