PACC Committee Report

RESPONSES TO RECOMMENDATIONS OF THE

4^TH REPORT OF THE STANDING COMMITTEE ON PUBLIC ACCOUNTS

RECOMMENDATION 1 -- That the Treasury Board Secretariat undertake and complete the required studies and consultations on full accrual based appropriations and that they prepare a set of proposals and alternatives, to be presented to the House of Commons Standing Committee on Public Accounts, no later than March 31, 2002.

RESPONSE:

At the outset, it is important to realize that the accounting basis for appropriations and that for financial statement reporting by the federal government, are not now the same and have not been the same for decades.  Appropriations are managed on the ‘partial’ accrual basis of accounting whereas the Government’s financial statements are prepared on the ‘modified’ accrual basis of accounting.  The main differences relate to the valuation of assets and liabilities recorded in the financial statements that do not require immediate appropriations.  The Government has successfully reported in the Public Accounts on both these bases of accounting and will continue in a similar manner with the introduction of full accrual accounting for financial statement reporting.

The subject of full accrual based appropriations is very complex and requires careful review and consultation.  Until this is completed, it would be premature to commit to their adoption and specific deadlines.  We are learning from the experiences of other countries that caution us not to rush too quickly into this decision.

Internationally, there is no consensus as to whether accrual budgeting and accrual appropriations regimes must accompany an accrual accounting regime for financial reporting.  Although each country accepts the fundamental objectives of good budgeting and reporting practices, there is no common path for moving forward and, in fact, there are several very different approaches that are workable, including the status quo.

The decisions taken respecting any contemplated changes to our budgeting and appropriation practices will have tremendous impact and consequences for government.  This strongly underlies the need for very careful, rigorous, and exhaustive study before taking any decisions in the area for the Government of Canada. 

RECOMMENDATION 2 -- That a parliamentary committee or working group be established with the mandate to review the proposals prepared by Treasury Board on full accrual based appropriations and present its conclusions and recommendations to the House of Commons

RESPONSE:

The Government notes that the issue of full accrual based appropriations is of interest to Members of the House of Commons.  It would appear that this issue could be adequately dealt with by the existing Standing Committee on Public Accounts.  However, the suggestion to establish a new parliamentary working group or committee is a matter for the House of Commons to decide.

RECOMMENDATION 3 -- That the Government and the Canada Employment Insurance Commission disclose their interpretation of the Employment Insurance Act with regard to setting of premium rates.

                  RESPONSE:

It is the Commissioners of the Canada Employment Insurance Commission that set the employment insurance (EI) premium rates and not the Government.  The Government can over-ride the rates set by the Commissioners but only through the tabling of legislation.  The Commissioners, in setting the rates, must follow the criteria set out in the Employment Insurance Act.

However, the consolidation of the EI premium revenues and program costs in the Government’s financial statements and the setting of the premium rates have resulted in confusion in the minds of someabout the role of the Commissioners and the effect of the EI program on the Government’s financial statements.  The Standing Committee on Finance, in its December 1999 Report, recognized this problem and recommended that the Government consider revising the accounting practices related to Employment Insurance and the manner in which premiums are set.

In response, the Government is launching a consultation process on this issue.  In the interim, Bill C-2 suspends the role of the Commissioners in formally setting the EI premium rates for 2002 and 2003.  Rates for these two years are to be set by Order-in-Council.  Once the consultation process is completed, the Government will announce what changes, if any, will be made to the current rate-setting process.

RECOMMENDATION 4 -- That the federal government repeal the legislation requiring the publication of the Debt Servicing and Reduction Account (DSRA).

            RESPONSE:

The Government believes that, at this time, the DSRA provides important information to Canadians on the flow of GST revenues, gifts to the Crown, and the net gains associated with disposals of investments in Crown corporations. The Government will continue to review this issue.

RECOMMENDATION 5 -- That the Government present its financial information contained in its financial statements and budget documents solely on a gross basis of accounting.

RESPONSE:

The Budget reports on the basis that Parliament appropriates funds to the Government, which is on a net basis.  However, both net and gross numbers are presented in the Annual Financial Report (AFR) and audited financial statements presented in the Public Accounts.  There is, therefore, full disclosure.

