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Annex 3
Private Sector Five-Year Economic and Fiscal Projections

Highlights

• The Department of Finance meets each fall with economists from all regions of the country, including the chief economists of the major chartered banks and four private sector economic forecasting organizations. The objective of this exercise, which was initiated in 1999, is to agree on a set of economic assumptions for planning purposes, which the four forecasting organizations then use to develop status quo fiscal projections of the budgetary balance for the current year and each of the next five years.

Approach to budget planning

• The Government’s approach to budget planning involves a number of important steps. The first step involves using private sector economic forecasts for budget-planning purposes.

• The Department of Finance conducts surveys of private sector economic forecasters. In total, about 20 forecasters are surveyed on a quarterly basis.

• Each fall the Department of Finance conducts extensive consultations with an economic advisory group, which includes the chief economists of Canada’s major chartered banks and leading economic forecasting organizations as well as representatives from different regions of the country.

• The second step involves using the average private sector economic forecasts to develop status quo fiscal projections for the fall Economic and Fiscal Update.

• Four private sector economic forecasting organizations develop detailed fiscal projections on a National Accounts basis, based on tax and spending policies in place at the time of the last budget.

• The four organizations are Global Insight, the University of Toronto, the Conference Board of Canada and the Centre for Spatial Economics.

• These projections are then translated to a Public Accounts basis by the Department of Finance and presented in the fall Economic and Fiscal Update. For the current fiscal year, year-to-date fiscal results are also used to estimate the potential budgetary outcome.

• The impact of policy decisions since the last budget is then subtracted from these fiscal projections.

• The third step adjusts the resulting fiscal projections for prudence to derive the fiscal surpluses for budget-planning purposes.

• An annual Contingency Reserve is set aside to guard against unforeseen circumstances. If not needed, it is applied to reduce the federal debt (accumulated deficit). An additional amount for economic prudence is included to provide further protection against falling back into deficit. If this amount is not needed, it becomes available to fund new priorities.

• The Contingency Reserve is normally set at $3 billion per year, while the economic prudence is generally set at $1 billion in the first year of the five-year planning horizon, rising to $4 billion by year five.

• This prudent approach to budget planning has allowed the federal government to record seven consecutive budgetary surpluses. In 2002 and 2003 Canada was the only country among the Group of Seven (G-7) countries to record a budgetary surplus on a total government basis. The Organisation for Economic Co-operation and Development projects that Canada will be the only G-7 country in surplus this year and next.

• Sound fiscal management means more than prudent planning, avoiding deficits and reducing debt. It also means managing tax dollars responsibly and delivering cost-effective and efficient government services. With this in mind, the Government launched the Expenditure Review Committee (ERC) in December 2003, with a mandate to conduct a fundamental review of all federal programs and expenditures. In August of this year the Prime Minister assigned a dual mandate to the ERC. The immediate task is to conduct a thorough review of government spending to reallocate a cumulative $12 billion from 2005–06 to 2009–10 from lower-priority areas and areas of inefficient spending to higher-priority areas. These savings are not built into the status quo projections. To achieve this the ERC is focusing on both improving government operations and assessing the relevance and effectiveness of current government programs. The second, and equally important, part of the ERC’s mandate is to develop a permanent mechanism to review spending on an ongoing basis as part of the yearly budget cycle. This will ensure that the review and reallocation processes are an embedded part of how the federal government does business.

Independent review of economic and fiscal forecasts

• Many of the key elements of the current approach to budget planning were put in place on the recommendation of an independent review of the Department of Finance’s approach to economic and fiscal forecasting concluded in 1994.

• Much has changed since then—the elimination of the deficit, the Government’s commitment to a balanced budget or better each year, and the shift to full accrual accounting. To ensure that the Government continues to use the most up-to-date economic and fiscal forecasting methods, and to benchmark Canadian practices against the best in the world, the Government of Canada has launched a new review. Dr. Tim O’Neill, Chief Economist and Executive Vice-President of BMO Financial Group, will lead the review. Dr. O’Neill’s review will identify and assess the source of differences between the budget and fall update fiscal projections and the outcome. It will also include an evaluation of the changes that have been made to the forecasting process over the last decade.

