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Overview of the Canadian Government Finance Statistics
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1. Background
Governments play an important role in Canadian society and the economy. They provide many important services such as health, education, justice and general administration. Governments also set fiscal policies that help steer the economy. Given this role, it is important to both quantify and monitor the activities of government.
Government financial statements and reports are based on the organizational structures and on the accounting and reporting practices of individual governments, resulting in a lack of consistency across jurisdictions and over time. For example, one government may discharge a function through a departmental structure, while another uses a crown corporation, and another employs a board, commission, or agency. Also, among governments, similar departmental titles do not necessarily mean the same responsibilities—while one individual government may regard a given operation as contributing to one specific function, another may allocate it to several functions. Organizational structures change as new programs are introduced, existing ones are amended, and responsibilities are assigned or reassigned.
Given this lack of uniformity in reporting practices it is difficult to take Public Accounts financial statements or other government accounting records and aggregate the financial data in a way that is comparable across jurisdictions and allows the understanding of the role of government activities or of the government as a whole. This lack of standard reporting and organizational structure across governments has lead to the development by the International Monetary Fund (IMF) of the Government Finance Statistics Manual (GFSM 2001 and 2014). The GFSM is an internationally accepted accrual accounting framework for government finance statistics. The GFSM is also fully integrated with the United Nations (UN) System of National Accounts (SNA) framework. Over the last five years Statistics Canada has undertaken a project which takes government accounting records and codes and compiles the data according to the GFS standard. This project and the resulting data is a major step forward in the Macroeconomic Statistics program at Statistics Canada. It provides government financial data according to the internationally recognized GFS standard, compiled directly from the accounting records of government.
Over the last 65 years, Statistics Canada has produced government statistics under the Financial Management System (FMS). The FMS, a statistical system unique to Canada, was founded on a modified-cash based system of accounting. Moreover, under the FMS, the expenditures were only presented on a functional basis (health, education, culture, etc.). In the 2000s, governments in Canada have progressively adopted the full accrual accounting. Therefore, the adoption of GFS is an opportunity for Statistics Canada to modernize its government statistics program. By combining both an economic and a functional classification, the GFS is also facilitating the harmonization of government statistics with the other macroeconomic statistics systems. For data users, it also means a better comparability with the other countries government finance statistics.
The purpose of this paper is to provide an overview of the Canadian Government Finance Statistics (CGFS) framework; how it relates to other government statistics such as the Canadian System of Macroeconomic Accounts and the Public Accounts; and the new GFS data products available to users.
2. Overview of the Canadian Government Finance StatisticsNote 1
Government finance statistics play an important role in helping policymakers, analysts, academics and the public at large to understand the financial operations, financial position and financial stability of governments. In essence, these statistics can be seen as playing two important roles: The first is as a means of monitoring the government to ensure they are good stewards of the resources that have been entrusted to them. The second role is to understand the importance and impact this sector has on the overall economy and to monitor the interaction of the government sector with the other sectors of the economy, such as households, corporations, non-profit institutions and non-residents.
It could be argued that Public Accounts financial statements serve the same purpose. While this is true for a single government entity it is very difficult to aggregate such information given the different way the information can be reported. The strength of the CGFS framework is that it takes all government financial data and integrates it into a well defined accounting framework. This makes it possible to aggregate government financial data across different institutional units and to compare data across jurisdictions, both domestically and internationally.
While compiling government finance statistics is a complex and time consuming exercise, the CGFS framework can be summarized and explained through the following:
- institutional units, the general government sector and the public sector;
- accounting rules; and
- stock, flow and statements.
A. Institutional units, the general government sector and the public sector
Institutional units are the building block of the GFS. An institutional unit is an “economic entity that is capable, in its own right, of owning assets, incurring liabilities, and engaging in economic activities and transactions with other entities” [GFSM 2014 2.22]. This definition of an institutional unit is consistent across macroeconomic statistical systems in use at Statistics Canada such as the System of National Accounts and Balance of Payments. In each of these macroeconomic statistical systems these institutional units are grouped into sectors, namely households, non-profit institutions serving households, financial corporations, non-financial corporations, and general government.
A government unit is an institutional unit that carries out the functions of government as their primary activity. These activities include exercising legislative, judicial or executive authority over other institutional units. The government units also provide goods and services to the community as a whole or to individual households, either free of charge or at prices that are not economically significant. Government units play an important role in redistributing income and wealth from one sector of the economy to another, or from one institutional unit to another institutional unit within a given sector. Government units finance their activities by means of taxes or other compulsory transfers.