As the Government indicated in its response to the Auditor General’s report, the issue is more complex than indicated in the report.  For example, the intent of the low-income GST credit was to provide a rebate to low- and middle-income Canadians for the incremental costs incurred in replacing the federal manufacturer’s sales tax by the Goods and Services Tax.  The simplest and least costly method of providing that rebateis the current low-income GST creditwhich is netted against tax revenue in the budget documents. The Government believes that the method chosen should not solely determine its classification.

RECOMMENDATION 6 -- That the Treasury Board Secretariat, in consultation with the Department of Finance and the Office of the Auditor General, review and update its budgeting and expenditure management guidelines in order to improve the government’s budgeting techniques and practices and to ensure economical, efficient and effective use of public funds.  That the Treasury Board Secretariat periodically report back to the Public Accounts Committee on the progress being made in this regard.

RESPONSE:

The economic and fiscal planning assumptions are derived through an exercise with private sector economists.  It is one of the most transparent exercises employed by any government.  The economic planning assumptions are based on the average of the private sector economic forecasts.  These are then translated into fiscal projections by the major private sector economic forecasting firms.  These results are discussed by the Minister’s private sector economic advisory group.  These become the basis of budget planning.

In the past four years, Canada has experienced extremely strong economic growth – much faster than expected by any private sector forecast.  As a result, the fiscal outcome turned out better-than-expected as well.  These improved results were not just restricted to the federal government in Canada.  Most provinces and industrialized countries have also done better-than-expected.

RECOMMENDATION 7 -- That the Treasury Board Secretariat, in consultation with the Department of Finance and the Office of the Auditor General, investigate the possibility of incorporating longer range forecasting techniques into its budget planning processes that would permit the evaluation of the long-term consequences of short-term budgetary decisions.  That the Treasury Board periodically report back to the Public Accounts Committee on the progress being made in this regard.

RECOMMENDATION 8 -- That the Treasury Board Secretariat, in consultation with the Department of Finance and the Office of the Auditor General, investigate the possibility of introducing generational accounting and forecasting in order to evaluate the long-term consequences of current fiscal and budgetary decisions on current health care and public pension costs.  That Treasury Board Secretariat periodically presents a progress report to the Public Accounts Committee on this initiative.

RESPONSE:

These recommendations are similar to one made by the Public Accounts Committee in April of 1998.  The Government’s response remains basically unchanged with one major exception.  In its fall 1999 Economic and Fiscal Update, the Government presented five-year economic and fiscal projections.  This was done on the recommendation of the private sector economic advisory group.  They argued that with the budget now in balance or surplus, a longer-term focus was needed for consultation and budget planning purposes.  However, given the uncertainty of longer-term projections, they also recommended that the Government continue to base its decisions on a two-year rolling budget basis.

Some other countries do produce longer-term economic and fiscal projections.  However, independent research shows that these projections are subject to substantial revisions and that great caution must be exercised in their use. 

The Government has produced longer-term structural analysis for specific policy issues.  For example, long-term projections were prepared as part of the consultations for the reform of the Canada Pension Plan.  Long-term studies have also been published on the impact of the ageing population.

RECOMMENDATION 9 -- That Treasury Board Secretariat, in consultation with the Department of Finance and the Office of the Auditor General, consider developing a continuous expenditure review mechanism that would encourage greater budgetary discipline. That Treasury Board Secretariat periodically report back to the Public Accounts Committee on the progress being made in this regard.

RESPONSE:

The new Treasury Board Policies on Evaluation and Internal Audit, introduced in April 1, 2001, represent a strengthening of oversight functions across government and an increased focus on the importance of clearly demonstrating  to the public results, responsible spending and accountable management.  As part of the broad Results for Canadians agenda, the scope of these policies has been broadened and new standards for management have been introduced. 

In the case of evaluation, the new Policy reinforces the link of evaluation to results-based performance measurement and monitoring.  Moreover, it stresses the need for managers to embed the discipline of evaluation in the life cycle of programs and policies, including front-end design. 

The new Internal Audit Policy, through a focus on assurance services, provides management with, an increased confidence that information used for decision-making and reporting of results is reliable and an understanding of the overall soundness of its risk management and control frameworks.  In both cases, the two new Policies reinforce the government’s commitment to transparency and management in ‘full public view’.  Finally, to monitor implementation, Treasury Board Secretariat has committed to undertake an evaluation of the Policies in Year 2 and Year 5 of implementation.

It should also be noted that the revised Policy on Transfer Payments requires that terms and conditions for grant and contribution programs be subject to Treasury Board renewal at least every five years with the results from evaluations included in the renewal process.