Budget 2001 - Budget Plan
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Annex 3
The Budgetary Balance, Financial Requirements/Source, and National Accounts Budget Balance

Alternative Measures of Annual Fiscal Position

There are three basic measures of the federal government’s fiscal position – two are based on the Public Accounts (the budgetary balance and financial requirements/source) and one on the System of National Accounts, as prepared by Statistics Canada.

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

Public Accounts Budgetary Balance

The fundamental purpose of the Public Accounts is to provide information to Parliament on the Government’s financial activities, as required under the Financial Administration Act. The Public Accounts are based on generally accepted accounting principles for the public sector (as recommended by the Canadian Institute of Chartered Accountants’ Public Sector Accounting Board) and are audited by the Auditor General of Canada.

Public Accounts Financial Requirements/Source

The financial requirements/source, excluding foreign exchange transactions, measures the difference between cash payments by the Government and cash receipts. 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 an effect on the level of market debt.

In essence, the budgetary balance includes obligations incurred by the federal government during the course of the year, whereas the financial requirements/source only includes the actual cash outlay related to these obligations.

Prior to April 1, 2000, the main difference between the budgetary balance and the financial requirements/source was the treatment of federal government employees’ pension accounts. The budgetary balance included 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 requirements/source included only the benefits paid out in that year less employee premiums paid.

The recent legislated reform of the federal employee pension plans has significantly narrowed this difference. Effective April 1, 2000, contributions to the plans are invested in the market, thereby reducing the difference between the budgetary balance and financial requirements/source by about $3.5 billion.

Most industrialized countries present their budgets on a basis that is more comparable to the financial requirements/source than to the Public Accounts measure of the budgetary balance. The financial requirements/source corresponds closely to the unified budget balance in the United States.

National Accounts Budget Balance

The primary objective of the National Accounts is to measure current economic production and income. The government sector in the National Accounts is treated on the same basis as other sectors of the economy. As such, only tax revenues collected on income generated in the current year are included as revenues, and only spending which relates to economic activity in the current year is included as expenditures. The current National Accounts treat the transactions of federal government employees’ pension accounts as part of the personal sector.

• National Accounts budget balances are used for international fiscal comparisons by the Organisation for Economic Co-operation and Development and the International Monetary Fund.
• The National Accounts also provide a consistent framework for aggregation and comparison of the fiscal positions of the various levels of government in Canada.

Conclusion

The Public Accounts budgetary balance (deficit or surplus) is the most comprehensive of the three measures. It includes all financial transactions between the Government and outside parties. It also includes liabilities incurred during the year for which no cash payment has been made.

Each of the three measures provides important and complementary perspectives on the Government’s fiscal position. Although the measures differ in their levels, their trends are broadly similar (see the table and chart on the next page).

Table A3.1
Alternative Measures of the Federal Fiscal Position
1980-81 to 2000-01

Alternative Measures of Federal Debt

As the deficits or surpluses derived from these three measures are different, so are the measures of debt (Table A3.2).

• The accumulation of annual budgetary deficits and surpluses since Confederation is the net public debt.
• For financial requirements/sources, the relevant measure is the stock of market debt that the Government has outstanding.
• Another important debt measure in the Public Accounts is interest-bearing debt. This measure includes all interest-bearing liabilities of the Government of Canada and is the most appropriate measure for calculating the average effective interest rate. Interest-bearing debt is larger than market debt because it includes liabilities that have not been issued on markets – notably the Government’s liabilities to its employees’ pension accounts. Interest-bearing debt is also larger than the net debt because it includes the Government’s liabilities only, while the net debt includes financial assets.
• The National Accounts debt represents the Government’s total liabilities minus its financial assets. It is broadly comparable to net debt on a Public Accounts basis.

Table A3.2
Alternative Measures of the Federal Debt
1980-81 to 2000-01

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