In addition to the concept of government units, the CGFS also has the concept of a public corporation, or what is often referred to in Canada as a government business enterprise (GBE). Corporations are legal entities that are created for the purpose of producing goods and services for the market. A corporation may be a source of profit or financial gain for its owners. When a corporation is owned by a government unit it is referred to as a GBE. All the profit and financial gain of the public corporation flows back to the government unit that owns it.
The inclusion of government business enterprises is very useful for analytic purposes. Government business enterprises activities are often an extension of the government fiscal policy. They may generate profits for the general government (or alternatively being a potential source of fiscal risk), protect key resources, provide competition where barriers to entry may be large and provides basic services where costs are prohibitive. Government business enterprises may also significantly impact key macroeconomic objectives such as bank credit, aggregate demand, borrowing abroad, and the balance of payments [GFSM 2014 2.105].
The general government sector is the set of government units operating within the economy. These units can further be divided into subsectors of general government. Within the GFS these subsectors include central government, state government and local government. Within the CGFS system there are five subsectors of government: federal, provincial and territorial, local, social security funds and aboriginal. The provincial and territorial sub-sector is further divided into provincial and territorial governments, education institutions (colleges and universities), and health and social services institutions.
The public sector includes the set of government units noted above as well as all public corporations. Public corporations are combined based on the subsector of government that controls them (federal, provincial and territorial, and local), and are further divided into non-financial and financial corporations. The public sector is therefore larger than the general government sector. The CGFS compiles statistics for both the general government and the public sector. The general government sector and public sector are illustrated in Figure 1.
Figure 1
B. Accounting rules
1. Double-entry recording
Similar to the principles for general bookkeeping, the GFS is based upon a double entry accounting system. Double entry accounting has at its foundation the rule that every transactions leads to at least two equal-value entries in the system—a debit and a credit entry. A debit entry is “an increase in an asset, a decrease in a liability, or a decrease in net worth”, whereas a credit entry is “a decrease in an asset, an increase in a liability or an increase in net worth” [GFSM 2014 3.55]. For example, revenue entries are recorded as credits because they increase assets or decrease liabilities and therefore increase net worth. Expense entries are recorded as debits because they decrease assets or increase liabilities and therefore result in a decrease in net worth. The use of a double entry recording system within the GFS ensures that all debits and all credits for all transactions in the system are equal—one of the main quality functions of the framework in that it ensures that the GFS accounts for a unit, subsector or sector are consistent.
2. Accrual accounting
The recording of all flows within the GFS framework are recorded on an accrual basis. Under accrual accounting the flows are recorded in the system at the time at which the economic value is created, transformed, exchanged, transferred or extinguished. The events are recorded when they occur rather than when cash was received or paid, or due to be received or paid. In general, the time attributed to events is “the time at which ownership of goods changes, services are provided, the obligation to pay taxes is created, the claim to a social benefit payment is established, or other unconditional claims are established” [GFSM 2014 3.62].
Flows are recorded on an accrual basis because this type of accounting is the best estimate of the macroeconomic impact of a government’s fiscal policy. The accrual basis for accounting also ensures that all transactions are recorded in the system—regardless of whether or not a monetary transaction takes place. Furthermore, the accrual accounting permits the full integration of flows with changes in the balance sheet.
The principle of accrual determines the timing of which transactions and other flows are recorded in the CGFS system. This definition is best illustrated by typical government transactions. For those examples, we will assume that government finance statistics are prepared for the calendar year 2010:
- A company income tax of $100,000 is assessed on the basis of income earned in 2010 and is payable by June 30, 2011.
- A tax revenue and an account receivable of $100,000 would be recorded in the government finance statistics for 2010. The receipt of the income tax would be subsequently recorded in 2011 as an increase in cash and as a decrease in accounts receivable.
- On January 1, 2010, a government department hires a consultant to work on a high profile IT project for two years. The department agrees to pay the consultant $50,000 for this contract immediately.
- An expense of $25,000 would be recorded in the government finance statistics in 2010 and an expense of $25,000 would be recorded in 2011.
- On December 1, 2010, a government acquires $1,000,000 of computers on 90 days credit from a supplier. On February 25, 2011, the government pays $1,000,000 to the supplier.
- In government finance statistics for 2010, non-financial assets and accounts payable would be increased by $1,000,000. In 2011, the payment to the supplier would be recorded as a decrease in cash and accounts payable by $1,000,000.
- On October 1, 2010, the federal government agrees to transfer $10 billion to provincial governments for five years to spend on infrastructure projects across the country. On December 1, 2010, a trust fund is created by the federal government and $10 billion is deposited in the trust.
