The Parliamentary Budget Office (PBO) is welcoming the Liberal government’s decision to move budget day from the spring to the fall, but says Finance Canada’s definition of capital spending announced Monday is “overly expansive.”
In an analysis posted on its website Tuesday, the PBO said that moving the budget date will give parliamentarians more timely and clear information when scrutinizing spending, and that the move is something the PBO has been asking for.
“This will allow for better alignment between the budget and the main estimates and ensure that parliamentarians have a more comprehensive federal spending plan before they are asked to approve money for the new fiscal year,” the PBO said in the analysis.
The main estimates are released in the spring and detail the planned spending for the coming fiscal year. MPs examine and vote on the estimates to authorize government spending.
Former PBO Kevin Page, writing in Policy Magazine, also welcomed the change, saying that releasing the budget months before the start of the fiscal year will help businesses and other levels of governments plan ahead.
The budget date change was announced Monday by Finance Minister François-Philippe Champagne, who also took the opportunity to outline Prime Minister Mark Carney’s plan to separate day-to-day operational spending from capital investments in all federal budgets going forward.
The budget will still deliver one deficit number but, Champagne says, it will be easier to see what is being borrowed to spend on the business of government and what is being borrowed to spend on buying or investing in assets.
The PBO says it’s pleased the Carney government has promised to remain compliant with public sector accounting standards, but has concerns about the way Finance Canada promises to define a capital expense.
Defining a capital expenditure
On Monday, Finance Canada said capital investment will be “defined broadly as any government expense or tax expenditure that contributes to public or private sector capital formation, held directly on the government’s balance sheet or on that of a private sector entity, Indigenous community or another level of government.”
The document explains that the intention is to focus on two types of capital expenditures: the first are situations where an entity receives funding from the government and is then required to invest it to create infrastructure or other capital assets; the second is when government spending “enables capital investment in identifiable sectors or projects.”
Spending that increases the country’s housing stock or pays off the cost of an asset over time would qualify as capital spending, as would tax breaks that give companies the incentive to invest in an asset, research and development or scaling up productive capacity.
A PBO official speaking on background explained that when giving a company a tax break in exchange for it building, say, a road or a factory or a bridge, that increases the quantity of infrastructure assets in the country; there is an obvious and direct link between the spending and the asset, just as there is when the government makes a similar investment.
The official said, however, that when giving a corporation a tax break, or funding, to scale up the size of a business or invest in research and development, the link between the spending and the creation of a new asset is less clear.
“Based on our initial assessment, we find that the scope is overly expansive and exceeds international practice,” the PBO analysis said.
“The inclusion of corporate income tax expenditures, operating (production) subsidies and measures to grow the housing stock likely overstate the actual contribution of federal government spending to non-residential capital formation in the economy,” the PBO adds.
Page agreed that separating capital spending from day-to-day spending will result in more transparent federal finances, but he did not tackle the issue of how the federal government defines a capital expense.
