According to the 2006 and 2008 International Monetary Fund (IMF) Article IV Consultations with Canada, fiscal policy implementation and transparency has been solid and improving. The 2002 IMF Report on the Observance of Standards and Codes (ROSC) emphasizes that transparency in fiscal policy and management in Canada complies with the IMF fiscal policy transparency code and, in some instances, represents best practice. In particular, the 2002 ROSC highlighted the use of private sector economic forecasts, prudence factors, and a contingency reserve for fiscal forecasting in Canada. Fiscal management was also commended for its statistical integrity, impartial tax administration, open procurement, and a transparent regulatory process. Nevertheless, the ROSC found several areas where Canada could improve its fiscal transparency regime, such as preparing timely and equally convincing current-year approximations of federal and provincial budgets; creating an extensive account of the budget cycle procedures and expenditure management systems; and systematically reporting the use of reserves for non-economic contingencies. However, many of these suggestions have since been addressed, according to the 2008 Article IV Consultations. For instance, Statistics Canada now publishes consolidated data for federal and provincial budgets on a Financial Management System basis. Plus, the Government of Canada and the Organization for Economic Co-operation and Development now publish thorough details of budget and expenditure management practices, such as a joint publication called "Budgeting in Canada." Furthermore, the Treasury Board Secretariat (TBS) posts on its website full descriptions of expenditure management policies and practices. The TBS also includes in its Budget and Update documents a detailed clarification of the budget cycle and process.
General Overview
The 2002 IMF Report on the Observance of Standards and Codes (ROSC) states that fiscal policy management in Canada complies with the IMF's fiscal policy transparency code and "in a number of instances represents best practice" (p. 1). The 2006 and 2008 IMF Article IV Consultations with Canada confirm this assessment, noting that Canada has run a steady and enviable fiscal policy transparency regime. However, the 2002 ROSC observed that there was room for improvement on numerous issues: "1) the preparation of timely, current year estimates of federal and provincial budgets on a comparable basis; 2) a comprehensive account of the procedures for the budget cycle and expenditure management system; 3) systematic reporting of the use of reserves for non-economic contingencies; 4) resumption of publication of reconciled national and public accounts forecasts of major aggregates over the forecast horizon; and 5) publication by all governments of quasi-fiscal activities" (p. 17-18). Nevertheless, according to the 2008 Article IV Consultations released in February, most of these issues have since been resolved. For instance, to address the first issue, Statistics Canada now publishes consolidated data for federal and provincial budgets on a Financial Management System basis. In addition, the government of Canada and the Organization for Economic Co-operation and Development (OECD) now publish thorough details of budget and expenditure management practices for Canada in their joint publication, "Budgeting in Canada." Furthermore, the Treasury Board Secretariat (TBS) now posts on its website full descriptions of expenditure management policies and practices. The TBS also includes in its Budget and Update documents a detailed clarification of the budget cycle and process.
The 2008 IMF Article IV Consultations note that in 1997 Canada embarked upon a prudent and well-publicized fiscal policy framework based on a "budget balance or better" principle, which has led to ten consecutive years of federal budget surpluses. Modified in 2006 to target a C$3 billion annual reduction in government debt, the plan is expected to enable the elimination of general government net debt by 2021. The Canadian government has begun using budget surpluses to fund tax relief. With higher than expected nominal GDP growth in 2007-2008 and the budget surplus projected to be substantial this fiscal year, Canadian authorities have set a fiscal policy objective of giving permanent tax relief. According to the 2008 IMF report, there are concerns that some recent revenue gains might be too temporary to support a permanent tax relief program, but the government insists that the plan "incorporates private economic and budget forecasts and that the assumed tax buoyancy appeared appropriately conservative, particularly in light of past revenue over-performance," (p. 19). As of February 2008, the fiscal policy framework persists in its pursuit of budget surpluses and further reducing public debt ratios. The latter is consistent with the IMF's 2006 Article IV Consultations, which suggested that Canada elevate the role of public debt reduction as a fiscal policy objective due to an expected spike in healthcare costs associated with the retirement of the baby boom generation. The Consultations view public debt reduction (along with health care reforms) as key to alleviating long-term healthcare spending pressures.