• As part of this forecasting review, the IMF will be conducting a comparative analysis of the budgeting practices and experiences in Canada and other major industrial countries. The IMF will examine how Canada’s fiscal environment compares to that of other countries, including the structure of revenues and spending as well as the fiscal rules and targets. It will compare Canada’s forecasting process to that of other nations and provide statistical analysis of the quality of Canada’s forecasts as well as the factors that might affect that quality. The IMF will report its findings in the context of its annual review of Canada’s economic policy. Its report will be shared with Dr. O’Neill to inform his review.

• Once this work is completed, Dr. O’Neill’s report will offer specific recommendations with respect to:

• Improving the accuracy of the economic projections.

• Improving the preparation and accuracy of the fiscal projections.

• Addressing ways of dealing with the uncertainties in economic and fiscal forecasting.

• The review is expected to be concluded in early 2005. The recommendations will be referred to the House of Commons Standing Committee on Finance, which has also been asked to make recommendations relating to the provision of independent fiscal forecasting advice for parliamentarians, including the consideration of the recommendations of the external expert.

Economic assumptions underlying the average private sector status quo fiscal projections

Table 3.1
Average of Private Sector Economic Forecasts: September 2004 Survey

• The average private sector forecast of real gross domestic product (GDP) growth is 3.0 per cent in 2004, 3.2 per cent in 2005 and 3.1 per cent in 2006. The average growth forecast over the 2007 to 2009 period is 2.9 per cent.

• GDP inflation is expected to be 3.1 per cent in 2004, decline to 2.1 per cent in 2005, and average around 1.7 per cent annually through 2009.

• As a result, nominal GDP growth is expected to average 6.2 per cent in 2004, up significantly from the growth of 4.1 per cent forecast in the March 2004 budget. However, it is forecast to slow to 5.3 per cent in 2005, up slightly from the March 2004 budget forecast, and 5.0 per cent in 2006. Over the 2007 to 2009 period, nominal GDP growth is forecast to average 4.7 per cent. As a result of the higher growth expected for 2004, the level of nominal income—the broadest measure of the Government’s tax base—is forecast to be higher throughout the five-year period than forecast in the March 2004 budget.

• Short-term interest rates are expected to average 2.1 per cent in 2004 before rising to 3.2 per cent in 2005 and 4.4 per cent in 2006. Over the 2007 to 2009 period, short-term interest rates are expected to average 4.7 per cent. Private sector forecasters project a gradual rise in longer-term interest rates between 2004 and 2009 from 4.7 per cent in 2004, to 5.7 per cent by 2006 and averaging 6.0 per cent over the 2007 to 2009 period.

Planning assumptions used to develop the five-year status quo fiscal projections

• The four private sector forecasting organizations derived projections of the major components of the federal budgetary balance on a National Accounts basis, using the economic forecasts outlined in Table 3.1. These projections were converted to a Public Accounts basis, on a full accrual basis of accounting, by the Department of Finance. For details, see Annex 4. The projections are based on the following assumptions.

• The projections include the impact of the policy initiatives announced in previous budgets. However, they do not include the impact of the agreements reached at the recent First Ministers’ Meetings on health, equalization and Territorial Formula Financing, as well as other policy decisions taken since the 2004 budget.

• For direct program spending, the private sector projections are consistent with expenses reported in the 2004 budget for 2004–05 and 2005–06. Starting in 2006–07, the projections assume underlying growth of population plus inflation, except in circumstances where there are economic or policy factors (reflecting past budget decisions) that drive spending.

• In light of the detailed information required to prepare projections of direct program spending and public debt charges, the private sector organizations agreed to use National Accounts projections provided by the Department of Finance. Major transfers to other levels of government were set to be consistent with the September 16 meeting of First Ministers.

