Ottawa now underreports true level of spending

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Appeared in the Hub, August 24, 2022
Ottawa now underreports true level of spending

During the pandemic, while Canadians were distracted by other things, the Trudeau government changed the way federal spending is disclosed. As a result, Ottawa now underreports its true level of spending and presents an incomplete picture to Canadians.

Prior to 2020, federal budgets and other financial disclosures only differentiated between public debt charges (i.e. interest costs on federal debt) and program spending (all spending except interest costs, including transfers to Canadians and other levels of governments, and direct spending on programs such as national defence).

It was fairly easy to identify how much Ottawa planned to spend and how much interest was paid on debt for past borrowing. But this simplicity and transparency was reduced in 2020 when “net actuarial losses” were removed from program spending and added as a separate item. Even the term itself sounds ominous.

Net actuarial losses is a fairly standard term in financial reporting. Specifically, these costs arise when the expected contributions from employees and employers, and the earnings from the monies invested, are insufficient to pay for the expected employee benefits and pensions over a prescribed period of time. This deficiency means the government (or a firm) must contribute more to these plans to ensure sufficient resources are available to pay for promised benefits.

The 2019 federal budget included an estimate for program spending of $329.4 billion for 2019-20. But in 2020, in its economic update—recall there was no federal budget that year—the government separated program spending (then estimated at $338.4 billion) from the actuarial loss of $10.6 billion. In other words, under the old classification, program spending would have been $10.6 billion higher at $349.0 billion.

This separation of expenses also affects the forecast for government spending as a share of the economy, since it excludes the actuarial loss.

These sums are not insignificant. The government has reclassified its spending going back to 2008-09. The total amount of spending on actuarial losses between 2008-09 and 2020-21 is $135.7 billion, which is now no longer categorized as program spending, thus underestimating how much Ottawa is actually spending. And the federal government expects to incur another $28.5 billion in net actuarial losses between 2021-22 and 2025-26.

The question is why differentiate between the two. Firms don’t generally care about the composition of the compensation to employees. What they care about is the total cost. Similarly, it’s not clear why taxpayers should care about a differentiation between wages and salaries and the costs of government-sector pensions. What they care about is the total cost of compensation for federal employees. Moreover, given that more than 87 per cent of government employees are covered by registered pensions and that employee compensation comprises more than 10 per cent of total federal spending, there’s a strong argument that actuarial losses should return to being consolidated with all other program spending.

The ability to hold elected politicians and bureaucrats accountable remains premised on an agreed set of facts. Financial disclosures that obscure the total cost of federal spending make such accountability more difficult and less transparent for average Canadians. Reforms to ensure better clarity and transparency are needed.

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