The 2008 IMF Article IV Consultations also call for reducing Canada's high marginal effective tax rates on capital, saving, and labor (in that order). So far, the main tax relief measure in Canada is a one percentage point reduction in the federal Goods and Services Tax (GST) rate to 5 percent. Nevertheless, the IMF lauded Canada for continuing to reduce high marginal effective tax rates on business investment, particularly the federal corporate tax rate cut which will gradually bring the rate to 15 percent by 2012. The IMF views a reduction in corporate tax rates and the elimination of the capital gains tax appropriate, given Canada's relatively high corporate tax burden. Furthermore, the IMF Consultation predicts that harmonizing some provincial sales tax bases with the federal GST would help reduce marginal effective tax rates on capital even more and justify more explicit incentives than the government's existing commitment to work with provinces.
Canada currently has a minority government. Therefore, the fiscal policy agenda is being set against the backdrop of imminent early elections, since minority governments have historically had short life-spans. The Conservative party won the January 2006 election, thus forming a minority government headed by Prime Minister Stephen Harper. Nevertheless, regardless of the outcome of current political maneuverings and uncertainty, there is little indication that Canada will be changing its fiscal policy course any time soon.
According to the IMF's 2002 Canada Report on the Observance of Standards and Codes (ROSC) - Fiscal Transparency Module, the Canadian Constitution Act of 1982 fully and clearly distinguishes the Government of Canada (GOC) from the rest of the public sector and economy. In terms of the structure, functions and responsibilities of government, the government, as defined by the 1993 System of National Accounts (SNA) and the Government Finance Statistics (GFS), consists of a medley of federal, provincial/territorial and local governments. The government also constitutes the Canada/Quebec Pension Plans (CPP/QPP), social security plans, nonprofit institutions (mainly financed by governments), non-financial public enterprises (NFPEs) and public financial institutions (PFIs). Canada is a constitutional monarchy, and the roles of the executive, legislative, and judicial branches in financial management are clearly defined. The executive branch is responsible for proposing the budget and for the use of the public funds approved by the legislature. Some funds are approved on an ongoing basis, while others are voted annually in appropriation bills. The legislature must authorize the executive's proposals to raise revenue by borrowing, taxation and other levies. The legislature exercises oversight of the budget process via parliamentary committees and the Auditor General, and officer of the Parliament. The judiciary branch is independent of the executive and adjudicates cases dealing with financial law.
Regarding the coordination and management of budgetary activities, the IMF ROSC notes that the legal and administrative framework for the financial management of the government is the Financial Administration Act (FAA). Beyond providing the foundation for the financial management of the government, the FAA established and maintains all Canadian accounts, including the parliamentary oversight of all public funds going in and out of the Consolidated Revenue Fund (a single treasury account). Under the FAA, the Department of Finance (DoF) is responsible for the budget and the TBS oversees the general management of government. The ROSC also observes that Canada does not engage in extra-budgetary or off-budget activities. According to the ROSC, Canada has clear mechanisms in place for the coordination of PFI budgets, noting that the annual losses or profits of PFIs (i.e. the Business Development Bank) are contained in the government's financial statements. In 1997, according to the 2008 IMF Article IV Consultation, Canada embarked upon a prudent and well-publicized fiscal policy framework based on a "budget balance or better" principle, which has led to ten consecutive years of federal budget surpluses. Modified in 2006 to target a C$3 billion annual reduction in government debt, the plan represents a clear mechanism for the management of budgetary activities. The ROSC states that the relations between government and public sector agencies, such as the Bank of Canada (BoC), PFIs, and NFPEs, are based on clear and solid arrangements.