- In government finance statistics for 2010, we would record a capital transfer expense of $10 billion for the federal government and capital transfer revenue of $10 billion for the provincial governments.
- On January 1, 2010, a government issues a $50,000,000 zero-coupon bond on the market, repayable in 10 years.
- In government finance statistics for 2010, we would record an expense for the interest accrued during the year on the zero-coupon bond. Even though principal and interest are only payable at maturity (2020), interest is continuously accruing on the bond.
C. Valuation
Another important accounting rule within the GFS concerns the valuation of transactions, other flows and stocks. Within the GFS all stocks and flows are valued at current market prices. This means that goods, services, assets other than cash, labour, the provision of capital are valued at the amount they are exchanged for, or could be exchanged for. The flows are valued at the current prices on the date for which they are recorded and the stocks are valued at the current prices on the balance sheet date.
In some cases, market prices will not be available or are not observable. Examples include barter or transfers in kind. In these cases it is acceptable to use market price equivalents as approximations for market prices. When possible, the market prices of the same or similar good should be used as the proxy market price. In addition, the prices should be taken from markets where a significant amount of the goods are traded under similar circumstances.
While it is generally straightforward to value transactions at current market prices, stock positions pose a significant challenge. The GFS states that “stock positions should be valued at market value, that is, as if they were acquired in market transactions on the balance sheet reporting date (reference date)” [GFSM 2014 3.113]. This is clear-cut for financial assets and liabilities that are readily traded in the financial markets. Financial assets and liabilities that are not traded in financial markets and non-financial assets, however, need to be estimated. The estimation method can take different forms for non-traded financial assets and liabilities. For debt instruments other than debt securities, the lack of generally available market values means that these values have to be estimated by using the nominal value as a proxy.
Within the CGFS system the value of non-financial assets are estimated using the Canadian System of National Accounts perpetual inventory method (PIM). This method accumulates the flow of investment through time into a stock of capital. Price indexes are used to create a volume of gross capital, which is then revalued to market price using current period prices. Next, depreciation rates are applied to the gross capital stock to derive both the consumption of fixed capital as well as the net capital stock, which is entered as the market value of non-financial assets on the CGFS balance sheet. The PIM is a generally accepted practice, adopted by many countries throughout the world. It has the desirable feature of ensuring that investment flows, stocks and consumption of fixed capital are all derived within the same framework and are therefore consistent. That said, the PIM is a model and the results of a PIM can differ substantially from the value placed on non-financial assets as found in the Public Accounts of a specific level of government. In order to better understand these differences, Statistics Canada will produces a reconciliation table between the CGFS balance sheet and the Public Accounts, for the federal government and for each provincial and territorial government.
D. Stocks and flows
1. Overview
All information with the CGFS measures is recorded as either stocks or flows. Stocks represent the value of non-financial and financial assets, liabilities, and the net worth of a level of government at a point in time. Stock positions are articulated on the Balance Sheet within the CGFS framework. Flows “reflect the creation, transformation, exchange, transfer, or extinction of economic value” [GFSM 2014 3.4]. They record the economic activity that occurs between two points in time and with the accumulation of that activity affecting the stocks. The CGFS records two types of economic flows of governments: transactions and other economic flows. Transactions are “an interaction, either an exchange or a transfer, between two units by mutual agreement or through the operation of the law” [GFSM 2014 3.5]. Other economic flows are all flows that are not transactions. In other words they represent the change in the volume of value of an asset that is not the result of a transaction. Examples of other economic flows include changes resulting from exchange rate movements, market price changes on marketable shares held by a government unit, debt write-offs which are unilateral actions, or the destruction of a non-financial asset due to a natural disaster.
2. Netting of flows and stock positions
The concepts of “gross” and “net” are used often in macroeconomic accounting. Gross can be loosely thought of as the entire amount (value) of a set of transactions or stock of assets and liabilities, whereas net indicates something has been subtracted from that amount. Therefore, when something is referred to as “net” we need to ask ourselves “net of what?” For example, total tax revenue could be presented as gross, which is the total amount of all taxes accrued, or net, which is the gross amount minus refunds. On the balance sheet, long-term debt could be presented gross, which is the sum all of outstanding debt securities on the market, or net, which is the gross amount minus the assets held in a sinking fund.
The choice of whether to present data gross or net depends on a number of factors, including the “category of flows or stock positions, the nature of the items that might be subtracted to obtain the net value, and the analytical utility of the gross and net values specific flows or stock positions, the analytical needs of the user and the nature of the transactions” [GFSM 2014 3.143].
