Annual Financial Report 2001-2002: 4
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The Budgetary Balance, Financial Requirements/Source and Debt

The budgetary balance is the most comprehensive measure of the federal government’s fiscal results. It is presented on a modified accrual basis of accounting, largely recording government liabilities when they are incurred, regardless of when the cash payment is made, and recording tax revenues only when cash is received. The budgetary balance covers only those activities over which the Government has legislative control.

In contrast, financial requirements/source measures the difference between cash coming in to the Government and cash going out. It differs from the budgetary balance in that it includes transactions in loans, investments and advances, federal employees’ pension accounts, other specified purpose accounts, and changes in other financial assets and liabilities. These activities are included as part of non-budgetary transactions. The conversion from modified accrual to cash accounting is also reflected in non-budgetary transactions. Non-budgetary transactions in 2001-02 resulted in a net requirement of funds amounting to $4.2 billion, compared to a net source of $0.8 billion in 2000-01.

With a budgetary surplus of $8.9 billion and a net requirement of funds from non-budgetary transactions of $4.2 billion, there was a financial source, excluding foreign exchange transactions, of $4.7 billion in 2001-02, down from the financial source of $19.0 billion in 2000-01. This marks the sixth consecutive year in which a financial source has been recorded.

Among the major components of non-budgetary transactions:

• Loans, investments and advances were virtually unchanged, as the impact of borrowings for the Canada Student Loans Program was offset by repayments from Crown corporations and others.

• Pensions and other accounts recorded a net requirement of funds of $1.7 billion, compared to net source of $1.3 billion in 2000-01. The net requirement primarily reflects the reforms of the federal government employees’ pension plans, effective April 1, 2000. Employer and employee contributions to the plans are now invested in financial markets, rather than being included as part of non-budgetary transactions. This reduces the non-budgetary source of funds by about $3 billion per year. In addition, a number of Crown corporations, which were members of the public sector pension plans, have set up their own pension plans, resulting in the transfer of the applicable assets to these new plans.

• Other transactions recorded a net requirement of $2.4 billion, compared to a net source of $2.2 billion in 2000-01. Developments in this component primarily reflect the conversion of accrual liabilities to cash. For example, in 2000-01 the federal government committed to providing the CFI with an additional $1.25 billion. This liability affected budgetary expenditures and therefore the budgetary balance in 2000-01, but had no impact on the financial balance, as the payment to the CFI was not made until June 2001. As a result, this liability resulted in a net source of funds in non-budgetary transactions in 2000-01 but a requirement for funds in 2001-02.

Financial requirements/source includes foreign exchange transactions. Foreign exchange transactions represent all transactions in international reserves held in the Exchange Fund Account (EFA). The objectives of the EFA are to provide general foreign currency liquidity for the Government and promote orderly conditions in the foreign exchange market. The EFA contains foreign currency investments, the Government’s gold holdings and assets related to Canada’s commitment to the International Monetary Fund (IMF). Increases in the level of reserves through borrowings, contributions to the IMF, and/or selling of Canadian dollars represent a requirement. Conversely, decreases in the level of reserves represent a source of funds. Taking all of these factors into account, there was a net requirement of $1.8 billion in 2001-02, compared to a net requirement of $8.8 billion in 2000-01.

As a result, there was a net financial source – the budgetary surplus plus non-budgetary and foreign exchange transactions – of $2.9 billion in 2001-02, compared to a net financial source of $10.2 billion in 2000-01.

With this net financial source and a drawing down of its cash balances, the Government retired $4.1 billion of its market debt. Cash balances at March 31, 2002, stood at $12.0 billion.

Total liabilities consist of interest-bearing debt and other liabilities. Interest-bearing debt includes unmatured, or market, debt and liabilities for pension and other accounts. At March 31, 2002, interest-bearing debt amounted to $583.4 billion, down $5.8 billion from the level a year earlier. Other liabilities, which include accounts payable and accrued liabilities, amounted to $40.7 billion, down $3.0 billion from 2000-01. As a result, total liabilities, or gross debt, stood at $624.1 billion.

Financial assets consist of cash and accounts receivable, foreign exchange accounts and loans, investments and advances. Capital assets, inventories and net receivables for tax revenues are not currently included, as capital assets and inventories are fully charged to expenditures at the time of acquisition or construction while tax revenues are reported on a cash basis. Financial assets totalled $87.6 billion at March 31, 2002, virtually unchanged from March 31, 2001.

As a result, net debt stood at $536.5 billion at March 31, 2002, down $8.9 billion from March 31, 2001, and $46.7 billion below the peak of $583.2 billion at March 31, 1997.

Foreign holdings of the Government of Canada’s outstanding market debt are estimated at $75.1 billion at the end of March 2002. This represents 17 per cent of the Government’s total market debt – the lowest ratio since 1986-87.

Table 6
Budgetary Balance and Financial Requirements/Source

Table 7
Outstanding Debt at Year-End

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