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Annex 4
Private Sector Five-Year Fiscal Projections: National Accounts–Public Accounts Reconciliation

Highlights

• This annex provides detailed information on the translation of the five-year fiscal projections provided by the private sector forecasters from a National Accounts basis to a Public Accounts basis.

National Accounts and Public Accounts budget balance

• Differences in the National Accounts and Public Accounts frameworks reflect:

• Differences related to the universe covered by each system. The Public Accounts include all departments, agencies, Crown corporations and funds, while the government sector in the National Accounts is, in the main, a subset of this universe based on ownership, control and funding criteria.

• Conceptual and definitional differences related to the scope of each system. For example, the Public Accounts include revenues related to capital gains, asset sales and asset revaluations. The National Accounts record assets at market value and record changes in the values as they occur on the Government’s balance sheet, but the gains and losses are not recorded in income. On a Public Accounts basis, they are recorded at the lower of the book or market value.

• Timing differences related to the recording of various revenues and expenses. In the Public Accounts, a liability for payments to arm’s-length organizations such as foundations and trusts is made in the year in which it is incurred. In the National Accounts, no obligation is recorded until the payment is made to the ultimate recipient.

• Both measures provide important and complementary perspectives on the Government’s fiscal position. Although the measures differ in their levels, their trends are broadly similar.

Table 4.1
Average Private Sector Projection of the Budget Balance
(National Accounts Basis)

• The National Accounts measure of the budget balance is net lending. This is the difference between total government income (revenues) and outlays (expenses), adjusted to reflect current expenses on capital as opposed to charges for depreciation.

• The following pages outline the adjustments required to translate each of the major revenue and expense components from a National Accounts basis to a Public Accounts basis.

Table 4.2
Average Private Sector Projection of Budgetary Revenues
(National Accounts Basis)

• The National Accounts provide a breakdown of revenue similar to that found in the Public Accounts. In translating these revenues to a Public Accounts basis, a number of adjustments are required. These include adjustments to reflect:

• More up-to-date data on a Public Accounts basis.

• The presentation of a number of revenue components in the Public Accounts net of tax expenditures such as the Canada Child Tax Benefit (CCTB) and the goods and services tax (GST) credit.

• Differences in the definition of the government sector in the two accounting systems.

• The inclusion of certain revenues in the Public Accounts that are not accounted for in the National Accounts, such as revenues from asset sales and the impact of revaluations of financial assets.

• The following section provides a detailed account of these adjustments for each major source of revenue.

Translation of National Accounts into Public Accounts

Table 4.3
Average Private Sector Projection of Personal Income Tax Revenues

• Various reclassifications are required to translate the National Accounts projection of personal income tax revenues to the accrual Public Accounts projection. The most important of these is to deduct the value of the CCTB from National Accounts revenues. In the Public Accounts, personal income tax revenues are presented net of the CCTB. The CCTB projection is based on forecasts of population growth, income profiles and the impact of measures to enhance the benefit announced in past budgets.

• Other reclassifications involved in moving to the Public Accounts definition of personal income tax revenues include:

• Adding tax revenues related to trust income.

• Deducting interest and penalties, which are counted in non-tax revenues in the Public Accounts.

• Deducting Old Age Security (OAS) benefit repayments, which are netted against OAS benefits in the Public Accounts.

• Deducting the non-resident withholding tax imposed on persons, which is shown separately in the Public Accounts.

• Deducting personal refundable tax credits.

• These adjustments are generally assumed to grow with National Accounts personal income tax revenues over the planning period.

• Next, year-to-date collections experience is incorporated to ensure the projection reflects the most up-to-date information available. Fiscal data through September 2004 suggest that personal income tax receipts will 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 the personal income tax base. As a result, the growth in personal income tax revenues in future years is consistent with the growth forecast by the private sector forecasters.

• Other adjustments are largely due to the fact that the latest National Accounts estimates do not reflect the final year-end fiscal numbers found in the 2003–04 Public Accounts.