• In Budget 2003 the Government announced that it would consult on a new permanent employment insurance (EI) rate-setting regime for 2005 and beyond, based on the following rate-setting principles: premium rates should be set transparently; premium rates should be set based on independent expert advice; expected premium revenues should correspond to expected program costs; premium rate setting should mitigate the impact of the business cycle; and premium rates should be relatively stable over time. Consistent with these principles, the four forecasting organizations were asked to set projected premiums equal to their projected program costs on an annual basis for 2005 to 2009.

Status quo fiscal projections on a National Accounts basis

Table 3.2
Private Sector Surplus Projections

• The private sector organizations provided projections of the Government’s budgetary balance before subtracting amounts for economic prudence and the Contingency Reserve. The projections do not include the impact of policy decisions announced since the 2004 budget. In particular, these projections do not reflect the proposed cost of commitments made at the two recent First Ministers’ Meetings on health, equalization and Territorial Formula Financing.

• On average, the four forecasting organizations project a surplus of $8.3 billion in 2004–05, $9.5 billion in 2005–06, $12.5 billion in 2006–07, rising thereafter to reach $25.0 billion in 2009–10.

• The differences in the projections primarily reflect differing assumptions about the responsiveness of tax revenues to growth in the various income tax bases.

• Global Insight projects the highest surpluses on average, primarily because it expects a higher rate of growth of personal income tax revenues in 2004–05 relative to the other three forecasting organizations.

• In 2004–05 and 2005–06, the Centre for Spatial Economics projects relatively low surpluses, largely because it expects weaker corporate income tax revenues.

• The Conference Board of Canada and the University of Toronto project surpluses that are largely in line with average projections, although the Conference Board projects a relatively low surplus in 2004–05.

• The range in the projections peaks at $3.6 billion in 2005–06. In other years the difference in projections ranges between $2.3 billion and $3.3 billion. These differences are relatively small in relation to combined federal revenues and expenses of $360 billion. For example, a 1-per-cent change in revenues and expenses translates into a difference of $3.6 billion in the budgetary balance.

Status quo fiscal projections on a Public Accounts basis

Table 3.3
Average Private Sector Surplus Projection—Status Quo
(Not Including New Policy Initiatives Since the 2004 Budget)

• A detailed reconciliation of the National Accounts and Public Accounts projections by component is provided in Annex 4. Some of the key adjustments of the translation to a Public Accounts basis are provided in Table 3.3.

• The first step in converting projections from a National Accounts basis to a Public Accounts basis is to incorporate the most recent fiscal data available.

• Estimates of government revenues and expenses on a National Accounts basis normally lag Public Accounts estimates by several months. For example, the second-quarter National Accounts data reflect fiscal data through June 2004 and do not incorporate the final 2003–04 results.

• The Department of Finance made three adjustments to the private sector projections on the basis of the final results for 2003–04 and the tax collections experience through September 2004.

• First, fiscal data through September 2004 suggest that personal income tax revenues should increase by about 5 per cent in 2004–05. The private sector projections were increased by $3.4 billion in 2004–05 to achieve this growth. In future years this adjustment is assumed to grow in line with National Accounts personal income tax revenues. As a result, the growth in personal income tax revenues in future years is consistent with the economic growth forecast by the private sector forecasters.

• Second, corporate income tax receipts in 2003–04 were affected by a one-time gain in corporate income tax receipts in the financial services industry. The one-time gain was related to downward revaluations of U.S.-dollar-denominated liabilities as a result of the increase in the value of the Canadian dollar. To reflect the one-time nature of these gains, the private sector projections were adjusted down by $2.8 billion in 2004–05, with the adjustment growing in line with National Accounts corporate income tax revenues over the planning period.

• Third, the average private sector projection of goods and services tax (GST) revenues was adjusted downward to reflect expected GST revenues over the remainder of 2004–05. Over the planning period, the adjustment grows in line with National Accounts GST revenues.

• The remaining adjustments reflect differences in the accounting treatment of revenues and expenses between the two accounting systems.