The Canadian GFS system adheres to the following gross and net principals:
- Revenue categories are presented gross of expense categories for the same or related category and likewise for expense categories. For example, the CGFS presents interest revenue separately from interest expense; rent revenue separate from rent expense; grant revenue separate from grant expense; and social benefits separate from social contributions. In addition, the sales of goods and services are recorded gross of any expenses incurred in delivering the goods and services. That said, the individual revenue categories are presented net of refunds, and likewise the individual expense categories are presented net of inflows from the recovery of expense.
- The acquisition and disposal of non-financial assets are presented on a net basis within the CGFS. While the international standard recommends that these assets be presented on a gross basis (e.g., showing the acquisition of land separate from the disposal of land) the CGFS uses investment and stock data from the Canadian System of Macroeconomic Accounts (CSMA) which presents investment flows and non-financial stock positions on a net basis.
- The acquisition and disposal of financial assets or liabilities are presented on a net basis within the CGFS—a treatment that aligns with the international standard. For example, if a government acquires currency and disposes of currency within an accounting period, only the acquisition less disposals will be recorded as the financial flow. The same is true for debt securities—if a government issues debt securities and disposes of debt securities in an accounting period, then only the difference between the two will be recorded as a financial flow.
- Similar to transactions in financial assets or liabilities, all other economic flows (holding gains and losses and other volume changes) are presented on a net basis within the CGFS, as recommended by the international standard.
- Finally, stock positions within the CGFS are presented on a gross basis. This means that on the CGFS balance sheet, debt securities will be shown as both an asset and as a liability. In many cases the net position may be analytically useful—presenting on a gross basis allows net positions to be calculated for any financial instrument.
E. Consolidation
Consolidation is a method of presenting statistics for a set of institutional units (or entities) as if they constituted a single unit. For example, consider the following sectors within the Canadian public sector universe: Federal general government, provincial and territorial general government and local general government. Assume that we would like to analyze the overall impact of the federal, provincial and territorial, and local governments on the Canadian economy. One way to do this would be to view these sectors as a single general government sector. In order to do this we could consolidate these units together and treat them as if they are a single unit.
Consolidation is not simply summing together the data into a single aggregate. Consolidation involves the elimination of all transactions and debtor-creditor relationships that occur among the units being consolidated. In other words, transactions or stock positions of one unit are paired with the same transactions or stock positions recorded for the second unit, and then transactions and debtor-creditor relationships that occur among the units are eliminated.
For example, suppose we want to estimate the level of government debt. Assume that the federal government holds $10 billion of provincial government bonds. Within the unconsolidated accounts the federal government would show a $10 billion asset while the provincial government would show a $10 billion liability. When these are consolidated both the asset and liability disappear, since at a consolidated level the general government sector cannot owe something to itself.
Within the GFS framework there are two types of consolidation: intrasectoral consolidation and intersectoral consolidation. “Intrasectoral consolidation is consolidation within a particular subsector to produce consolidated statistics for that particular subsector” [GFSM 2014 3.155]. An example of intrasectoral consolidation is when the ministries, departments and agencies (core government) of the federal administration are combined with the special fundsNote 2 under its control and flows and stocks positions between those units are eliminated to produce the government finance statistics for the federal government subsector. Intrasectoral consolidation is applied to all CGFS data products. The second type of consolidation is intersectoral consolidation. Intersectoral consolidation is “consolidation between subsectors of the public sector to produce consolidated statistics for a particular grouping of public sector units” [GFSM 2014 3.156]. An example would be the consolidation of federal, provincial and territorial, and local governments. In terms of the sequence of consolidation, intrasectoral consolidation is always prepared before intersectoral consolidation.
The current CGFS does not apply intersectoral consolidation which means it is not possible to examine consolidated statistics for the government or public sector as a single entity. This element will be available in the future.
Consolidation has many important analytical uses. First, it eliminates distortion that may be caused by different administrative arrangements over time. The second benefit is improving the relation of government aggregates to the economy as a whole. Indicators such as government debt to gross domestic product (GDP) are more analytically useful on a consolidated basis than on an unconsolidated basis. Consolidation eliminates internal transactions within the government or public sector and allows users to focus on the governments interactions with other sectors in the economy, or with non-residents. That is, by eliminating all reciprocal stock positions and flows among the units being consolidated, consolidation has the effect of only measuring flows or stocks of the consolidated unit(s) vis-à-vis units outside the boundary. Consolidation avoids double-counting of transaction or stocks positions among a grouping of institutional units. Finally, consolidation does not affect the GFS balancing items (net operating balance, net lending / borrowing, net worth, or net debt). This is the result of the symmetry of the consolidation process.