Translation of National Accounts into Public Accounts

Table 4.4
Average Private Sector Projection of Corporate Income Tax Revenues

• The main reclassifications involved in translating corporate income tax revenues from a National Accounts to a Public Accounts basis are the deduction of the corporate refundable tax credits, which are netted against revenues in the Public Accounts, and the removal of interest and penalties, which are reported as other non-tax revenues in the Public Accounts. These are projected to grow in line with corporate income tax collections over the planning period.

• An adjustment is made for the one-time gain in corporate income tax receipts from the financial services industry in 2003–04. This 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 starting point for the private sector projections is adjusted down by $2.5 billion.

• Remaining adjustments reflect the fact that corporate tax liabilities in the National Accounts are based on a quarterly survey of corporate profits, while in the Public Accounts they are based on assessed corporate income tax. This adjustment is projected to grow in line with National Accounts corporate income tax revenues over the planning period.

Translation of National Accounts into Public Accounts

Table 4.5
Average Private Sector Projection of Non-Resident Withholding Tax and Other Income Tax

• The main adjustment involved in translating the non-resident withholding tax from a National Accounts to a Public Accounts basis is the removal of tax on trust income included in the National Accounts estimate. This is included in personal income tax revenues in the Public Accounts. Tax on trust income and other income tax are projected to grow in line with National Accounts personal income tax revenues.

Translation of National Accounts into Public Accounts

Table 4.6
Average Private Sector Projection of Goods and Services Tax Revenues

• The key adjustment required to translate GST revenues from a National Accounts to a Public Accounts basis is the subtraction of the GST credit from National Accounts revenues. The National Accounts report GST receipts gross of the credit, while the budgetary presentation in the Public Accounts is net of the credit. The GST credit is projected on the basis of expected increases in population, income profiles and benefits.

• The average private sector projection of GST revenues is adjusted downward to reflect GST collections experience in 2004–05. Over the remainder of the projection, the adjustment grows in line with the consumption base.

• Of the remaining adjustments, the most important involves replacing the accrual adjustment contained in the National Accounts, which is based on a model of taxable expenditures, with the Public Accounts accrual estimate based on assessed receipts, rebates and refunds. This adjustment factor is projected to grow in line with National Accounts GST revenues over the planning period.

Translation of National Accounts into Public Accounts

Table 4.7
Average Private Sector Projection of Customs Import Duties

• The estimates of customs import duties are very similar under the two accounting systems.

• The main adjustment required to move from a National Accounts basis to a Public Accounts basis is to replace Statistics Canada’s accrual adjustment related to the timing of receipts with the assessment-based accrual estimates contained in the Public Accounts. This adjustment is assumed to grow in line with National Accounts customs import duties over the planning period.

Translation of National Accounts into Public Accounts

Table 4.8
Average Private Sector Projection of Other Excise Taxes and Duties

• The two key components of other excise taxes and duties are tobacco taxes and motive fuel taxes. The estimates of these tax bases are similar in the two accounting systems.

• The adjustment in translating other excise taxes and duties from a National Accounts to a Public Accounts basis largely reflects the exclusion of an accrual adjustment made in the Public Accounts accrual figures to reflect underlying taxes assessed.

Translation of National Accounts into Public Accounts

Table 4.9
Average Private Sector Projection of Employment Insurance Premium Revenues

• Translating employment insurance (EI) premium revenues from a National Accounts to a Public Accounts basis involves removing the premiums paid by the federal government as an employer from the National Accounts estimate, as they are netted out of both revenues and expenses on a Public Accounts basis.

Translation of National Accounts into Public Accounts

Table 4.10
Average Private Sector Projection of Net Crown Corporation Revenues, Foreign Exchange Revenues, and Return on Investments

• The National Accounts concept of return on investments is considerably different than the Public Accounts concept. The key differences between the two are highlighted here.

• First, the National Accounts include the interest earnings of a number of entities that are not considered part of the Government of Canada for the purpose of the Public Accounts, including interest earnings of trusts and foundations set up as third parties.

• Second, royalties are included on a National Accounts basis as a return on the rental of an asset, while on a Public Accounts basis royalties are included in sales of goods and services.

