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Chapter 3 - Building a Better Canada:
Accountability

Highlights

A core priority of the Government is to improve the accountability and transparency of government operations to Canadians. The Federal Accountability Action Plan, released on April 11, introduced a wide-ranging set of reforms, including establishing the position of a Parliamentary Budget Officer and a commitment to provide quarterly updates of the fiscal outlook for the current fiscal year.

Budget 2006 announces a more transparent framework for budget planning, consisting of the following elements:

• The Government will make decisions in the budget over a two-year planning horizon. Measures will be introduced when they are affordable and ready to be implemented.

• The Government will restrain the rate of spending growth. The Government will introduce a new approach to managing overall spending to ensure that government programs focus on results and value for money, and are consistent with government priorities and responsibilities. The President of the Treasury Board will identify savings of $1 billion in 2006–07 and 2007–08.

• The Government will plan on reducing the federal debt by $3 billion annually. The Government is advancing by one year, to 2013–14, the goal of lowering the debt-to-GDP ratio to 25 per cent.

• The Government will examine the possibility of allocating a portion of any surplus at year-end larger than $3 billion to the Canada Pension Plan and Quebec Pension Plan, in order to make them more equitable for young Canadians and improve economic competitiveness.

• Financial reporting will be improved, in keeping with recommendations from the Auditor General of Canada.

Introduction

Accountability is the foundation of good government. A strong accountability regime assures Parliament and Canadians that the Government of Canada is using public resources efficiently and effectively. A central element of accountability is transparency. Full and clear information on programs and operations allows citizens and Parliament to hold the Government accountable for its actions and results.

Transparency is also vital for the effective participation of citizens and organizations in developing public policy, which helps to ensure better decisions and better policies and programs for Canadians.

Improving public accountability and transparency is the first core priority of the Government. The proposed Federal Accountability Act was the first piece of legislation brought forward to Parliament by the Government. The Federal Accountability Action Plan represents a comprehensive blueprint for a more accountable, open and ethical government.

Building on these initiatives, Budget 2006 proposes an approach to fiscal planning and managing taxpayer dollars that will improve transparency and strengthen accountability.

Core Priority: Federal Accountability Action Plan

Through the Federal Accountability Action Plan released on April 11, 2006, the Government proposed a broad-ranging set of reforms to strengthen accountability, transparency and oversight in government operations. The proposed Action Plan would:

• Ban institutional and large personal donations to political parties.

• Ensure that positions of public trust cannot be used as stepping stones to private lobbying.

• Provide real protection for whistleblowers who show courage in coming forward to do what is right.

• Establish within the Library of Parliament the position of Parliamentary Budget Officer with a mandate to provide objective analysis on the state of the nation’s finances and trends in the national economy, to conduct economic and fiscal research, and to estimate the financial cost of budgetary proposals under consideration in either the House of Commons or the Senate.

• Require updates of the fiscal outlook for the current fiscal year on a quarterly basis.

• Strengthen the capacity and independence of Officers of Parliament, including the Auditor General of Canada, to hold the Government to account.

• Strengthen auditing and accountability within departments by clarifying the managerial responsibilities of deputy heads within the framework of ministerial responsibility, and by bolstering the internal audit function within departments and Crown corporations.

• Increase the transparency of appointments, contracts and auditing within government and Crown corporations.

These measures will cost $164 million over the next two years.

Going forward, the Government will streamline its management policies and consult with stakeholders on reducing barriers that inhibit access to government. It will:

• Review its procurement and financial management policies to identify where they could be streamlined.

• Repeal policies and regulations where they inhibit the effectiveness of public service employees, while always maintaining a focus on promoting accountability and good management.

Table 3.1
Accountability

Improving Fiscal Transparency and Financial Management

Budget 2006 proposes a more transparent budget framework, which will include:

• A new approach to budget planning.

• Actions to limit spending growth and better manage expenditures.