• There are differences related to when liabilities are recognized under the two accounting systems. For example, payments made to provinces through Canada Health and Social Transfer supplements in the 2004 budget are reported in 2004–05 in the National Accounts, while they were recorded in 2003–04 on a Public Accounts basis.

• The net revenue gain from the sale of the Government’s remaining shares in Petro-Canada is not accounted for in the National Accounts. These are added to the Public Accounts estimate of the surplus. Similarly, the impact of foreign exchange revaluations of financial assets is not part of the budget balance in the National Accounts but is captured in the Public Accounts.

• The National Accounts projection assumes high and constant capital transfers from persons to the Government related to the amortization of surpluses in employee pension accounts. In the Public Accounts this amortization is much lower and continues to fall over the projection period.

• Finally, there are a large number of other adjustments, mostly reflecting the fact that the National Accounts do not yet incorporate the final 2003–04 Public Accounts information.

• The average of the four forecasting organizations’ fiscal projections, converted to a Public Accounts basis, but prior to adjusting for new policy decisions since the 2004 budget, or any allocation for the Contingency Reserve and economic prudence, results in a fiscal surplus of $12.8 billion in 2004–05, $9.5 billion in 2005–06, $11.6 billion in 2006–07, $15.2 billion in 2007–08, $20.3 billion in 2008–09 and $25.3 billion in 2009–10.

• To derive the fiscal balance for planning purposes, decisions made since the 2004 budget must be deducted from these amounts as well as amounts for the Contingency Reserve and economic prudence.

Fiscal impact of policy initiatives since the 2004 budget

Table 3.4
Initiatives Announced Since the March 2004 Budget

• The Government is committed to proposed new funding of nearly $75 billion over 10 years to the provinces and territories in support of health, equalization and Territorial Formula Financing (subject to the passage of authorizing legislation).

• At the First Ministers’ Meeting in September 2004, the Government, all the provincial premiers and all territorial leaders signed the 10-Year Plan to Strengthen Health Care, which will provide $41.3 billion over 10 years to the provinces and territories. Over the planning period, this agreement will increase federal funding for health care by $18.9 billion, including $18.1 billion in the form of transfers to provinces and territories.

• In October 2004, the Government committed to increasing equalization and Territorial Formula Financing by more than $33 billion over the next 10 years relative to Budget 2004 levels for 2004–05. Over the planning period, this agreement will increase transfers to provinces and territories by $14.1 billion.

• Total commitments arising from the First Ministers’ Meetings amount to $3.6 billion in 2004–05, rising to $6.7 billion in 2009–10, for a cumulative total of $33.0 billion over the six-year period.

• Since the March 2004 budget, the Government has announced additional assistance to help the Canadian cattle and beef industry to offset the impact of border closures following the discovery of a single cow with bovine spongiform encephalopathy, as well as other initiatives such as increased funding for the Canadian Strategy on HIV/AIDS and support for the auto sector.

Allocation for prudence

• Private sector forecasters strongly advise that the Government maintain the $3-billion annual Contingency Reserve and set aside additional amounts for economic prudence. Despite the recent strengthening of the economy, high oil prices, the rise of the Canadian dollar and the U.S. budgetary deficit pose risks to the economic outlook, as described in Annex 2.

• The Contingency Reserve is set at $3 billion annually. Economic prudence is set at $1 billion in the first year of the five-year planning horizon, rising to $4 billion by year five.

• The Contingency Reserve and economic prudence are used to absorb the fiscal impact of short- and longer-term economic and other shocks. They provide a buffer to protect the annual balanced budget target, to avoid having to undo previous budget initiatives, and to avoid going back into deficit.

• If the Contingency Reserve is not required, it is applied to reduce the federal debt (accumulated deficit). If the economic prudence is not required, it is made available for budget planning.

Average of private sector projections of the fiscal surplus

Table 3.5
Surpluses for Purposes of Fiscal Planning

• Table 3.5 adjusts the status quo projections for initiatives announced since the 2004 budget and for the Contingency Reserve and economic prudence.

