A Canadian flag flies in front of the Peace Tower on Parliament Hill in Ottawa.Chris Wattie/Reuters
Clément Gignac is a Canadian senator. Patrick Leblond is an associate professor and holder of the CN-Paul M. Tellier Chair on Business and Public Policy at the University of Ottawa. Charles Asselin is a research assistant at the Senate of Canada.
The federal budget planned for this autumn is expected to account for public spending by separating current operations and long-term investments. This new framework proposed by Prime Minister Mark Carney marks a significant change in the way the government presents its fiscal policy.
According to Mr. Carney, this move will enable a more accurate presentation of the government’s financial situation. More importantly, this budgetary strategy is part of the government’s repositioning as an investor in Canada’s economic and security transformation.
The Liberal Party’s fiscal and costing plan for the recent federal election campaign said the new approach “will mean spending less on operations so we can invest more in the things that build Canada, like homes, naval ships, roads, and the capacity of businesses to invest in technology, production, and ideas.”
This new budgetary approach raises important questions: Will it strengthen fiscal discipline? What public spending qualifies as an investment? What supervisory mechanisms will guarantee transparency?
Consider the British Treasury, which has long distinguished between resource spending and capital spending. Under Tony Blair’s government, the “golden rule” was introduced in 1997, dictating that a balanced current (resource) budget must be maintained over the economic cycle, to avoid financing operating expenditure by borrowing. The government should only borrow to finance capital expenditures, according to the rule. In Canada, Mr. Carney’s government plans to balance the operating budget by the end of its term in 2029.
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However, since 1997, the British government has only recorded a balanced or surplus current budget on four occasions. This highlights the difficulty of respecting the golden rule, particularly when a government must spend massively to support the country’s economy in times of economic crisis (for example, during the 2008 global financial crisis and COVID-19).
According to Institute for Government, a British think tank, the Treasury has allowed government departments to reallocate money intended for capital investment to current expenditures, even if such diversion of funds was originally prohibited.
So the Canadian federal government’s new budgetary approach doesn’t guarantee fiscal discipline for current (operations) expenditures.
What about investments? First, the federal government must clearly explain to the Canadian public what it means by investment and how it will account for it in the fall budget and government records.
For public accounting purposes, capital expenditures are currently well defined. They consist of tangible assets such as land, buildings, military equipment, infrastructure, computer software and hardware, and vehicles that are acquired or developed by the federal government.
However, the Liberal Party’s campaign platform defined capital spending as “direct investments the government makes in machinery, equipment, land, and buildings, as well as new incentives that support the formation of private sector capital (e.g. patents, plants, and technology) or which meaningfully raise private sector productivity.”
This means that federal government tax credits and subsidies that support business creation, innovation and (tangible and intangible) capital expenditures by the private sector would be included in the Carney government’s definition of capital spending, whereas they are now included in current expenditures.
Not only would this be a big change to government accounting compared with current Public Sector Accounting Standards, but it would also have for effect to reduce immediately the government’s current budget deficit, without changing anything in terms of actual spending.
To ensure transparency and accountability, the federal government should form a non-partisan panel of experts to develop clear guidelines for accounting for public investments beyond traditional capital expenditures. Representatives from the Department of Finance, the Treasury Board Secretariat, the Office of the Parliamentary Budget Officer and the Office of the Auditor General of Canada could be members of this panel, in addition to academic and independent experts. The panel’s report should be made public when it is tabled.
Second, to maintain fiscal discipline, the federal government should develop and publish a long-term (five to 10 years) investment plan that delivers value for money by aligning with national priorities such as economic growth, climate resilience, social inclusion and reconciliation with Indigenous people. In doing so, the federal government will need to engage provinces, territories, municipalities, Indigenous communities, the private sector and the general public.
This investment plan should set measurable goals, identify priority projects and provide clear timelines and milestones. It should also indicate how it will impact the operating budget over time in terms of revenues and expenditures. Finally, it should be updated annually to reflect changing assumptions and risks.
Once investments are clearly defined from operating expenditures and a long-term investment plan is in place, the Office of the Parliamentary Budget Officer, the Office of the Auditor General and the House of Commons standing committee on public accounts must act collaboratively to ensure consistent and effective oversight of the federal government’s implementation of this major budgetary reform.