IV. CANADA

establishes constitutional principles for fiscal relationships between the federal and provincial governments. The FAA as amended specifies both general principles and specific procedures on public financial administration. One of the most important provisions is that the government cannot raise revenues or incur spending without the approval of Parliament. It also establishes the Treasury Board and the Ministry of Finance, and specifies principles for the use of public money, public debt, and public accounts. The AGA confirms the long-standing existence of the Office of the Auditor General (OAG) (over 125 years), and states the types of audit and criteria for undertaking them, the power of the Auditor General, and measures to secure the independence of the audit including the appointment and tenure of the Auditor General.

Intergovernmental fiscal relations are based on the Constitution Act 1867 and the Federal-Provincial Fiscal Arrangements Act 1985. The latter act states the major types of federal transfers to the provinces to support specific provincial and territorial programmes (health and social transfer), to provide general funding to less prosperous provinces (fiscal equalisation payments), or to help a region with special needs (fiscal stabilisation payments).

1.2. Reforms of budget system laws

Over the past 20 years, there have not been any path-breaking changes in the laws relating to the budget system, although some amendments have been made to the FAA and AGA. In general, new budgeting procedures have been introduced by Cabinet decision, rather than by new statutes or major modifications to existing statutes. This reflects the strong unwritten powers enjoyed by Cabinets and Cabinet committees in Westminster countries. Also, unlike several other Westminster countries, Canada has not adopted a law to enhance fiscal responsibility and accountability.

After study, it was concluded that the federal government did not need to adopt a new law or amend the FAA to introduce accrual accounting (compare the adoption of a statute in 2000 to introduce an accrual-based accounting system in the United Kingdom). The adoption of full accrual accounting for the budget and Government of Canada audited financial statements was a policy decision taken by the government in 2003. The FAA provides broad powers to the Minister of Finance and the President of the Treasury Board relating to the form and content of the public accounts. In 2004, partly to address mismanagement of public funds, the government announced that it would review the FAA for the purpose of strengthening oversight and accountability. Changes in the FAA may be required to align the accounting basis of the budget, Government of Canada financial statements, the estimates, and the spending authority.

IV. CANADA

To address high fiscal deficits and rapidly increasing public debt, Parliament enacted the Spending Control Act in June 1992 (Box 2). This statute was designed to directly control spending and indirectly limit the growth of the federal debt.2 In 1994, the government chose not to extend the act beyond its original five-year period.

Box 2. Canada: Main provisions of the Spending Control Act 1992

●Expenditure ceilings, expressed in Canadian dollar terms, were established. The ceilings applied only to programme spending, which was defined as expenditures that were funded directly by an independent source of revenue.

●The spending limits covered five fiscal years: 1991/92 to 1995/96.

●Exceptions to the ceilings were made. In aggregate over the five-year period, adjustments to the limits amounted to only CAD 315 million.

●Overspending in any fiscal year was permitted provided that the government accounted for the excess spending in the following two fiscal years. Excess spending could be justified if the proposed increase would result in government revenues equal to or greater than the proposed excess spending.

In 1994/95, significant reforms in the budget planning process were made by the government, without resort to legislation. The key reform was to establish and maintain successive rolling two-year fiscal objectives. Two institutional features in budget formulation were included, namely prudent economic assumptions and a contingency reserve fund to be used only for compensating forecasting errors and unpredictable events (Blöndal, 2001, Box 2). Furthermore, a programme review was conducted to review all aspects of non-statutory departmental spending based on six tests.3 The key objective was to reduce or eliminate low priority programmes, and require government resources to be directed to high priority activities where the federal government is best placed to deliver its service. Statutory programmes were subject to review as well, with major structural changes made to the employment insurance programmes and transfers to other levels of government. In addition, a pre-budget consultation process was introduced, again without legislation, to encourage wider participation in budget formulation at the earlier stages.

The budget programme reviews led to major cuts in expenditures, including a substantial reduction of government personnel (Sturm and Müller, 1999).