• As a result, the surplus for planning purposes is $5.9 billion in 2004–05, $0.5 billion in 2005–06, $0.9 billion in 2006–07, $3.2 billion in 2007–08, $7.5 billion in 2008–09 and $11.5 billion in 2009–10. Over the six-year period, the cumulative surplus for planning purposes totals $29.5 billion.

• The $5.9-billion surplus in 2004–05 reflects a number of factors.

• The net proceeds from the sale of the Government’s remaining shares in Petro-Canada increase revenues by $2.6 billion.

• Public debt charges are expected to decline by $1.1 billion, reflecting lower interest rates in 2004.

• The release of $1 billion in economic prudence set aside in the 2004 budget for the current year, as is normal practice in the fall Economic and Fiscal Update.

Average of private sector fiscal projections

Table 3.6
Summary Statement of Transactions

• Table 3.6 sets out the details of the fiscal projections to 2009–10.

• The profile of the budget-planning surplus in 2004–05 and 2005–06 reflects the combination of policy decisions related to tax reductions and spending increases, as well as a one-time gain in 2004–05 from the sale of the Government’s remaining shares in Petro-Canada.

• Budgetary revenues are expected to increase by $7.9 billion in 2004–05, and $5.4 billion in 2005–06. Thereafter revenues increase by about $11 billion per year. The increase in revenues reflects strong growth in nominal income. The revenue gains in 2004–05 and 2005–06 are tempered by the impact of previously announced tax reductions, the one-time gain from the sale of the Government’s shares in Petro-Canada and a decline in EI premium revenues in 2005–06.

• Reflecting primarily the impacts of the February 2003 First Ministers’ Accord on Health Care Renewal and the September and October 2004 First Ministers’ agreements on health, equalization and Territorial Formula Financing, program expenses are expected to increase by $9.1 billion in 2004–05, $8.6 billion in 2005–06, $7.8 billion in 2006–07 and by about $6.5 billion per year thereafter.

• Public debt charges are expected to decline by $1.1 billion in 2004–05, reflecting the impact of lower short-term interest rates. Thereafter the increase in short-term interest rates and the refinancing of maturing long-term bonds at higher interest rates push up public debt charges by $1.2 billion in 2005–06 and a further $1.1 billion in 2006–07.

• The revenue-to-GDP ratio was 15.3 per cent in 2003–04, down significantly from 17.0 per cent in 2000–01, primarily reflecting the impact of tax reduction measures. It is expected to decline to 15.0 per cent in 2004–05, reflecting the incremental impact of tax measures announced in and since the 2000 budget. The revenue ratio declines further in 2005–06, reflecting the one-time gain in 2004–05 from the sale of the Government’s Petro-Canada shares.

• The program expenses-to-GDP ratio was 11.6 per cent in 2003–04, well below the level of 15.7 per cent in 1993–94. It is projected to remain stable until 2006–07 before falling slightly in the last three years.

• Public debt charges as a per cent of GDP were 2.9 per cent in 2003–04, a significant drop from the peak of 6.6 per cent in 1990–91. Public debt charges are expected to fall to 2.7 per cent of GDP in 2004–05 and to continue to decline throughout the planning horizon. As a percentage of revenues, public debt charges are projected to decline to 15.3 per cent in 2009–10 from 19.2 per cent in 2003–04.

• The federal debt-to-GDP ratio (accumulated deficit) stood at 41.1 per cent in 2003–04, down dramatically from its peak of 68.4 per cent in 1995–96. Assuming no incremental debt reduction, it would fall to about 30.6 per cent by 2009–10.

Average private sector projections of budgetary revenues

Table 3.7
Average Private Sector Projections of Budgetary Revenues

• Budgetary revenues are projected to increase by 4.2 per cent in 2004–05. This reflects the impact of strong growth in personal income, somewhat offset by the impact of the implementation of the final phase of the $100-billion Five-Year Tax Reduction Plan on personal income tax revenues (via the increase in the income threshold to which the statutory rates apply) and on corporate income tax revenues (via the 2-point reduction in the corporate income tax rate from 23 to 21 per cent).