• A commitment to reducing the federal debt.

• A proposal for allocating unplanned surpluses.

• Reforms to the Government’s financial reporting.

A New Approach to Budget Planning and Fiscal Forecasting

Since the federal deficit was eliminated in 1997–98, budget surpluses have frequently been higher than projected. This has eroded the credibility of the budget process and limited the scope for parliamentarians and Canadians to debate alternative uses of surplus funds. A new approach is required. The Government will plan on achieving an annual debt reduction of $3 billion. The former practice of adjusting the budget projections for economic prudence is discontinued. In order to incorporate objective assumptions, the budget projections will continue to be based on the average forecast of private sector economists.

While in some key areas it is appropriate to signal the Government’s medium- to longer-term fiscal intentions (e.g. defence and infrastructure), in general it is important that the focus of the planning period be on the near term, where uncertainties are fewer and the Government can reasonably be held to account for its fiscal plan. For this reason, the economic and fiscal projections of the budget are presented over a two-year time horizon.

Limiting Spending Growth Through Improved Expenditure Management

Over the past five years, total program spending has grown by an average of 8.2 per cent annually. In 2004–05 growth in spending reached 14.4 per cent. This growth is neither sustainable nor desirable. The Government is committed to restraining the rate of growth of spending to a more sustainable level. This will require a focused approach to implementing the Government’s priorities.

Reflecting the Government’s focus on its priorities for this budget, it will not proceed with about $7 billion in spending proposals over five years announced in the November 2005 Economic and Fiscal Update.

More broadly, the Government needs a new ongoing approach to managing overall spending to ensure that all government programs are effective and efficient, are focused on results, provide value for taxpayers’ money and are aligned with the Government’s priorities and responsibilities.

To that end, the Government is launching a review of its expenditure management system. Led by the President of the Treasury Board, this review will report on a new approach by the fall.

The new expenditure management system will respect the following principles:

• Government programs should focus on results and value for money.

• Government programs must be consistent with federal responsibilities.

• Programs that no longer serve the purpose for which they were created should be eliminated.

By applying these principles, the Government will ensure that growth in program spending is sustainable and that the federation works better for all Canadians.

To begin to put spending on a more sustainable track, the President of the Treasury Board will identify savings of $1 billion for 2006–07 and 2007–08 and provide a progress report by the fall.

A Commitment to Reduce Canada’s Debt Burden

The Government is committed to keep the federal debt-to-GDP ratio on a downward track.

While Canada’s federal debt burden has been reduced significantly over the last decade, it is still too high. As a percentage of GDP, federal debt stood at 38.3 per cent in 2004–05, well above the ratio of the mid-1970s, when large deficits began to emerge. It is also about double the combined debt burden of provincial and territorial governments.

Lowering the debt burden reduces Canada’s exposure to fluctuations in global interest rates and reduces the share of each revenue dollar that goes to service the debt. It also helps Canada prepare for the fiscal challenges of population aging. Population aging will slow government revenue growth and put pressure on government expenditure programs such as health care and pension benefits. These fiscal pressures provide a strong rationale for additional debt reduction over the next decade.

In the 2004 budget, the previous government set the objective of reducing the debt-to-GDP ratio to 25 per cent by 2014–15. Having taken stock of the current financial situation, and in keeping with Canada’s new government’s commitment to fiscal discipline, Budget 2006 advances this commitment by one year with a new objective of reducing the debt-to-GDP ratio to 25 per cent by 2013–14.

The Government will achieve this commitment by planning on annual debt reduction of $3 billion. Reducing the federal debt-to-GDP ratio to 25 per cent will mean that approximately 12 cents of every revenue dollar would go to servicing the debt in 2013–14, compared to more than 16 cents in 2004–05.

