Proceedings of the Standing Senate Committee on National Finance

Issue 23 - Tenth Report of the Committee

Tuesday, April 22, 1997

The Standing Senate Committee on National Finance has the honour to present its

TENTH REPORT

Your Committee, to which were referred the Main Estimates, 1997-98, has, in obedience to the Order of Reference of Tuesday, March 4, 1997, examined the said estimates and herewith presents its interim report.

As is customary with this Committee, two meetings were arranged for the initial review of the Estimates. On the evening of Wednesday, 19 March 1997, the Honourable Marcel Massé, President of the Treasury Board, accompanied by his officials, appeared before the Committee and answered questions of concern to members of the Committee. On the next day, 20 March, Treasury Board officials returned to provide additional information on issues raised by Committee members.

There are four components to this years Estimates. PART I provides an overview of federal spending by summarizing the key elements of the Main Estimates and highlighting the major changes. PART II, which is traditionally referred to as the Blue Book, directly supports the Appropriation Act. It lists in detail the resources that individual departments and agencies require for the upcoming fiscal year. It also identifies the spending authorities and the amounts to be included in subsequent appropriations. PART III contains an expenditure plan for each of the departments and agencies of the federal government. There are 78 Part III documents, and they elaborate on, and supplement, the information contained in Part II. Finally, there is a supplement to the Estimates and Budget documents entitled "Program Expenditure Detail: A Profile of Departmental Spending". It presents spending information by department and agency on a basis consistent with the Expenditure Plan contained in the Budget, together with capsule descriptions.

THE EXPENDITURE PLAN -- AN OVERVIEW

The February 1997 Budget provides for planned spending of $151.8 billion, of which $46 billion is for public debt charges and $105.8 billion is for program spending. It should be noted that the Estimates will differ from the total budgetary expenditure forecast presented by the Minister of Finance in several ways:

1. A number of items do not appear in the Estimates because of timing in the Budget decisions or because they depend on the passage of separate legislation.

2 The Estimates do not include funds that are set aside within the Expenditure Plan for operating contingencies or for items that are still subject to Parliamentary or Treasury Board approval.

3 Some spending authorities in the Estimates are expected to lapse.

In recognition that these amounts may be of interest to Parliamentarians, additional information is presented, beginning on page 12 of the Part I of the Estimates.

An overall sketch of the Expenditure Plan is presented below in Table I:

TABLE I

THE EXPENDITURE PLAN AND MAIN ESTIMATES 1997-98, IN MILLIONS OF DOLLARS

Voted appropriations 42,826

Statutory programs

Public debt charges 46,000

OAS/GIS/Spouses Allowances 22,308

Employment Insurance 14,667
Fiscal equalization 8,292
Canada Health and Social Transfers 12,500

Other statutory obligations 2,601

Total Main Estimates 149,194
Adjustments to reconcile with Budget 2,606
Total Planned Budgetary Expenditures 151,800

SOURCE: 1997-98 Main Estimates, Part I, page 10.

Of the $149.2 billion set out in the Main Estimates, $106.4 billion, or 71 per cent, represents statutory expenditures. Another way to look at the overall expenditures is in terms of payment type (see page 11 of Part I). Almost half ($71.5 billion, or 47.9 per cent) of the total budgetary estimates is in the form of transfers to other governments and to individuals. In other words, the federal government has no say in the ultimate use of half of the funds in its budget. Since public debt charges account for $46.0 billion, or 30.8 per cent of the budget, only $31.7 billion (21.2 per cent) of the budget is subject to day-to-day government control.

THE HEARINGS

In his opening statement, Mr. Massé outlined some significant changes in the Estimates, and addressed certain issues regarding the speed with which the government has brought its spending under control. The Minister believes that the government is well under way towards meeting its spending objectives. He reminded the Committee that forecast program spending for the 1996-97 fiscal year is essentially at the $109 billion level anticipated a year ago.

Recent press reports have expressed concerns that the government will not meet its 1995 Budget forecast for program spending in the 1997-98 fiscal year. Mr. Massé assured the Committee that the budget cuts originally outlined in the 1995 Budget will be implemented, and on time. What has changed is that in the intervening years the government has announced new programs whose budget requirements could not have been anticipated in 1995. He noted that the difference between the original forecast and the current estimate for program spending in 1997-98, is explained by these modest spending increases, which reflect government priorities. The current estimate is now $44.99 billion versus the original forecast of $42.09 billion. The difference of about $2.9 billion represents government expenditures announced subsequent to the original forecast.