• In 2005–06 budgetary revenues are projected to grow by only 2.8 per cent, primarily due to decreases in EI premium revenues and other revenues, the latter reflecting the one-time gain in 2004–05 from the sale of the Government’s Petro-Canada shares. Beyond 2005–06 the average of the private sector projections for revenue growth is broadly in line with the growth in nominal GDP.

• Personal income tax—the largest component of budgetary revenues—falls slightly as a percentage of GDP in 2004–05, reflecting the final impact of the $100-billion Five-Year Tax Reduction Plan. Thereafter it increases as a percentage of GDP, reflecting the progressivity of the income tax system.

• In 2004–05 corporate income tax revenues are expected to increase 2.2 per cent following a 23.4-per-cent, or $5.2-billion, increase in 2003–04. Much of the increase in 2003–04 resulted from a one-time foreign exchange gain by the chartered banks, which is not expected to carry forward over the planning period. Beyond 2004–05 corporate income tax revenues are expected to grow broadly in line with corporate profits.

• Excise taxes and duties are expected to increase by 3.4 per cent in 2004–05, after remaining relatively flat in 2003–04. The projection for GST revenues includes the impact of providing a 100-per-cent rebate to municipalities for GST paid on their inputs. Excise taxes and duties as a percentage of GDP remain relatively stable over the outlook.

• Over the projection period, EI premium revenues are assumed to match EI program costs. The decline in EI premium revenues in 2004-05 and 2005–06 reflects the private sector projected decline in EI benefits.

• Other revenues include revenues from enterprise Crown corporations, foreign exchange revenues, return on investments and sales of goods and services. These revenue sources are volatile, owing partly to the impact of revaluations of exchange rate movements on foreign-denominated interest-bearing assets and to net gains/losses from enterprise Crown corporations. In 2004–05 other revenues are projected to increase 12.2 per cent, or $1.4 billion, which largely reflects a one-time gain from the sale of the Government’s Petro-Canada shares, offset somewhat by losses realized on revaluations of U.S.-dollar-denominated assets.

Revenue ratio

• A more revealing picture of movements in tax revenue can be obtained by examining the "revenue ratio"—total federal revenues in relation to the total income in the economy (or GDP).

• This ratio primarily reflects the impact of policy decisions and economic developments. The ratio declines during economic downturns and tends to increase during recoveries, reflecting the progressive nature of the tax system and the cyclical nature of corporate profits.

• The decrease in the ratio in 2001–02 was largely attributable to the implementation of the $100-billion Five-Year Tax Reduction Plan. Thereafter the decline in the ratio reflects both the incremental impact of the Five-Year Tax Reduction Plan and the tax reductions announced in the February 2003 budget.

• The revenue ratio is projected to decline from 17.0 per cent in 2000–01 to 14.6 per cent in 2005–06, remaining in the 14.7 to 14.8 per cent range over rest of the planning period.

• As mentioned above, the decline in the revenue ratio in 2004–05 and 2005–06 reflects the implementation of the final phase of the $100-billion Five-Year Tax Reduction Plan in January 2004, lower EI premium revenues in 2005–06, and the one-time boost to revenues in 2004–05 from the sale of the Government’s shares in Petro-Canada.

Average private sector projections of program expenses

Table 3.8
Average Private Sector Projections of Program Expenses

• Table 3.8 provides projections of program expenses that include the cost of policy decisions announced since the 2004 budget, as set out in Table 3.4.

• Program expenses are divided into three major components: major transfers to persons, major transfers to other levels of government and other program expenses—the latter include subsidies and other transfers, expenses of Crown corporations, and defence and all other departmental operating expenses.

• Program expenses are expected to increase by $9.1 billion, or 6.5 per cent, in 2004–05, with about one-half of this increase due to higher transfers to other levels of government, reflecting the impact of the recent First Ministers’ agreements on health, equalization and Territorial Formula Financing as well as the February 2003 First Ministers’ Accord on Health Care Renewal. Thereafter, based on the average of the projections provided by the four forecasting organizations, total program expenses are estimated to increase broadly in line with the increase in nominal GDP before falling off in the last three years of the planning period.

