Annual Financial Report 1998-99: 3
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Budgetary Expenditures

Table 3 on page 16 presents budgetary expenditures on both a gross and net basis. The differences are identical to those between gross and net budgetary revenues.

Net budgetary expenditures amounted to $152.8 billion in 1998-99, up $3.1 billion, or 2.1 per cent, from 1997-98. The expenditure ratio – net budgetary expenditures as a percentage of net budgetary revenues – stood at 98.1 per cent, up slightly from 1997-98. This implies that, in 1998-99, revenues exceeded total expenditures by 1.9 per cent. In 1993-94, the expenditure ratio stood at 136.2 per cent, which meant that an amount equivalent to 36.2 per cent of revenues had to be financed by borrowings.

Public debt charges increased by $0.5 billion, or 1.1 per cent, in 1998-99. Public debt charges are affected by interest rate developments as well as by the stock and composition of interest-bearing debt.

• The average effective interest rate on the government's interest-bearing debt (unmatured debt and pension liabilities) was 7.4 per cent in 1998-99, compared to 7.3 per cent in 1997-98. The average effective interest rate on unmatured debt was 6.7 per cent, while that on pension and other accounts was 9.8 per cent. Since 1990-91, the average effective interest rate on interest-bearing debt has declined by 3.5 percentage points, with virtually all of this attributable to lower average effective interest rates on unmatured debt – down 4.5 percentage points.

• The stock of interest-bearing debt increased slightly in 1998-99, from $594.8 billion to $595.0 billion: the stock of unmatured debt declined by $6.9 billion to $460.4 billion, while the liabilities to pension and other accounts increased by $7.1 billion to $134.6 billion. Since 1990-91, the share of unmatured debt has declined by about 2 percentage points with a corresponding increase in the liabilities for pension and other accounts. Within unmatured debt, the share of marketable bonds has increased by over 25 percentage points, while that for Treasury bills and Canada Savings Bonds has declined.

The interest ratio – public debt charges as a percentage of net budgetary revenues – declined only marginally from 26.7 per cent in 1997-98 to 26.6 per cent in 1998-99. This ratio means that, in 1998-99, the government spent about 27 cents of every revenue dollar for interest on the public debt. This is down from the peak of 36 cents in 1995-96. This is money that must be paid to meet the government's obligations on its debt. The lower the ratio, the more flexibility the government has to address the key priorities of Canadians.

Net program spending – net budgetary expenditures less public debt charges – increased by $2.6 billion, or 2.4 per cent, in 1998-99. As was the case in 1997-98, a number of initiatives undertaken during the course of 1998-99 raised the overall level of program spending. These included the one-time cash supplement of $3.5 billion to the Canada Health and Social Transfer and incremental funding of $0.4 billion to the Canada Foundation for Innovation, the Canadian Institute for Health Information and the Canadian Health Services Research Foundation. Funding was also provided for the Canadian Fisheries Adjustment and Restructuring Program and the Agricultural Income Disaster Assistance Program (total of $1 billion). In addition, Equalization entitlements increased significantly ($1.6 billion), reflecting prior-year data revisions.

The program share – net program spending as a percentage of net revenues – amounted to 71.6 per cent, up slightly from 1997-98 but still well below previous levels.

Within program spending, net major transfer payments to persons consist of elderly benefits and employment insurance benefits. This component increased by $0.6 billion, or 1.8 per cent, in 1998-99.

• Elderly benefits consist of Old Age Security payments, Guaranteed Income Supplement payments and spouse's allowance payments. Total benefits were up $0.6 billion in 1998-99, reflecting both higher average benefits and an increase in the number of recipients.

• Employment insurance benefits were virtually unchanged from 1997-98. Regular benefit payments were lower, reflecting the decline in the number of unemployed. However, this was offset by increased transfers to the provinces under the Labour Market Development Agreements.

Major transfer payments to other levels of government include the Canada Health and Social Transfer (CHST), fiscal arrangements (Equalization, transfers to the territories as well as a number of small transfer programs) and Alternative Payments for Standing Programs. Net cash transfers increased by $5.0 billion in 1998-99, or 24.5 per cent. Of this increase, $3.5 billion was attributable to the CHST cash supplement while the remainder was attributable to higher Equalization payments.

