8.4 Deflation – Estimates in real terms

8.47 For deflation purposes, government current expenditure on goods and services is broken down into 24 components. The deflation is carried out in three broad segments: wages, salaries and supplementary labour income (called, broadly, labour income); capital consumption allowances; and, all other current expenditures.

Labour income

8.48 Labour income represents about 60% of total net government expenditure on goods and services and is considered separately for 11 sub-sectors. The associated hours worked in the period are used as an indicator of volume, and the price indexes are obtained implicitly, as the ratio of the current dollars estimate to the constant dollar estimate. Estimates of labour income in current dollars are produced by the Income and Expenditure Accounts Division (IEAD) as part of the estimation of the wages, salaries and supplementary labour income aggregate. Data on hours worked in each sub-sector are also compiled by the Income and Expenditure Accounts Division, using public sector employment data from the Public Institutions Division and average hours worked per employee provided by the Labour Force Survey. The sub-sectors are:

  • federal government
    • civilian defence
    • military pay
    • other civil servants
  • provincial and territorial government
    • general government
    • universities
    • colleges
    • hospitals
    • residential care facilities
    • other health and social services
  • local government
    • general government
    • school boards

8.49 Over time, compositional changes occur in federal and provincial government sector employment that amount to a quality change in the labour input to production. These changes need to be reflected in the estimates in real terms, but cannot be captured through the total hours worked data. To reflect this type of change in the estimates in real terms, quality indexes are applied during the benchmarking revision cycle. On an annual basis, Industry Accounts Division provides quality indexes for federal civilian defence, military pay and allowances and all other civil servants, while the Income and Expenditure Accounts Division provides a quality index for provincial government employment.

Capital consumption allowances

8.50 Capital consumption allowances (CCA) are estimated in current dollars for nine sub-sectors. As for other estimates related to capital, the CCA estimates and their associated price indexes are produced by the Investment and the Capital Stock Division. The sub-sectors are:

  • federal government
    • civilian defence
    • other civil servants
  • provincial and territorial government
    • general government
    • universities
    • colleges
    • hospitals
    • residential care facilities
  • local government
    • general government
    • school boards

Other non-wage current expenditures

8.51 Other non-wage current government expenditure on goods and services is broken down into four parts: defence, medicare, hospitals, and a remainder for all other outlays. Combined, they represent about 30% of net government expenditure on goods and services.

8.52 The deflation of defence expenditures presents unusually difficult problems. First, an object breakdown of these expenditures in the level of detail most appropriate for deflation is not available from the Department of National Defence. Second, the problem of pricing individual products or commodities within the available breakdown of defence expenditure is particularly troublesome. Changes in price can be measured readily if the nature of the priced object remains constant. For example, a bushel of Number 1 Northern Wheat in 2000 is essentially unchanged from a bushel of that commodity in 1990. But commodities such as aircraft are constantly undergoing technological and structural changes so that an aircraft produced today is not easily comparable to an aircraft produced fifteen years earlier. Consequently, changes in the cost of these goods to the government cannot be regarded wholly as changes in their price. Because of these difficulties, the present deflator for defence expenditure combines various material and average-hourly-earning indexes, with the implicit assumption that these prices move in the same way as do the prices of the final products.

8.53 Medicare expenditures are deflated using a fee-benefits index for physicians provided by the Canadian Institute of Health Information (CIHI).

8.54 Hospital expenditures are deflated with a fixed-weighted index of commodities used in hospitals.

8.55 The remaining portion of government current expenditure on goods and services is deflated using a base- weighted composite price index covering major operating expenditure categories: freight, postage, and telephones; utility expenses; office supplies and equipment; and building maintenance and repairs. The component price indexes used to build this composite index for all other expenditures are largely final-purchase prices as incorporated in the Consumer Price Index (CPI) although some use is made of intermediate input prices in the form of Industry Price Indexes (IPI). The weights come from the latest Input-Output Tables.

Continue

Back to