• Major transfers to persons, consisting of elderly and EI benefits, are expected to increase by $0.9 billion in 2004–05. The growth in elderly benefits of $0.9 billion, or 3.3 per cent, is largely determined by the growth in the elderly population and average benefits, which are fully indexed to quarterly changes in consumer prices. EI benefits are essentially unchanged. Beyond 2004–05, major transfers to persons increase in line with nominal GDP, reflecting growth in both elderly and EI benefits.

• Major transfers to other levels of government in 2004–05 are $4.3 billion (14.7 per cent) higher than in 2003–04, and are projected to grow by another $3.7 billion (11.0 per cent) in 2005–06. Growth in the outer years averages around 4 per cent per year. Transfers increase from $29.4 billion in 2003–04 to $44.1 billion in 2009–10. This is a 50-per-cent increase, almost double the growth in the other components of program spending over this period.

• Other program expenses are projected to grow by $4.0 billion, or 5.7 per cent, in 2004–05. In 2005–06, other program expenses are projected to grow by $3.6 billion, or 4.9 per cent. Over the remainder of the period, growth in spending is consistent with population growth plus inflation (except for components of program expenses that are clearly linked with economic factors).

• In December 2003 the Prime Minister launched the Expenditure Review Committee (ERC) to undertake an extensive and rigorous review of all government expenditures to ensure that government programs are better aligned with the priorities of Canadians and that they are delivered in the most cost-effective way.

• The ERC will identify total cumulative savings of $12 billion by 2009-10 from existing programs, which will be reallocated to fund new priorities. As in the March 2004 budget, these savings are not built into the status quo projections.

Program expense-to-GDP ratio

• Program expenses as a per cent of GDP are 11.6 per cent in 2004–05, unchanged from 2003–04.

• The ratio has declined significantly from the levels of the 1980s and early 1990s. This is primarily attributable to the expenditure reduction measures implemented in the 1995 and 1996 budgets, which structurally lowered program expenses. In light of the recent First Ministers’ agreements on health, equalization and Territorial Formula Financing, this ratio is expected to remain relatively stable over the projection period.

Financial management and accountability

• In the March 2004 budget, the Government announced five significant new initiatives to strengthen financial management, oversight and accountability in departments and agencies. These initiatives are being carried out under the leadership of the President of the Treasury Board.

• On May 6, 2004, the Government announced the appointment of Mr. Charles-Antoine St-Jean as the new Comptroller General for Canada. The Comptroller General will provide overall leadership in ensuring that departments comply with Treasury Board policies for strong expenditure control and rigorous stewardship of public funds. The Comptroller General will review and sign off on policy proposals to ensure that expenditure plans are sound.

• Re-establishing the Office of the Comptroller General is a key part of the Government’s effort to strengthen financial oversight across the federal government. Some of the initiatives the Comptroller General has chosen to undertake include:

• Providing leadership to ensure appropriate frameworks, and policies and guidance on controls, are available across the federal public service.

• Promoting transparency and openness of financial activity, including systems for accounting, asset management and procurement.

• Building financial management and audit capacity to nurture and manage professional development of the financial management and internal audit communities, including establishing accreditation and certification standards and advising on the modules of the public service learning curriculum.

• The Government is working on the appointment of professionally accredited comptrollers to sign off on all new spending initiatives in every government department.

• The Government is also planning to introduce modern, real-time information systems to track all spending and provide appropriate tools for effective scrutiny and decision making. As an example, a new Expenditure Management Information System will integrate government-wide information and provide a common database for all departments, agencies and the Treasury Board Secretariat. This will enable on-line sharing of expenditure management and performance information. Information on Government of Canada contracts for goods and services over $10,000, and on the travel and hospitality expenses of political staff and senior Government of Canada officials, is now available on-line.

• Finally, the Government has undertaken a review of governance rules for Crown corporations. The results of the review will be released shortly.

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