• On April 1, 1996, the CHST – a new block-funded transfer – replaced Established Programs Financing and the Canada Assistance Plan. Total CHST entitlements are paid in the form of tax point transfers and cash transfers. In the 1998 budget, CHST entitlements were forecast to be $26 billion for 1998-99. The budget also set a floor on the cash portion of the transfer at $12.5 billion for the years 1997-98 to 2002-03. Without this floor, the cash entitlement would have fallen below $12.5 billion in both 1997-98 and 1998-99.

• In the 1999 budget, the government announced a special payment of $3.5 billion to be paid to a third-party trust to be drawn by the provinces and territories over a period not to exceed three years, in a pattern which best meets the needs of their health care systems. This supplement was charged to the 1998-99 fiscal year, in accordance with objective accounting standards.

• Equalization is the largest of the transfers under fiscal arrangements. Under the Equalization program, the federal government transfers funds to the less prosperous provinces so that they can provide reasonably comparable levels of public services at reasonably comparable levels of taxation. Tax data for 1997 indicated much stronger revenue gains in the non-Equalization-receiving provinces than in the Equalization-receiving provinces, thereby resulting in higher Equalization entitlements.

• The Alternative Payments for Standing Programs represent recoveries of federal tax point abatements under contracting-out arrangements. These arrangements allowed provinces to assume the administrative and financial authority for certain federal-provincial programs. In turn, the federal government provided provinces with tax points, the value of which are netted against total entitlements, and accordingly recovered from cash transfers. These recoveries reflect the growth in the value of the tax points.

Net direct program spending – total program spending less major transfers to persons and other levels of government – consists of subsidies and other transfer payments, expenditures related to Crown corporations, defence spending, and operating and capital expenditures of non-defence departments and agencies.

• Spending in this component amounted to $51.2 billion in 1998-99, down $3.0 billion, or 5.5 per cent, from 1997-98. This decline was attributable to the recording of a number of one-time liabilities in 1997-98 amounting to $5.5 billion: liabilities for the Canada Millennium Scholarship Foundation ($2.5 billion), compensation for hepatitis C victims ($0.8 billion), the Aboriginal healing strategy ($350 million) and the change in accounting policy relating to assistance to international financial institutions ($1.8 billion).

• Excluding the impact of these liabilities, direct program spending increased by $2.5 billion, or 5.1 per cent. This increase was entirely attributable to the initiatives announced in the 1998 and 1999 budgets ($1.9 billion) and the economic adjustment programs for farmers and fishers ($1 billion).

Within net direct program spending:

• Subsidies and other transfer payments declined by $3.7 billion, with the decline attributable to the special factors noted above ($5.5 billion). Partially offsetting the impact of these liabilities were:

• booking of the 1998-99 liabilities associated with the Agricultural Income Disaster Assistance Program;
• payments under the Canadian Fisheries Adjustment and Restructuring Program;
• initiatives under the Canadian Opportunities Strategy, as announced in both the 1998 and 1999 budgets, including the introduction of the Canada Education Savings Grant and the Canada Jobs Fund, renewal of the Youth Employment Strategy, increased funding for the granting councils and the Canada Study Grants program, and an additional investment in the Canada Foundation for Innovation; and
• other initiatives announced in the 1998 and 1999 budgets, including funding for Gathering Strength (the government's response to the Royal Commission on Aboriginal Peoples), for the Canada Television and Cable Production Fund, and for furthering international co-operation, among others.

• Expenditures related to Crown corporations were up $0.9 billion. This component includes appropriations to consolidated Crown corporations (those Crown corporations that rely on government funding as their principal source of revenue) and the annual profit and losses for enterprise Crown corporations. The increase was largely attributable to changes in the allowance for loan guarantees and borrowings of enterprise Crown corporations. In contrast, appropriations for consolidated Crown corporations were virtually unchanged from 1997-98.

• Operating and capital expenditures include the costs of defence, government administration and delivery of specific services to the public, such as:

• health care to Aboriginals and veterans;
• research undertaken by government departments;
• food inspection;
• Coast Guard and air and sea rescue;
• operation of national parks and historic sites;
• collection of taxes;
• operation of federal correctional institutions and provision of police services; and
• administration of programs.

Spending in this component declined $0.2 billion, or 0.6 per cent, from 1997-98.

Consistent with the difference between gross and net budgetary revenues, gross budgetary expenditures were $11.9 billion higher than net budgetary expenditures. The differences are described on page 10.

Table 3
Budgetary expenditures