Earlier this month, Ottawa released details of what it calls its capital budgeting framework, a new approach to implementing the annual budget. federal budget the purpose of which is to distinguish between operating and capital expenses. First proposed during the election campaign as part of Prime Minister Mark CarneyAs part of the platform, the Liberals argue that the new budget-sharing process will provide a more accurate picture of federal finances as the government focuses investment on growth Canadian economy in the long term. Critics and the opposition, however, question whether the changes amount to a fiscal sleight of hand. Ahead of the November 4 Budget, the Financial Post's Jordan Gowling looks at what we know about the new system, how it should work and the controversy surrounding the move.
What is Ottawa's new budget structure?
The new budget will divide government spending and revenue into two categories: operating and capital. The main justification for the separation is that capital and operating expenditures are fundamentally different: while operating expenditures are spent and renewed year after year, capital expenditures should grow the economy and ultimately generate profits in the long run. Companies already make similar distinctions in their accounting by capitalizing and amortizing certain expenses. Theoretically, a government could balance or even have an operating surplus and claim to be operationally efficient while running a large capital deficit. But the government said the November 4 budget would continue the practice of including one overall deficit measure.
What are capital expenditures?
According to Treasury Canada, capital expenditures will include any government expenditures or taxes “that contribute to the generation of public or private sector capital held directly on the balance sheet of the government or on the balance sheet of a private sector enterprise, First Nations community or other level of government.” To make such a decision, two main criteria will be used: conditionality and clear communication. Conditions mean that the recipient of the funding must invest in capital formation to receive the benefit, and clear linkage means that the expenditure encourages or allows capital investment in “identifiable sectors or projects.” Treasury Canada has listed a number of categories of capital expenditures, including capital transfers, which are transfers to other levels of government intended for use on infrastructure or other productive assets, capital-focused corporate income tax credits, federal debt amortization, direct financing or tax credits for private sector research and development, measures to increase the housing stock, and contractual agreements with proponents that result in large-scale capital investments.
What are operating expenses?
Treasury Canada defined operating expenses as transfers to individuals, health and welfare transfers, and expenses associated with day-to-day government operations, such as wages and benefits. Canada's public reports released for 2024 provide some insight into the operating effect of government spending net of expenses.
era programs. Transfers to other levels of government, including the Canada Health Benefit and Canada Social Security Benefit, accounted for 19.2 percent of government spending; large transfers to individuals amounted to 23.1 percent; and “other expenses,” which represent the operating expenses of 135 government departments, agencies, and crown corporations, accounted for 26.9 percent of total government spending. This adds up to just under 70 percent of government spending.
Has anyone else tried this?
The United Kingdom currently practices a similar fiscal model of separating capital expenditure from what it calls resource expenditure. Capital expenditure is defined as money spent on assets that last several years (eg buildings, vehicles) and input expenditure is defined as money spent on things that are spent (eg salaries). Notably, capital spending represents just five percent of total government spending in the UK and has remained around this level since 2005. Capital spending is expected to make up a much larger share of Ottawa's budget. In a note,
warned that Canada's definition of capital spending is “overly broad” and goes beyond the UK definition, including tax breaks, subsidies and measures that increase housing stock. In particular, it states that Ottawa's definition runs the risk of including the “fiscal cost” of measures associated with capital formation, rather than necessarily the actual amount of capital formation it would result in.
Why is this controversial?
The new budget process has raised questions and concerns in several quarters. The PBO questioned the breadth of its definition of capital expenditures and warned that it would “likely overstate” the amount of expenditures that actually creates capital. There are also questions about how “clear communication” will be measured and presented in the capital budget and whether there will be any restrictions on spending in this category. For example, Desjardins Group deputy chief economist Randall Bartlett suggested that the government present estimates in future budgets that show how capital investment directly or indirectly contributed to economic growth and whether it exceeded the government's borrowing costs. Conservative leader Pierre Poilievre was more direct in his criticism of the split, accusing the federal government of “cooking the books” for political gain. The PBO also noted that it does not yet have a full picture of the changes and that it will “provide a more in-depth assessment as more details are revealed.” Finance Minister Francois-Philippe Champagne said the federal government plans to balance the operating budget in three years, even if the overall deficit is projected to remain in the medium term.
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