3. The CGFS analytical framework
The strength of the CGFS framework lies in the fact that it is a set of interrelated statements that integrate flows and stock positions for different levels of governments and government business enterprises. It provides an assessment of the role of government in the economy, helps monitor the impact current government policy and spending have on its stock of assets and liabilities, examines the liquidity of governments and the sustainability of government fiscal policy [GFSM 2014 3.155].
Government finance statistics are useful in helping understand the management of government finances and the effectiveness of policy decisions. They are also closely linked to other macroeconomic frameworks such as the System of National Accounts, Balance of Payments and International Investment Position. This ensures the data are comparable to other macroeconomic indicators such as gross domestic product, the balance of payments, household debt and net worth positions. GFS allow users to analyze the financial soundness of the government and government business enterprises in the same way that financial soundness and stability is measured in the corporate or household sector. GFS also enable users to determine whether government decisions are sustainable over the long term, and assess government liquidity constraints as well as financing needs.
This analysis is facilitated through the use of three GFS accounting statements referred to as:
- statement of operations;
- statement of other economic flows; and
- balance sheet.
The structure of the GFS framework is depicted in Figure 2, which has been taken directly from the international GFSM 2014.
Figure 2
A. Statement of operations
The statement of operations provides a summary of a sector or subsector’s transactionsNote 3 within an accounting period. It shows how the government raises revenues and how it spends it; providing a net operating balance. It shows how the government acquires or disposes of non-financial assets, how it acquires or disposes of financial assets, and how it incurs or extinguishes liabilities; providing a change in net worth due to transactions. The net operating balance minus the net acquisition of non-financial assets, or the net acquisition of financial assets minus the net incurrence of liabilities, provides the net lending (or borrowing) of the government, or in other words; whether it can lend funds or needs to raise funds from other sectors in order to sustain its operations.
The key components and balances contained in the statement of operations include:
- revenue;
- expenses;
- net or gross operating balance;
- net or gross investment in non-financial assets;
- net lending or borrowing;
- net acquisition of financial assets; and
- net incurrence of liabilities.
The following tables outline detailed categories within each component, definitions and CGFS examples.
1. Revenue
| Category | Definition | Example – CGFS |
|---|---|---|
| Taxes | Taxes are compulsory, unrequited amounts receivable by government units from individual institutional units [GFSM 2014 5.2]. Compulsory, in that the institutional unit does not have a choice as to whether they can pay the tax or not and unrequited in that nothing is expected in return. | • Personal income tax paid by households • Corporate income tax paid by corporations • Value added tax such as the Goods and Services Tax (GST) or the Harmonized Sales Tax (HST) |
| Social contributions | Social contributions are actual or imputed revenue receivable by social insurance schemes to make provision for social insurance benefits payable [GFSM 2014 5.4]. Social contributions differ from taxes in that the contributor secures the right to an entitlement when certain conditions arise, such as the loss of employment. | • Employment Insurance Program • Canada Pension Plan premiums • Quebec Pension Plan premiums |
| Grants | Grants are transfers receivable by government units from other resident or non-resident government units or international organizations, and that do not meet the definition of a tax, subsidy or social contribution. The grants can be current or capital and can be receivable in cash or in kind [GFSM 2014 5.5]. | • Federal government health transfers • Federal government equalization payments • Provincial and territorial governments transfers to health and education institutions • Transfers to municipalities for infrastructures |
| Other revenue | Other revenue represents all revenue receivable excluding taxes, social contributions and grants [GFSM 2014 5.6]. Other revenue comprises: (i) Property income such as interest income, royalties, dividends, and remitted profits of government business enterprises (ii) Sales of goods and services (iii) Fines, penalties, and forfeits (iv) Voluntary transfers other than grants (v) Miscellaneous and unidentified revenue |
• Interest income on bonds • Natural resource royalty fees • Profits from government business enterprises1 • Revenue from the collection of fees for goods provided or services rendered, such as fees collected for the rental of sports facilities or entrance fees to museums |
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2. Expense
| Category | Definition | Example – CGFS |
|---|---|---|
| Compensation of employees | Compensation of employees is the total remuneration, in cash or in kind, payable to a government employee in return for work done during the accounting period, except for work connected with own account capital formation. Compensation of employees includes wages and salaries and employer's social contributions which are payments made by general government units to social insurance schemes to obtain entitlement to social benefits for their employees, including pensions and other retirement benefits. |
• Basic wages or salaries paid at regular intervals, including allowances for working overtime or at irregular hours • Pension contributions • Meals and drinks, uniforms, services of vehicles or other durables provided for the personal use of employees, car parking and day care for the children of employees • Special allowances such as housing and cost of living allowances, bonuses, annual supplementary pay, holiday pay |