• Third, revaluations (largely foreign exchange-related revaluations) and gains and losses on sales are not included in current income on a National Accounts basis but are included on a Public Accounts basis.

• Fourth, the National Accounts do not include the unremitted profits of enterprise Crown corporations in current income, but these are included on a Public Accounts basis.

• Fifth, other estimates reduce the projected growth in the Public Accounts estimate in 2004–05, reflecting the impact of the forecast decline in short-term interest rates on the return on the Government’s assets. This impact is diminished over time, consistent with the expected increase in U.S. short-term interest rates and ongoing growth in the stock of Canada Student Loans.

Translation of National Accounts into Public Accounts

Table 4.11
Average Private Sector Projection of Sales of Goods and Services
and Other Non-Tax Revenues

• In the Public Accounts, departmental revenues that are levied for specific services, such as contract costs of policing services in provinces, are netted against expenses, whereas in the National Accounts they are presented on a gross basis.

• Interest and penalties related to overdue taxes must be added as these are included in other non-tax revenues in the Public Accounts, but classified with their respective revenues in the National Accounts. These revenues are forecast to grow with either the corresponding tax base or tax revenues.

• In addition, revenues from the sale of the Government’s remaining shares in Petro-Canada are not included in the National Accounts and thus must be added in 2004–05.

• Royalties are added to the National Accounts estimate as these are included in the Public Accounts sales.

• The Youth Allowance Recovery (YAR) must be deducted from the National Accounts revenues as the YAR is presented on a net basis in the Public Accounts.

Table 4.12
Average Private Sector Projection of Federal Government Expenses (National Accounts Basis)

• The National Accounts concept of total outlays corresponds to the Public Accounts expenses, including public debt charges. The National Accounts include all major transfers to persons, such as OAS and EI benefits, as well as other transfers to persons, such as programs supporting research and students and transfers to Aboriginal peoples and organizations. The National Accounts also include the CCTB and the GST credit as transfers to persons.

• Transfers to other levels of government, including transfers in support of health care and equalization, are part of National Accounts total outlays. Other transfers to other levels of government include transfers in support of labour training and infrastructure.

• Business subsidies, transfers to non-residents and interest on the public debt are also part of National Accounts total outlays.

Translation of National Accounts into Public Accounts

Table 4.13
Average Private Sector Projection of Elderly Benefits

• Translating elderly benefits from a National Accounts to a Public Accounts basis involves adding OAS payments to non-residents to the National Accounts estimates. In the National Accounts these are treated as transfers to non-residents.

• The impact of income testing OAS payments for pensioners with an individual net income above $59,790, which is done through the tax system at tax filing time, is not included in total OAS payments on a National Accounts basis. This impact is reflected in a reduction of personal income taxes on a National Accounts basis. On a Public Accounts basis, OAS payments are reported net of the impact of income testing.

Translation of National Accounts into Public Accounts

Table 4.14
Average Private Sector Projection of Employment Insurance Benefits

• Translating employment benefits from a National Accounts basis to a Public Accounts basis requires the following two adjustments.

• The National Accounts estimate includes only those employment benefit and support measures (EBSMs) that the System of National Accounts considers to be direct transfers to persons, which represent about one-third of total EBSM spending. In the National Accounts the other two-thirds of the cost of EBSMs is attributed to the respective recipients (e.g., businesses, other levels of government), while all EBSM spending is included in the Public Accounts estimate.

• The cost of transfers to provinces funded out of the EI program are included as transfers to provinces in the National Accounts. These need to be included in translating to a Public Accounts basis.

Translation of National Accounts into Public Accounts

Table 4.15
Average Private Sector Projection of Federal Transfer Support for Health and Other Social Programs

• For 2002–03 and 2003–04 transfers to other levels of government on a National Accounts basis include the Canada Health and Social Transfer (CHST) as well as transfers to the Medical Equipment Trust Fund and the Public Health and Immunization Trust. Starting in 2004–05 the new Canada Health Transfer and Canada Social Transfer replace the CHST.