These numbers elicited considerable discussion between the members of the Committee and the Minister. In the end, members were not entirely satisfied with the matter. In fact, they were frustrated by their inability to reconcile earlier budget forecasts with the current Estimates of government expenditures. It was felt that in order to do a half-decent job, Committee members should be able to get some information in a form that lends itself readily to comparison with numbers from earlier government financial documents. The Minister agreed that it is often difficult to compare numbers over time, especially if there have been changes in accounting practices or in policies that affect spending. With respect to the current Estimates, the Minister promised to provide the Committee with additional information which he hoped would clarify the situation to members' satisfaction.

The Committee wanted to know how the surplus in the Unemployment Insurance Fund might be used to reduce the deficit. Mr. Massé explained that, under the present accounting system, accumulated premiums in the Unemployment Insurance Fund are counted as part of government revenues. This system of accounting has been in place since 1986, and was introduced at the request of the Auditor General. In this accounting system, outflows from the fund in the form of payments for unemployment insurance are entered as government expenditures, and premiums collected are entered as revenues. Therefore, each budget prepared by the Minister of Finance will contain an estimate of the future balance in the Fund so as to determine what its impact will be on the deficit. In this way, the Minister explained, the current improvements in this year's deficit over what had been anticipated in earlier budgets cannot be attributed to the $5 billion surplus in the U.I. Fund. This surplus and its effect on the deficit has already been included in earlier budget forecasts.

Members of the Committee sought to determine the relative importance of revenue increases over budget cuts in arriving at the current lower deficit levels. For instance, it was noted that revenues have increased from $116 billion in 1994-95 to a projected level of $132 billion in 1997-98, and that revenue enhancement therefore plays a significant role in reducing the deficit. The Minister was also asked to address the charge that the federal government's cost-cutting exercise is no more than a shifting of costs onto other levels of government, and that most of the cost reductions are in fact borne by the provinces. Mr. Massé responded that his government's deficit reduction exercise was never intended to be accomplished solely through cost cutting, nor was cutting federal programs intended to be the only approach: the reality is a combination of cuts in federal expenditures and increases in revenue. He reminded the Committee that actual federal program spending has declined from $120.9 billion in 1994-95 to $105.6 billion in the current fiscal year. With respect to transfers to provinces, he noted that the federal departments have reduced spending by about 14 per cent from 1993-94, while federal transfers to provinces are down only about 9.9 per cent. Any difference observed between the federal claim and the provincial claim arises because of the base year employed to measure the change in federal transfers to provinces. The current government is measuring from 1993-94, the last year of the previous government, while the provinces are measuring from 1995-96, the last year at which transfers were increased, and the peak year for level of transfers to provinces. Mr. Massé reminded the Committee that the objective of the government was to reduce its absolute size by 20 per cent. However, as 55.9 per cent of federal expenditures are transfer payments, it is difficult to achieve a 20 per cent reduction without cutting transfers.

The federal government's student loan and interest costs programs continued to hold the attention of Committee members. Over the last year, members have questioned Treasury Board about the relatively high levels of federal expenditures on student loans. The current Estimates reveal that these programs will again cost the federal government in the vicinity of half a billion dollars in 1997-98, slightly less than the figure for the last fiscal-year. At $616.4 million for 1997-98, the Committee is concerned that these cost are increasing in part as a result of declining federal transfers for post-secondary education. In other words, members wanted to know if there was a link between federal cut-backs to provinces on post-secondary education transfers, and the costs of the student loan programs. The Treasury Board officials did not think that this was the case. In their opinion, a number of factors are behind the increases in student loan expenses of the federal government, including higher loan limits since 1994 and an increase in the number of students applying for loans, from 322,000 in 1993-94 to 385,000 this year.

In recent years the government has begun reporting a number of expenses that are anticipated in the coming year but for which there are no provisions in the Estimates. The Committee expressed an interest in some of these items and asked the Minister if he could add further explanations. In particular, the items under Agriculture and Agri-Food and the Department of Industry attracted members' attention. The Minister explained that the items listed under Agriculture and Agri-Food involved expenditures under the group of safety-net programs that provide farm income protection. That group of programs has not yet been approved by Parliament, although the government expects it ultimately to cost up to $3 billion, some of which will be incurred in the current fiscal year. Because the programs are not yet approved, the announced expenditures cannot be included in the Estimates. However, an amount has been set aside, so that Parliament will be aware of the projected expenditure. When the programs are approved and the details of the expenditures are clarified, the amounts will be sent to Parliament for approval in the Supplementary Estimates. A similar situation exists at the Department of Industry for the proposed infrastructure program, which is expected to cost $425 million and will be delivered by the regional development agencies. As these agencies are the responsibility of Industry Canada, the amount appears in that Department's estimates.