| Use of goods and services | This category consists of goods and services used for the production of market and nonmarket goods and services—except for own-account capital formation—plus goods purchased for resale less the net change in inventories of work in progress, finished goods, and goods held for resale. | • Payments made to individuals hired on contract • Payments for heat, hydro and telecommunications • Payments for the maintenance of buildings |
| Consumption of fixed capital | Consumption of fixed capital is the decline, during the course of an accounting period, in the current value of the stock of fixed assets owned and used by a general government unit as a result of physical deterioration, normal obsolescence, or normal accidental damage. [GFSM 2014 6.53]. It is valued in the average prices of the period. Consumption of fixed capital may deviate considerably from depreciation as recorded in government financial records, which is normally calculated using the original costs of fixed assets. |
• Estimates for the consumption of fixed capital within the Canadian Government Finance Statistics Program are taken from Statistics Canada’s Fixed Assets and Investment Program. These estimates differ significantly from the estimates found in accounting records. The Fixed Assets and Investment Program values the consumption of fixed capital at the average price of the period using the Perpetual Inventory Method (PIM). This is an international accepted method for deriving capital stock estimates and consumption of fixed capital. It is the same method that is used throughout the Canadian System of Macroeconomic Accounts for valuing stock and consumption of fixed capital. |
| Interest | Interest is a form of investment income that is receivable by the owners of certain kinds of financial assets (SDRs, deposits, debt securities, loans, and other accounts receivable) for putting these financial and other resources at the disposal of another institutional unit [GFSM 2014 6.62]. Interest is payable by units that incur liabilities by borrowing funds from another unit. Interest is the expense that the debtor unit incurs for the use of the principal outstanding, which represents the economic value that has been provided by the creditor [GFSM 2014 6.63]. |
• Interest payments on government notes, bills, and bonds • Interest payments on bank loans • Interest payments on trade and other accounts payable • Interest payments on deposits in government trust funds |
| Subsidies | Subsidies are current unrequited transfers that government units make to enterprises on the basis of the level of their production activities or the quantities or values of the goods or services they produce, sell, export, or import [GFSM 2014 6.84]. Subsidies may be designed to influence levels of production, the prices at which outputs are sold, or the remuneration of the enterprises. Subsidies are payable to producers only, not to final consumers. |
• Direct foreign trade subsidies • Subsidies payable to resident producers • Regular transfers to corporations that are intended to compensate for recurrent losses • Subsidies on payroll or workforce • Subsidies to reduce pollution or to support cleaner industries or green energy producers |
| Grants | Grants are transfers payable by government units to other resident or non-resident government units or international organizations, and that do not meet the definition of a tax, subsidy or social contribution. The grants can be current or capital and can be payable in cash or in kind [GFSM 2014 6.92]. | • Federal government health transfers • Federal government equalization payments • Provincial and territorial governments transfers to health and education institutions • Transfers to municipalities for infrastructures |
| Social benefits | Social benefits are current transfers, in cash or in kind, receivable by households intended to provide for the needs that arise from social risks, such as sickness, unemployment, retirement, housing or education. These benefits are paid by a government unit to protect the entire population or specific segments of it against certain social risks. Social risks are events or circumstances that may adversely affect the welfare of households [GFSM 2014 6.96]. | • Employment insurance program • Canada and Quebec Pension Plan • Child care benefits • Drug plans • Workers’ compensation boards benefits • Goods and Services Tax (GST) credits |
| Other expense | Other expense is a broad category that includes government expenses other than those listed above. These include such things as property expense other than interest such as dividends payable, payments for the lease of land or payments for the extraction of minerals or fossil fuels. Generally these types of expenses are incurred by government business enterprises. Other expense also includes transfers by government to persons (other than social benefits) and non-profit institutions serving households. | • Transfers to non-profit institutions serving households in order to carry out social programs such as social housing • Transfers to students (bursaries, scholarships and support to post-secondary students) • Payments made to individuals under Labor Market development program (training and apprenticeship) • Payments made to individuals under disaster relief such as flooding • Expense of insurers - claims and expenses particular to government business enterprises insurance entities • Transfers for capital acquisition to government business enterprises such as public transit |
| Source: Statistics Canada | ||
The revenue and expense section are an important component of the Statement of Operations and provide the net operating balance and gross operating balance. The net operating balance equals revenue minus expense. The gross operating balance equals revenue minus expense other than consumption of fixed capital. These indicators represent the amount of funds available to government to invest in non-financial assets, to acquire financial assets or to extinguish liabilities. If the balance is negative it represents the amount of funds governments must borrow to finance current operations. The net operating balance is a measure of the ongoing sustainability of government fiscal policy and is comparable to the national accounting concept of saving plus net capital transfer receivable. Net and gross operating balances exclude gains and losses resulting from changes in price levels and other changes in the volume of assets. Those balances measure the change in net worth of a government that is due to transactions.
