Annex 7
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, which are audited by the Auditor General of Canada) 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 Public Sector Accounting Board [PSAB] of the Canadian Institute of Chartered Accountants) and are audited by the Auditor General of Canada.

With this budget, the Government is presenting its financial statements on a full accrual basis of accounting, as recommended by the PSAB and 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 contrast, the budgetary balance is on a full accrual basis of accounting, recognizing revenues when they are earned and obligations when they are incurred.

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 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 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.

The move to full accrual accounting in this budget further affects the difference between the two measures. If the accrual and resulting cash impact occur in the same year, then there is no difference. However, if the cash impact of the accrual falls in a different year, there will be a difference between the two measures.

Most industrialized countries present their budgets on a basis that is more comparable to the financial requirements/source. 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. In the National Accounts the government sector 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.

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 revenues earned for which cash has not been received and liabilities incurred during the year for which no cash payment has been made. This is the measure that is audited by the Auditor General.

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 below).

Table A7.1
Alternative Measures of the Federal Fiscal Position 1993–94 to 2001–02

Alternative Measures of Debt

As the deficits or surpluses derived from these three measures are different, so are the measures of debt (see Table A7.2).

• The sum of annual budgetary deficits and surpluses since Confederation under full accrual accounting is the federal debt (accumulated deficit). The change in this measure is the annual budgetary balance.

• For financial requirements/sources, the relevant measure is the stock of market debt that the Government has outstanding.

• Another 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.

• The National Accounts net worth represents the Government’s total liabilities minus its assets. With the move to full accrual accounting, the difference between the Public Accounts measure of the accumulated deficit and the National Accounts measure of net worth has increased, mainly due to the recognition of environmental liabilities, aboriginal claims, and post-employment and retirement benefits.

Table A7.2
Alternative Measures of the Federal Government Debt 1993–94 to 2001–02

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