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4. Legal provisions for each stage of the budget cycle

4.1. Budget preparation and presentation by the executive

4.1.1. Institutional coverage of the budget

By a convention inherited from the United Kingdom, a distinction is made between the budget and the main estimates. The budget is the document tabled in the House of Commons by the Department of Finance giving the government’s overall fiscal plan for revenues and expenditures, including new initiatives. The main estimates are the detailed plans for government expenditures, by department and agency, tabled several days after the budget by the Treasury Board. The budget and main estimates are limited to fiscal activities of the federal government. The coverage of the budget is not defined in law. By convention, the executive departments can propose changes in the institutional units comprising “federal government”.

The provincial governments have their own budgets which have similar structure and characteristics of federal government. Provincial laws relating to provincial budget processes are beyond the scope of this study. At the federal level, there is no legal requirement for provinces and territories to report on their fiscal developments to the federal government.

4.1.2. Extrabudgetary funds and earmarking of revenues

A central feature of financial management is the Consolidated Revenue Fund (CRF), established under the Constitution Act 1867. This fund pools all federal government income, such as revenues from taxes, tariffs and fees, and profits from Crown corporations. The FAA requires all revenues of the government to be paid into the CRF, and money must not be paid out of the CRF, without the authority of an appropriation by Parliament (Art. 17). The main exceptions to the concept of CRF are certain social insurance programmes, whose sources of funds are payroll taxes paid jointly by employers and employees. The Employment Insurance Act 1996 stipulates the setting of premiums and eligibility requirements for the payment of unemployment benefits. However, although contributions are earmarked, the programme is consolidated with the government’s financial statements (there is no separate account). In contrast, for the pension funds, although contributions are deposited in the CRF, transactions are not consolidated in the financial statements of either the federal government or the provincial governments. The Canada Pension Plan Act 1966, as amended, governs the activities of the main programme, which is a jointly managed programme between the federal government and the provinces, with the exception of Quebec which has its own programme.

Transfers of taxpayers’ money to foundations and other delegated arrangements set up to achieve public objectives have been a source of concern.





Although the funds provided to such foundations are shown in the budget, the use of these funds is beyond the scope of government accounting and audit arrangements. The statutory authority for some of these delegated arrangements is in the Canada Corporations Act, the federal non-profit framework law. Only a few of these arrangements were established by direct legislation, which has the advantage of facilitating good governance and accountability to Parliament.

4.1.3. Definition of budget aggregates

The major budget aggregates are not defined in law. In the process of preparing the annual budget, the budget aggregates for major sectors and each ministry or agency are proposed for two years.

4.1.4. Fiscal rules

Canada currently has no statutory fiscal rules to control spending, deficits or debt. As mentioned, the Spending Control Act 1992 lapsed in 1996. However, clear fiscal targets are set by the government in the budget formulation process. The federal fiscal policy presently aims to achieve “a balanced budget or better” to ensure that the public debt-to-GDP ratio remains on a clear downward track. In the 2004 budget, the government announced an objective of reducing federal debt to 25% by 2010. Although the ex ante target aims at balancing the budget, the prudence allowance and contingency reserve have led to de facto budget surpluses.

4.1.5. The timetable for budget preparation and presentation to Parliament

The fiscal year for the federal government begins on 1st April (FAA, Art. 2). The timetable for budget preparation and presentation to Parliament is not governed by law. Traditionally, the budget planning process begins about 12 months before the beginning of the fiscal year, with the Department of Finance submitting macroeconomic forecasts to Cabinet, and the Treasury Board calculating reference levels for expenditure of each department and government programme (Box 4). Each department then enters into negotiation with the Treasury Board on the spending levels for the upcoming year. Departments must submit a business plan to the Treasury Board in June. These plans include proposed expenditure for the upcoming year, the department’s strategy, goals and targets, and measures for programme and management changes over the next three years. Cabinet reviews the budget priorities and strategy and makes a final decision on the budget in January or February. The Minister of Finance typically submits the budget and the Treasury Board typically submits the main estimates (appropriation bills) to the House of Commons around February-March.





Box 4. Canada: Key steps in the annual budgeting process

March-June: Preparation and review of departmental business plans.

June: Cabinet review of priorities.

September-October: Cabinet review of budget consultation targets and conduct of consultations.

December-January: Cabinet review of budget strategy.

January-February: Final Cabinet decision on the budget between the Prime Minister and the Finance Minister, and the President of the Treasury Board.

February-March: Budget speech and tabling of estimates.

4.1.6. Approval process within the executive

The approval process by Cabinet is not specified in law. New policy initiatives are presented directly by ministers to the applicable policy Cabinet committees. These committees meet weekly during the autumn to discuss the merits of new policy proposals presented by ministers. During this process, the Privy Council Office, the Department of Finance and the Treasury Board also review ministers’ proposals. After negotiations, Cabinet approves the draft budget. However, final decisions on the budget are made by the Prime Minister and the Minister of Finance.