3. Transactions in non-financial assets
This leads to the second important component of the Statement of Operations which articulates the government’s transactions in non-financial assets. The current CGFS does not include non-financial assets and the related consumption of fixed capital from the Canadian System of Macroeconomic Accounts (CSMA). Consequently, only the gross operating balance will be available in the current CGFS. In the future, the CGFS will integrate CSMA estimates for stocks of non-financial assets and for consumption of fixed capital.
| Category | Definition | Example – CGFS |
|---|---|---|
| Fixed assets | Fixed assets are produced assets that are used repeatedly or continuously in production processes for more than one year [GFSM 2014 7.35].These would include the purchase of new assets, the construction of new assets on own account, the disposal of existing assets or major improvements to existing assets. | • The purchase of a building • The construction of a road or bridge • The sale of transport equipment • The development of informatics systems or software on own account • The purchase of military aircrafts |
| Change in Inventories | Inventories are produced assets consisting of goods and services, which came into existence in the current period or in an earlier period, and that are held for sale, use in production, or other use at a later date [GFSM 2014 7.75]. Within the CGFS we include the change in inventories from one period to the other. The change is calculated as the additions less the disposals. | • Office supplies • Construction material to be used in own account capital formation • Strategic stocks which are goods held for strategic and emergency purposes, such as oil, grain and military inventories |
| Valuables | Valuables are produced assets of considerable value that are not used primarily for purposes of production or consumption but are held as stores of value over time [GFSM 2014 7.87]. Valuables include precious stones and metals, works of art, collections held as stores of value. | • This is not being recorded in the CSMA and CGFS at this time |
| Non-produced assets | Non-produced assets consist of tangible, naturally occurring assets (natural resources), over which ownership rights are enforced, and intangible non-produced assets that are constructs of society [GFSM 2014 7.90]. | • Land • Oil and gas deposits • Electromagnetic spectrum |
| Source: Statistics Canada | ||
4. Transactions in financial assets and liabilities
The third component of the Statement of Operations records the government’s financial transactions and reflects change in government’s holdings of financial assets and liabilities due to transactions (net acquisition of financial assets, net incurrence of liabilities). Financial transactions can be presented in a number of ways. They can be presented by sector of the other party to the instrument and by residence in which the transactions are classified as either domestic or foreign. Alternatively they can be group by instrument where the transactions are classified by type of asset or liability. In the current CGFS, financial transactions within the Statement of Operations are presented by instrument.
