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Annex 4
The Budgetary Balance, Financial Source/Requirement, and National Accounts Budget Balance

Introduction

There are three basic measures of the Government of Canada’s fiscal position—two are based on the Public Accounts (the budgetary balance and the financial source/requirement, 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 and because of timing factors related to the receipt of data.

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. The budgets of the Government of Canada are based on the Public Accounts. Public policy decisions are, therefore, made on the Public Accounts basis.

Starting with the February 2003 budget, the Government’s financial statements are prepared on a full accrual basis of accounting, as recommended by the PSAB and the Auditor General. Revenues are recognized when they are earned and obligations when they are incurred.

Public Accounts Financial Source/Requirement

The financial source/requirement 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.

Prior to April 1, 2000, the main difference between the budgetary balance and the financial source/requirement was the treatment of Government of Canada employee 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 source/requirement included only the benefits paid out in that year less employee premiums paid.

The legislated reform of the Government of Canada 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 source/requirement by about $3.5 billion.

Full accrual accounting 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 source/requirement. The financial source/requirement corresponds more closely to the unified budget balance in the United States, except that the U.S. measure includes the surplus from Social Security while the Canadian measure excludes the surpluses in the Canada Pension Plan and Quebec Pension Plan.

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.

The accounting standards used in the System of National Accounts are generally consistently applied across all major industrialized economies. In contrast, accounting standards used by governments in presenting their financial statements vary across jurisdictions. As a result, the National Accounts data, prepared by the Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF), are a better proxy for international fiscal comparisons.

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

Public Accounts Budgetary Balance and the National Accounts Budget Balance

Differences between the Public Accounts budgetary balance and the National Accounts budget balance (net lending) have decreased over time. Accounting policy changes implemented by the Government on the recommendation of the Auditor General during the mid-1980s in the Public Accounts, mainly relating to the consolidation of specified purpose accounts such as the Employment Insurance Account, brought the budgetary balance closer to the National Accounts concept of net lending. Accounting changes by Statistics Canada, whereby public service employee pension plans were reclassified to the personal sector from the government sector, brought net lending closer to the budgetary balance.

Remaining differences between the two measures primarily relate to the universe covered by each measure and timing issues. The Public Accounts include all departments, agencies, Crown corporations and funds, while the government sector in the National Accounts is, in the main, a sub-sector of this universe based on ownership, control and funding criteria.

In the National Accounts, payments to arm’s-length organizations such as foundations and trusts and provisions for liabilities are not recognized until the payment is made to the ultimate recipient. In contrast, in the Public Accounts, a liability is recorded in the year in which it is incurred, even though payments may only be made sometime in the future. This helps to explain why the National Accounts net lending in 1997–98, and more recently in 2002–03, were higher than the budgetary surpluses recorded in the Public Accounts.

Finally, the National Accounts incorporate revised data on a regular basis, whereas the audited Public Accounts results are not revised unless there has been a change in accounting policy or a major error is discovered. On balance, the impact of data revisions move the National Accounts net lending closer to the Public Accounts budgetary balance.

Summary

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 A4.1
Alternative Measures of the Federal Fiscal Position—1993–94 to 2002–03

Corresponding Measures of Federal Debt

As the deficits or surpluses derived from these measures are different, so are the measures of debt (see Table A4.2).

The sum of annual budgetary deficits and surpluses since Confederation under full accrual accounting is the federal debt (accumulated deficit). This represents the statement of the financial position of the Government of Canada, as audited by the Auditor General of Canada. The change in this measure is the annual budgetary balance.

For the financial source/requirement, 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 A4.2
Alternative Measures of the Federal Debt—1993–94 to 2002–03

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