The ROSC notes that the government's regulation of the private sector is done openly and publicly. The Canadian Cabinet, specifically its Special Committee of Council, is responsible for regulatory policy directed towards the private sector. The committee publishes its work in its Government of Canada Regulatory Policy paper. In line with OECD practice, Canada's regulatory policy requires the preparation of Regular Impact Analysis Statements, the findings of which are then published in the Canada Gazette, the government's official newspaper. In addition, the ROSC report points out that, while government equity holdings in the private sector are relatively low, they are fully and clearly reported in the Public Accounts of Canada. The government is required by law to serve an annual report to Parliament on its private sector activities and investments. This report is also available to the public.
The main document governing budgetary activities is the Financial Administration Act (FAA), which regulates the basic parameters of fiscal activity across the public sector and establishes a well-defined budgetary process. In addition to providing the legal basis for the financial management of the government, the FAA establishes and legally maintains all Canadian accounts, including the parliamentary oversight of all public funds going in and out of the Consolidated Revenue Fund (a single treasury account). Under the FAA, the DoF is responsible for the budget and the TBS oversees the general management of government.
The ROSC observes that the legislative and legal basis for taxation in Canada is clear and observed in practice. All taxation at the federal level is codified in statutes enacted and issued by Parliament and the Governor General respectively. Published and publicly available, these tax laws and regulations are administered by the Canada Customs and Revenue Agency (CCRA). The CCRA, which disseminates interpretation bulletins and information circulars to assist taxpayers, is required by the Declaration of Taxpayer Rights to apply all tax laws and regulations consistently and fairly. All taxpayers can appeal to the CCRA, to the Tax Court of Canada and, finally, to the Supreme Court. Fully independent, the courts have the power to override the CCRA. In 1997, according to the 2008 IMF Article IV Consultation, Canada embarked upon a prudent and well-publicized fiscal policy framework based on a "budget balance or better" principle, which has led to ten consecutive years of federal budget surpluses. Modified in 2006 to target a C$3 billion annual reduction in GOC debt, the plan, while not law, represents a clear mechanism for the management of taxation. By law, according to the ROSC, the federal government can generate revenues by any means while provincial governments can impose only direct taxes. Also, due to variances in provincial laws, the taxing powers of local governments vary across provinces.
The ROSC also underlines Canada's policy of subjecting all public service employees to a code of behavior. Similar to the United Nations' International Code of Conduct for Public Officials, Canada's Conflict of Interest and Post-Employment Code for the Public Service covers all public service employees within the Treasury Board. The code contains compliance obligations on conflict of interest, post-employment, and interchange agreements. The Office of the Ethics Counselor administers a similar code for members of Parliament and senior public office holders appointed by order. The Public Service Employment Act requires federal public servants to swear an oath of office, allegiance, and secrecy. Like the United States, corruption is not a major problem in Canada, which was ranked the 9th least corrupt country in the world by Transparency International's 2007 Corruption Perceptions Index.
According to the 2002 ROSC, Canada has a largely open budget preparation, execution and reporting process, noting that the government has embarked upon several initiatives to improve its budget preparation process. Regarding fiscal policy objectives, the 2008 IMF Article IV Consultation notes that since 1997, Canada has embarked upon a prudent and well-publicized fiscal policy framework based on a "budget balance or better" principle, which has led to ten consecutive years of federal budget surpluses. Modified in 2006 to target a C$3 billion annual reduction in government debt, the plan has successfully incentivized the use of budget surpluses for tax relief. As of January 2008, the fiscal policy framework persists in its pursuit of budget surpluses and further reducing public debt ratios. The 2007 Economic Statement emphasizes further tax relief and a commitment to eliminate net general government debt by 2021. The ROSC report notes that the government closely monitors performance against aggregate fiscal targets on a federal and provincial level, and the results of such monitoring are publicly available. All fiscal policy objectives are widely publicized and available on the internet. For instance, the DoF publishes the monthly Fiscal Monitor that provides comprehensive budget outcome information, including net public debt and surpluses. However, there are no within-year reports on program performance within federal agencies and departments. The GOC requires department managers to monitor, evaluate and audit certain functions of their programs, and these policy reviews (the Internal Audit and Evaluation Policies) are then submitted to Parliament and made available to the public.