Questions were raised about the financial accountability of Royal Commissions and other commissions of inquiry. The Minister agreed that it is difficult to control the amounts of money spent by commissions of inquiry, in part because they are supposed to operate at arm's-length from the government. However, he said he would welcome advice on ways to control the budgets of such inquiries without exercising control over their freedom to conduct their proceedings as they see fit. He recognized their need to operate at arm's length, but also the need to keep their expenses within reasonable limits.

At the Committee's second day of hearings on the 1997-98 Estimates, Mr. David Miller, Assistant Secretary, Expenditure Management Sector, Treasury Board of Canada, responded to questions from the members of the Committee. One such question involved an item under the Department of Citizenship and Immigration for loan write-offs and foreign interest costs. The Committee was informed that new immigrants, upon entering the country, have the option of applying for loans so that they can establish themselves here in Canada. The loans are repaid under terms worked out with the individuals. In some cases, the money become difficult or impossible to collect. At that point, Parliament is asked to delete the loans from the accounts of Canada. There remained some question about the size and use of these loans. For instance, were the loans given to immigrants who were refugees or to immigrants who were contemplating going into business? The Treasury Board representatives agreed to obtain further clarification on the use of this type of loan, their purpose and their size.

Questions surrounding the Controlled Drugs and Substances Act (CDSA) were raised by members of the Committee. Specifically, they wanted to know if provisions were made in the Estimates for implementing the CDSA, which received Royal Assent in June 1996. There appear to be unusual delays in developing a licensing scheme, which would permit Canadian farmers to cultivate industrial hemp legally. After nine months, Health Canada, which has been charged by Parliament with the responsibility of formulating the new regulations, has still not completed its work. Until regulations are available, the Act cannot be proclaim into force. Unfortunately, the Treasury Board officials could not say what stage preparation of the regulations had reached. The Committee is concerned about what Health Canada, with its $1.5 billion budget, is doing to develop a system allowing the cultivation of industrial hemp in Canada. Mr. Miller assured the Committee that he will have the Department of Health respond to this questions. If the answer remains unsatisfactory, the Committee is considering inviting officials of the Department of Health to appear before it to answer questions about this legislation.

A question arose as to whether Canada benefits from any assistance it provides for natural resource exploration in developing countries. In particular, the Committee wanted to know if Canada was entitled to any royalties on large petroleum discoveries that might have resulted from federal assistance programs for developing countries. Mr. Miller thought that such royalties payable to a foreign aid donor would be unusual. The more likely scenario is that assistance is provided to a developing country which then contracts out the exploration to a Canadian firm. The firm, in turn, may obtain certain royalty rights as part of the exploration contract. In the past, such petroleum exploration assistance was often carried out by state-owned Petro-Canada, and Canada therefore stood to benefit from any significant natural resource discovery. Mr. Miller said he would attempt to determine what is the current practice, now that Petro-Canada has been privatized.

The question of recovery fees and user fees for government services also came up at this second meeting, and led to a lengthy discussion on the nature of and use of such fees in federal programs. Mr. Miller explained that in general when the government receives revenues, they are deposited to the Consolidated Revenue Fund. However, in some instances, when Parliament is asked to approve spending for a particular operation or agency, it may require that the agency receive a certain amount of money and spending authority up to a certain level of revenue, i.e., it is permitted to spend some of the revenue that it can raise. If a department receives what is referred to as a net amount or a net vote, it can carry on its activity provided that it can raise the net amount required to pay for the activity. If not, then it does not have the authority to pursue its expenditure plans. Where fees cannot be directly linked to the service that is provided, the amount collected is credited to the Consolidated Revenue Fund and is treated in the same fashion as tax revenue. The Committee expressed an interest in obtaining further information on these practices in the federal government, and requested that Treasury Board provide it with additional data.

Also of interest to the Committee is the on-going reform of the expenditure reporting system. Mr. Miller said that the changes are well under way, and that implementation has been facilitated by the relative stability in the planning environment, a situation that he expects to persist until the year 2000. On the other hand, he noted that the government is about to re-enter collective bargaining for the first time in six years, and that this could introduce uncertainty in the planning process. He also observed that one problem that continues to plague Treasury Board is its difficulties in dealing with programs that affect more than one department. If Treasury Board were able to take a broader view rather than a departmental view, it might be better able to ensure that there is no duplication in government activities.

The Public Service pension plan has been in a surplus situation for some time. The Committee was interested in knowing how much the government expected to take out of the Plan next year. The Treasury Board representatives explained that the total amount invested for Public Service Superannuation is $106 billion, and that the moneys are invested in the federal government. Actuaries have assessed at $86 billion the amount that the federal government requires to meet its present obligations under the Plan. This means that the Plan has a $20 billion surplus at this time, which the government intends to reduce over a period of from 12 to 15 years. For fiscal 1997-98, the reduction is expected to be about $1.4 billion.

Respectfully submitted,

DAVID TKACHUK

Chairman