• In order to move from the National Accounts projection to the Public Accounts projection, the following adjustments must be made:

• Amounts for Alternative Payments for Standing Programs must be added to the National Accounts projection, since the National Accounts nets this amount off of the CHST.

• Numerous timing adjustments are required since the National Accounts record the expenditures when the payments are actually made to the trust funds, whereas the Public Accounts record when the liability for these amounts is incurred. These timing differences between the accounts arise due to payments made for the Medical Equipment Trust Fund, CHST supplements and the Public Health and Immunization Trust.

• Differences may also arise between these series because the latest National Accounts do not reflect the final year-end fiscal numbers found in the 2003–04 Public Accounts.

Translation of National Accounts into Public Accounts

Table 4.16
Average Private Sector Projection of Fiscal Transfers

• Fiscal transfers on a National Accounts basis consist of equalization. To translate this to the Public Accounts basis requires adding amounts for Territorial Formula Financing, Youth Allowance Recoveries and statutory subsidies.

• Accrual adjustments are required since the National Accounts reflect equalization cash payments, whereas the Public Accounts reflect equalization entitlements.

• Other adjustments reflect the fact that the National Accounts do not include the final year-end fiscal numbers.

Translation of National Accounts into Public Accounts

Table 4.17
Average Private Sector Projection of Direct Program Spending

• Direct program spending in the National Accounts consists of federal government expenses on goods and services, other transfers to persons and other transfers to other levels of government, as well as transfers to business and non-residents (see Table 4.12 for details). Also included are components for capital to put other program spending on a consistent basis with the concept of net lending.

• A number of adjustments are needed to reflect differences in the universe of programs included in the National Accounts and the Public Accounts.

• Payments of elderly benefits and EI employment support benefits to non-residents are deducted from the National Accounts estimates because these are included in the Public Accounts estimates of OAS benefits and EI benefits respectively.

• The federal government’s payment of EI premiums as an employer are deducted from the National Accounts estimates.

• Veterans’ benefits are deducted from the National Accounts estimate of direct program spending because, on a Public Accounts basis, the cost of providing veterans’ benefits is accounted for as an interest charge on the liability.

• Spending on Territorial Formula Financing and statutory subsidies is deducted from the National Accounts estimate as these are included in transfers to other levels of government on a Public Accounts basis.

• Departmental revenues that are levied for specific services are deducted from the National Accounts estimate because these are netted against expenses in the Public Accounts.

• The expenditures of Crown corporations in the National Accounts are also presented on a gross basis. Therefore an adjustment is required in translating these to the Public Accounts, in which the expenses of consolidated Crown corporation expenses are presented net of revenues generated by these corporations.

• The value of refundable tax credits is deducted from the National Accounts estimate of direct program spending, as these are netted against the applicable tax revenues in the Public Accounts.

• An amount must also be added to the National Accounts estimate to reflect the liability recognized in the Public Accounts for debt in arrears that the Government does not expect to collect.

• An adjustment is required to align the estimate of the federal public sector pensions included in the National Accounts with the actual cost of the pensions recorded in the Public Accounts.

• Similarly, an adjustment is required to account for differences in the depreciation costs included in the two accounting systems, which stem from differences in estimates of the capital stock of the federal government.

• Other adjustments arise in large measure because the latest National Accounts do not reflect the final year-end fiscal numbers found in the 2003–04 Public Accounts and the estimate of direct program spending for 2004–05 and 2005–06 in the 2004 budget.

Table 4.18
Average Private Sector Projection of Public Debt Charges

• Two major accrual adjustments are made to the National Accounts in order to reconcile the two projections:

• First, the National Accounts estimate of interest on pension liabilities is adjusted to incorporate returns on pension fund assets and the interest on the average actuarial obligation.

• Second, the National Accounts record payments for employee benefits, post-employment benefits and veterans’ pensions in other program spending, whereas for the Public Accounts, public debt charges include the interest on liabilities for these programs.

• Other adjustments arise between these series because the latest National Accounts do not reflect the final year-end fiscal numbers found in the 2003–04 Public Accounts.

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