On the macroeconomic framework, according to the 2005 Article IV report, Canada employs a conservative budgeting approach that emphasizes explicit prudence, contingency factors, a strong focus on transparency and accountability. As part of this conservative and comprehensive approach, Canada uses macroeconomic projections from a diverse list of private sector forecasters to prepare the budget. However, a common criticism of this approach is that the DoF rarely recruits public sector forecasters. Another commonly cited shortcoming is that Canada, like many other countries, could "enhance the understanding of budgetary forecasts by providing more information on the assumptions and methods underlying the translation of the macroeconomic outlook into fiscal projections," (IMF 2005b, p. 45). Equally, on budget preparation, execution and monitoring, the 2002 ROSC report observes that Canada's budget preparation process is open and extensively documented.
The ROSC report states that the government conducts some analysis of economic risks. For instance, an analysis of the vulnerability of federal budget aggregates to macroeconomic variables is included in budget documents. However, the federal budget document does not contain analysis of fiscal risks. Canadian budget documents do not contain an analysis of medium-to-long-term fiscal policy sustainability. In fact, several important issues impacting fiscal sustainability analysis are not covered by Canada's budget process. To encourage fiscal sustainability, the Canadian government has adopted a conservative budgeting approach that emphasizes explicit prudence, contingency factors, a strong commitment to transparency and accountability. For instance, every year all government accounts are reconciled with bank and appropriations accounts.
The ROSC report notes that Canada clearly classifies budget information generally in line with international best practices. Pertaining specifically to budget reporting, the Fiscal References Tables give historical approximations of federal government budget balances, but there is no forward-looking calculation of these balances in the budget document. The TBS conducts evaluations on certain programs and submits them to Parliament as part of its "Managing for Results" report, which also contains societal indicators. All departments and agencies publish the Departmental Performance Reports for the previous fiscal year. On the provincial level, both quarterly and annual reports are published on fiscal operations and program performance. According to the 2002 ROSC, Canada publishes clear statements of accounting policy in its budget and in the Public Accounts. Approved by the Auditor General and the PSAB, Canada's federal government accounting practices are considered Generally Accepted Accounting Principles and in compliance with OECD best practice. Most of Canada's federal and provincial government accounts use full accrual accounting. Regarding procurement and employment transparency, the ROSC observes that the government management of procurement and employment is open, effective and of a high standard. The Canadian Government is in compliance with international trade agreements regarding its purchasing arrangements. Employment and compensation regulations and conditions are clearly-defined and listed in relevant collective agreements under the Public Service Staff Relations Act. Furthermore, appointments in Canada are merit-based and open to competition.
The 2002 ROSC states that Canada fully provides the public with comprehensive information on the past, current and projected fiscal activity of each level of government. The ROSC outlines the Canadian central government's numerous efforts at disseminating information. In accordance with the annual budget law, the budget, which contains important revenue and expenditure aggregates for the initial budget year and the two following years (including defense expenditures), is published on the DoF website, and the budget estimates are updated every fall in the "Economic and Fiscal Update." Presented soon after the budget, the "Main Estimates" contain department-specific expenditures. In addition, the government publishes a report every spring that gives federal tax expenditure estimates and projections. The government also regularly produces fiscal reports. At the end of each financial year, the DoF releases its Annual Financial Report, which lists government revenue and expenditure performance in the concluding year. The DoF also publishes monthly and annual data on the government's budget, tax policies, rules and regulations for Canadian financial institutions. This published data enables comprehensive measurement of the impact fiscal policy measures have on Canada's economic performance. In the fall, the government publishes the annual Public Accounts of Canada, which chronicles actual expenditures from the previous year. Overall, the government publishes reports on tax expenditures and contingent liabilities but none are produced on quasi-fiscal activities. Nevertheless, the IMF's 2006 report warns that, like many other countries, Canada could improve public understanding of budgetary forecasts by publicizing more information on the methods behind the "translation of the macroeconomic outlook into fiscal projections," (p. 45).