4.1.7. Documents to accompany the budget law

The content of the budget proposal agreed by Cabinet is governed by convention. The main estimates present information on operating and capital expenditures, the cost of servicing the public debt, transfer payments to other levels of government, organisations or individuals, and payments to Crown corporations (Box 5).

Medium-term macroeconomic framework and fiscal strategy.

Since 1995, a system of rolling two-year fiscal objectives was introduced by a Cabinet decision, not law. Before 1995, a five-year fiscal framework was used. The reason for the change was that the government wanted to enhance its credibility and be held accountable for meeting its targets (Blöndal, 2001). A distinctive feature is the systematically prudent economic assumptions for the macroeconomic framework. Optimistic assumptions for the budget had significantly downgraded the credibility of government-generated economic forecasts. Rather than relying on internally-generated economic forecasts for the budget, the government now uses the average of forecasts made by four private sector forecasting firms which are contracted to derive the fiscal





Box 5. Canada: Major contents of the main estimates

Part I: The Government Expenditure Plan. This provides an overview of federal spending and summarises the relationship of the key elements of the main estimates to the current expenditure plan.

Part II: The Main Estimates. These directly support the Appropriation Act. The main estimates identify the spending authorities (Votes) and amounts to be included in appropriation bills. Parliament will be asked to approve these Votes to enable the government to proceed with its spending plans.

Part III: Departmental Expenditure Plans. These are divided into two components: Reports on Plans and Priorities (RPPs) and Departmental Performance Reports (DPRs). RPPs, which are tabled in the spring (the March-May period), are individual expenditure plans for each department and agency (excluding Crown corporations). These reports provide detailed information on objectives, initiatives and planned results, including links to related resource requirements over a three-year period. DPRs are individual department and agency accounts of results achieved against planned performance expectations, as set out in respective RPPs. DPRs cover the most recently completed fiscal year and are normally tabled in the autumn (September-November period).

projections using the average of the private sector economic forecasts. Prudent projections and a contingency reserve act as a buffer to maintain the government’s fiscal objectives. In addition, the Minister of Finance presents an Economic and Fiscal Update to the House of Commons Finance Committee early in the autumn. This provides an update of macro-fiscal developments since the last budget and launches the pre-budget consultation process. Since 1999, the economic and fiscal projections are for a five-year period. The committee holds public consultations and presents recommendations to the government based on its hearings in early December.

New measures versus existing expenditure policies. The law does not require new policies to be distinguished from existing expenditure policies or ongoing projects. New budgetary initiatives are proposed by Cabinet, with parliamentary approval granted either through the appropriation bills or the Budget Implementation Act.

Performance-related information. Although there is no legal obligation, the federal government presents two main reports with performance-related information to Parliament: Reports on Plans and Priorities (RPPs) and Departmental Performance Reports (DPRs) midway through the financial year (see Box 5). In the context of the provision of information about what each





department plans to achieve with the resources entrusted to it and how it performed against those plans, the Treasury Board has provided the following six reporting principles:6

Provide a coherent and balanced picture of performance that is brief and to the point.

Focus on outcomes, not outputs.

Associate performance with earlier commitments, and explain any changes.

Set performance in context.

Link resources to outcomes.

Explain why the public can have confidence in the methodology and data used to substantiate performance.

Tax expenditures, contingent liabilities and fiscal risks. There are no statutory provisions requiring the reporting of tax expenditures and fiscal risks. However, the budget presents information on new tax expenditures, general tax relief initiatives and their fiscal impact. Also, potential fiscal risks are included in the Economic and Fiscal Update. The Department of Finance releases information and assessments on tax expenditures on an annual basis.

The Financial Administration Act (FAA) requires reports on contingent liabilities in the public accounts. Contingent liabilities are listed in the audited financial statements, and appropriate provisions are included in the statement of assets and liabilities.

4.1.8. Budgets of Parliament and other constitutional bodies

Statutory provisions allow Parliament to prepare its own budget independently of the Department of Finance or the Treasury Board. The Parliament of Canada Act provides that the Clerk of the Senate shall, by an order signed by the Clerk, apply for such credits as the Clerk deems necessary for the expenditures of the Senate not otherwise provided for under the Act (s. 3). The same Act also provides that, prior to each fiscal year, the Board of Internal Economy of the House of Commons shall cause to be prepared an estimate of the sums required to be provided by Parliament for the payment of charges and expenses of the House of Commons during the fiscal year (s. 52.4). The estimate shall be transmitted by the Speaker to the President of the Treasury Board who shall lay it before the House of Commons with the estimates of the government for the fiscal year. Also the Auditor General Act (AGA) has statutory provisions for the budget preparation of the audit office (Chapter IV.5).