Allocating Unplanned Surpluses

Recognizing that surpluses in excess of $3 billion may arise, the Government is open to considering options to allocating unplanned surpluses. In particular, the Government is proposing to discuss with provinces and territories the possibility of introducing legislation authorizing the allocation of a portion of unanticipated surpluses at fiscal year-end to the Canada Pension Plan (CPP) and Quebec Pension Plan (QPP). This would allow the unplanned surpluses to be used for the future benefit of Canadians.

Sharing unanticipated surpluses with the CPP/QPP would have three main benefits.

• First, by contributing to a well-functioning federal-provincial program, it would help further progress already achieved in building a cooperative, effective federation. The CPP/QPP is a key pillar of Canada’s retirement income system, providing a significant part of the income of Canada’s seniors. Reforms undertaken as part of the 1997 federal-provincial agreement have put the Plan on a sustainable footing for at least the next 75 years and have contributed to making Canada one of the few industrialized nations to have an affordable and sustainable pension system.

• Second, the proposal would improve intergenerational equity. While the 1997 reform agreement helped address some of the intergenerational unfairness that had built up in the CPP, current young workers are still paying a much higher contribution rate (9.9 per cent) than that paid by past generations for the same benefits. For example, a Canadian born in 1990 will earn a real rate of return of 2.1 percent on his or her CPP investment, compared to a real rate of return of 6.2 per cent for someone born in 1940. By committing to direct a portion of federal unplanned surpluses to the CPP/QPP, the Government could help to lower future contribution rates and thus further improve intergenerational equity in the Plan.

• Third, over the medium term, by lowering the contribution burden on future generations of workers, the proposal would encourage participation in the Canadian labour market and enhance the competitiveness of the Canadian economy.

Reforms to Government Financial Reporting

Informed public discussion of fiscal issues requires up-to-date knowledge of Canada’s fiscal position. In the Federal Accountability Action Plan, the Government committed to update government fiscal forecasts for the current fiscal year on a quarterly basis. This responds to parliamentarians’ desire for more frequent access to up-to-date fiscal forecasts.

Quarterly updates of the fiscal outlook for the current fiscal year will now be provided as follows:

Table 3.2
Schedule of Updates of the Fiscal Outlook for the Current Fiscal Year

Consistent with recommendations made by the Auditor General, the Government is taking action in Budget 2006 to improve the transparency of its financial information.

First, the revenues and expenses of a number of organizations will now be included in the Government’s financial statements. These include:

• Canada Foundation for Innovation.
• Canada Millennium Scholarship Foundation.
• Sustainable Development Technology Canada.
• Aboriginal Healing Foundation.

These foundations will continue to operate as they have since their creation. The Government will retain the use of foundations as an important policy tool on the same governance principles. The independence, financial stability and focused expertise of foundations allow them to address specific challenges in a highly effective manner. Foundations have become important vehicles for implementing policy, particularly in areas such as research and development, where expert knowledge, third-party partnerships and peer review are especially important. With this change in accounting policy, the Government’s financial statements of prior periods will be restated, resulting in an estimated cumulative $5.5-billion decrease in the size of the federal debt as at March 31, 2005.

Second, budgeted revenues and expenses will now be presented on a gross basis. Previous budgets were presented on a net basis, whereby certain disbursements were netted against budgetary revenues and certain revenues were netted against expenses. On a gross basis, all disbursements are included in program expenses and all revenues are included as part of budgetary revenues. The move to a gross basis brings the presentation of the budget forecast in line with the presentation of annual audited results reported in the Public Accounts of Canada.

Presenting forecast results on a gross basis increases the level of estimated spending and revenues by $13.8 billion each in 2005–06, or about 1 percentage point of GDP. Notably, the Canada Child Tax Benefit, an income-tested benefit that was previously netted against personal income tax revenues, will now be presented as an expenditure. As these changes affect both budgetary revenues and program expenses by the same amount, they have no impact on the budgetary balance.

These changes will be reflected in the monthly Fiscal Monitor starting in 2006–07. Annex 2 contains a more detailed discussion of these changes.