The ROSC reports states that data on government debt and financial assets are regularly reported. For instance, the DoF publishes its annual Debt Management Report which details the government's debt operations for the previous fiscal year, and the Debt Management Strategy, which gives a comprehensive look at the government's debt management strategy for the upcoming fiscal year. Released monthly, the Fiscal Monitor also gives information about Canada's level and composition of debt and financial assets. This data is also published by the IMF as part of its Special Data Dissemination Standard (SDDS). On the advance release of calendars, the ROSC notes that Canada subscribes to the IMF's SDDS and thus publishes advance release calendars for fiscal data. Plus, regarding general government operations, precise release dates for the next 15 months are posted by Statistics Canada in "The Daily" and on its website.
According to the IMF 2002 ROSC, Canada, as a subscriber to the SDDS, is broadly compliant with IMF standards for fiscal data quality, periodicity, consistency, and timeliness. The ROSC states that independent auditors at the provincial and federal level are responsible for conducting external audits. The report also notes that Canada's accounting and auditing functions are strictly separated within government. For example, at the federal level, the Auditor General is independent of the government and can recruit its own staff, performs external audits, and then submits its publicly available reports to the Parliament. All annual reports and publications are also posted on the Auditor General's website. Canada's current audit capabilities are just as strong on the provincial level. Finally, the Canadian government's macroeconomic models and economic plans are also subject to scrutiny by external actors like chartered bank-employed economist and major forecasting groups. The DoF also conducts an internal scrutiny using the DoF econometric model. The results of such scrutiny are made available to the public.
The ROSC observes that Canada's national statistics agency Statistics Canada is afforded broad legislative assurance of independence. Statistics Canada, which is mandated independent by the Statistics Act of 1918, is required by law to publish data on the national accounts. All published data is governed by the Act, which also stipulates that statistics be objective and available to the public (i.e. on the web). The independence of Statistics Canada is such that neither the Parliament nor government is allowed to meddle in SC decisions and its overall mandate.
ROSC observes that Canada's national statistics agency Statistics Canada (SC) is afforded broad legislative assurance of independence. Statistics Canada, which is mandated independent by the Statistics Act of 1918, is required by law to publish data on the national accounts. All published data is governed by the Act, which also stipulates that statistics be objective and available to the public (i.e. on the web). The independence of Statistics Canada is such that neither the Parliament nor government is allowed to meddle in SC decisions and its overall mandate.
International Monetary Fund, "Canada: Report on the Observance of Standards and Codes-Fiscal Transparency Module," Country Report No. 02/51, Washington, D.C.: IMF, January 2002. Available from International Monetary Fund website. Accessed on April 21, 2008. (IMF 2002)
International Monetary Fund, "Canada: Selected Issues," Country Report No. 05/116, Washington, D.C.: IMF, March 2005. Available from International Monetary Fund website. Accessed on April 21, 2008 (IMF 2005)
International Monetary Fund, "Canada: 2008 Article IV Consultation--Staff Report; Staff Statement; and the Public Information Notice on the Executive Board Discussion," IMF Country Report No. 08/69, Washington, D.C.: IMF, February 2008. Available from International Monetary Fund website. Accessed on April 21, 2008. (IMF 2008a)
Department of Finance, Canada, "Strong Leadership. A Better Canada: 2007 Economic Statement," DoF 2007 Economic Statement: DoF, October 2007. Available from Department of Finance website. Accessed on April 21, 2008 (DoF 2007)
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