Annex 2

The Budgetary Balance, Financial Balance and National Accounts Budget Balance

There are three basic measures of the federal government's fiscal position in Canada -- two measures based on the public accounts (budgetary balance and financial balance) and one based on the System of National Accounts, as prepared by Statistics Canada. Corresponding to each measure are indicators of the net debt position of the federal government.

Differences in the measures arise because the accounting frameworks are designed for different purposes.

The fundamental purpose of the public accounts measures (budgetary balance and financial balance) is to provide information to Parliament on the government's financial activities as required under the Financial Administration Act. The purpose of the public accounts is to permit parliamentary control of public funds into and out of the Consolidated Revenue Fund. The results are based on generally accepted accounting principles for the public sector and are audited by the Auditor General of Canada.

The financial balance (requirements/surplus) measures the amount by which cash going out from the government exceeds cash coming in. Over time, it is roughly equivalent to the amount of money that the government has to borrow in credit markets or the amount of market debt that the government is repaying.

However, in any one year, changes in the government's cash balance and foreign reserve position can also have a temporary effect on the level of market debt.

▪	The main difference between the budgetary balance and the financial balance relates to the treatment of federal government employee pension accounts. The budgetary balance includes the total annual pension-related obligations (the government's contribution as an employer for current service costs plus interest on its borrowings from the pension accounts) while the financial balance includes only the benefits paid out in that year less employee premiums paid.

▪	In addition, the budgetary balance includes all the federal government's obligations incurred during the course of the year while the financial balance only includes the actual cash outlay related to these obligations.

Most industrialized countries present their budgets on a basis that is more comparable to the financial balance approach than to the public accounts measure of the budgetary balance. The financial balance corresponds closely to the Unified Budget Balance in the United States.

The primary objective of the national accounts is to measure economic production and income. The government sector in the national accounts is treated on the same basis as other sectors of the economy. The current national accounts treatment of the transactions of federal government employee pension accounts is similar to that in the public accounts measure of the financial balance.

▪	National accounts balances are used for international fiscal comparisons by the Organization for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF).

▪	The national accounts also provide a consistent framework for aggregation and comparison of the fiscal positions of the various levels of government in Canada.

The budgetary balance (deficit or surplus) is the most comprehensive of the three measures. It includes all transactions with outside parties that enter into the calculation of the deficit or surplus of the government. It also includes liabilities incurred during the year for which no cash payment has been made and only those revenues and program spending over which Parliament has given it control.

Chart A2.1 (see BPA2-1E.WMF or .WPG)

Table A2.1

Alternative measures of the federal balance1

1980-81 to 1996-97 (fiscal years)

Budgetary balance Financial balance (excluding foreign exchange transactions)

National accounts balance

Year Millions

of dollars Per cent

of GDP Millions

of dollars Per cent

of GDP Millions

of dollars Per cent

of GDP 1980-81 -14,556 -4.6 -9,917 -3.1 -10,219 -3.2 1981-82 -15,674 -4.3 -9,264 -2.6 -8,168 -2.3 1982-83 -29,049 -7.6 -23,819 -6.3 -21,323 -5.6 1983-84 -32,877 -8.0 -25,219 -6.1 -25,957 -6.3 1984-85 -38,437 -8.6 -29,824 -6.6 -33,128 -7.4 1985-86 -34,595 -7.1 -30,510 -6.3 -29,725 -6.1 1986-87 -30,742 -6.0 -22,918 -4.5 -24,934 -4.9 1987-88 -27,794 -5.0 -18,849 -3.4 -21,511 -3.9 1988-89 -28,773 -4.7 -22,424 -3.7 -20,704 -3.4 1989-90 -28,930 -4.4 -20,530 -3.1 -23,571 -3.6 1990-91 -32,000 -4.7 -24,538 -3.6 -28,801 -4.2 1991-92 -34,357 -5.0 -31,800 -4.7 -29,638 -4.3 1992-93 -41,021 -5.9 -34,497 -4.9 -33,659 -4.8 1993-94 -42,012 -5.8 -29,850 -4.1 -32,021 -4.4 1994-95 -37,462 -4.9 -25,842 -3.4 -26,884 -3.5 1995-96 -28,617 -3.6 -17,183 -2.2 -24,401 -3.1 1996-97 -8,897 -1.1 1,265 0.2 -7,482 -0.9 1	A positive number denotes a surplus, a negative number denotes a deficit.

Each of the three measures provides important complementary perspectives on the government's fiscal position. Although the measures differ in levels, their trends are broadly similar (Chart A2.1 and Table A2.1).

As the deficits or surpluses derived from these three measures are different, so are the measures of debt (Table A2.2). The accumulation of annual budgetary balances (deficits and surpluses) since Confederation is the net public debt. For financial requirements/surplus, the relevant measure is the stock of market debt that the government has outstanding (Table A2.2). Another important debt measure in the public accounts is interest-bearing debt. This measure includes all interest-bearing liabilities of the Government of Canada. As such, this is the measure that is most appropriate for calculating the average effective interest rate. Interest-bearing debt is larger than market debt because it includes liabilities which have not been issued on markets -- notably the government's liabilities to its employee pension accounts.

The national accounts debt represents the government's total liabilities minus its financial assets (federal net debt consistent with recent revisions to the national accounts measure of the budget balance is not currently available).

Table A2.2

Alternative public accounts measures of the federal debt1

1980-81 to 1996-97 (fiscal years)

Net debt Interest

bearing debt

Market debt National

account debt2

Actual Millions

of dollars Per cent

of GDP Millions

of dollars Per of

GDP cent Millions

of dollars Per cent

of GDP Millions

of dollars Per cent

of GDP 1980-81 91,948 29.2 112,418 35.7 83,138 26.4 49,609 15.7 1981-82 107,622 29.9 126,684 35.1 93,167 25.8 57,817 16.0 1982-83 136,671 36.0 154,221 40.6 116,562 30.7 79,547 20.9 1983-84 169,549 41.2 184,849 45.0 142,901 34.8 105,765 25.7 1984-85 207,986 46.3 219,458 48.8 172,719 38.4 136,620 30.4 1985-86 242,581 50.0 253,381 52.2 201,229 41.5 169,619 35.0 1986-87 273,323 53.4 286,034 55.9 228,611 44.7 195,919 38.3 1987-88 301,117 54.0 313,948 56.3 250,809 44.9 215,613 38.6 1988-89 329,890 53.9 345,057 56.4 276,301 45.2 236,708 38.7 1989-90 358,820 54.7 370,104 56.4 294,562 44.9 262,021 39.9 1990-91 390,820 57.6 406,475 59.9 323,903 47.8 287,618 42.4 1991-92 425,177 62.2 440,181 64.4 351,885 51.5 309,189 45.3 1992-93 466,198 66.7 477,034 68.3 382,741 54.8 340,699 48.8 1993-94 508,210 70.2 514,510 71.1 413,975 57.2 366,494 50.6 1994-95 545,672 71.6 550,192 72.2 440,998 57.9 395,313 51.9 1995-96 574,289 71.9 586,387 73.4 469,547 58.8 425,893 53.3 1996-97 583,186 71.1 600,557 73.2 476,852 58.1 439,279 53.5 1	National accounts balance sheet data not available on the basis of revised Canadian System of National Accounts.

2	National accounts debt figures represent net financial assets on a calendar year basis.