| Category | Definition | Example – CGFS |
|---|---|---|
| Currency and deposits | This represents the net acquisition of currency and deposits by government units within a given accounting period. For domestic currency this represents the change in the stock of currency and deposits between the opening balance sheet and the closing balance sheet. For foreign currency and deposits, this represents the change in the stock of foreign currency and deposits less any change in value resulting from changes in the exchange rate between the domestic currency and the foreign currency | • Cash held in chartered banks • Federal government deposits at the Bank of Canada • Deposits in a government trust fund • Guaranteed investment certificates • Coins and notes in circulation |
| Monetary gold and special drawing rights | Monetary gold is gold to which the monetary authorities have title and is held as a reserve asset [GFSM 2014 7.126]. Special drawing rights (SDRs) are international reserve assets created by the International Monetary Fund (IMF) and allocated to its members to supplement existing reserve asset [GFSM 2014 7.131]. An SDR represents an unconditional right to obtain foreign exchange or other reserve assets from other IMF countries. |
• Bank of Canada gold reserves • SDRs allocations in the Foreign Exchange Account |
| Debt securities | Debt securities are negotiable financial instruments serving as evidence of a debt and for which there normally exist a schedule of interest payments and principal repayment [GFSM 2014 7.143]. | • Treasury bills • Banker’s acceptances • Commercial paper • Negotiable certificates of deposit • Bonds and debentures, including bonds convertible into shares • Asset-backed securities and collateralized debt obligations |
| Loans | A loan is a financial instrument that is created when a creditor lends funds directly to a debtor and receives a nonnegotiable document as evidence of the asset [GFSM 2014 7.157]. If a loan is tradable, it is reclassified to debt securities. | • Bank overdrafts • Mortgage loans • Installment loans • Loans to finance trade credit and advances • Financial leases • Securities repurchase agreement (repo) |
| Equity and investment fund shares | Equity and investment fund shares have the distinguishing feature that the holders own a residual claim on the assets of the unit that issued the instrument. In contrast to debt securities, equity does not generally provide the owner with a right to a pre-determined amount or an amount determined according to a fixed formula [GFSM 2014 7.164]. Government units themselves cannot issue shares but they can hold shares of other units. Shares and other equity are usually evidenced by shares, stocks or participations. | • Government non-marketable shares and other equity in government business enterprises • Marketable shares in publicly traded corporations held by a government • Investments in mutual funds or pooled investment funds not managed by a government unit |
| Insurance, pension, and standardized guarantee schemes | This category consists of nonlife insurance technical reserves, life insurance and annuities entitlements, pension entitlements, claims of pension funds on pension manager, and provision for calls under standardized guarantee schemes (such as student loans guarantees and deposit insurance guarantees). These represent liabilities of a public sector unit as the insurer, pension fund, or issuer of standardized guarantees and a corresponding asset of the policyholder or beneficiaries (most commonly households) [GFSM 2014 7.178 & 7.179] | • Non-autonomous pension plans unfunded liability (superannuation pension plans) • Actuarial deficits in trusteed pension plans sponsored by public sector units • Death benefit plans for government employees • Annuities |
| Financial derivatives | A financial derivative contract is a financial instrument that is linked to another specific financial instrument or indicator or commodity and through which specific financial risks (interest rate risk, foreign exchange risk, equity and commodity price risks, and credit risk) can be traded in their own right in financial markets [GFSM 2014 7.204] | • Financial derivatives are currently combined with other accounts receivable / payable categories in the CGFS and CSMA |
| Other accounts receivable / payable | This represents the value of trade credit and advances and miscellaneous items that either need to be paid or are due to be received by public sector units. | • Purchase of supplies on credit. • Advances for work in progress or to be undertaken • Accrued by unpaid taxes, dividends, rent, wages and salaries, social benefits, etc. |
| Source: Statistics Canada | ||
B. Statement of Other Economic Flows
As noted previously there are two types of flows within the GFS framework – transactions and other economic flows. The Statement of Operations concerns itself with the recording of transactions within the GFS Framework. The net/gross operating balance shows the change these transactions have on the net worth of the government. Other economic flows represent those flows that change the government’s net worth but are not transactions.
There are two types of other economic flows recorded in the GFS Framework:
- Holding gains or losses
- Other changes in the volume of assets / liabilities
Holding gains or losses reflect changes in the value of an asset (financial or non-financial) or liability due to a change in its price or market value. For example, if a government entity owns property and the property appreciates in value over time the appreciation in its price would be recorded as a holding gain. Similarly, suppose a government holds foreign currency deposits and the foreign currency appreciates relative to the domestic currency. This appreciation would be recorded as a holding gain on foreign currency holdings in the Statement of Other Economic Flows. If a government unit holds shares in a publicly traded company any increase in the value of the shares (as determined by the market) are treated as a holding gain while any decline in the value of the shares are treated as a holding loss.
Other changes in the volume of assets represent changes in the value of an asset that are not due to transactions or holding gains or losses. The GFS categorizes the other changes in the volume of assets into three broad categories:
- Recognition and de-recognition of economic assets
- Other changes in the quantity or quality of economic assets
- Changes in classification
The recognition and de-recognition of economic assets represent assets that come into existence or exit from the asset boundary because circumstances change such that the asset has economic use or no longer has economic use. Other changes in the quantity or quality existing economic assets arise when events that impact the volume of the asset occur. The easiest way to understand these flows and these categories is through the use of examples that provide a more intuitive picture of other changes in the volume of assets.
- The recognition of a deposit of subsoil minerals that become economic viable due to technological progress or a change in relative prices.
- Earthquakes or other natural disasters destroy assets and significantly alter their value.
- The quality of financial assets can also change such as when a debtor defaults on a loan repayments and the creditor writes off the loan (unilateral decision)
- Natural resources can deplete over time as such this depletion needs to be reflected on the balance sheet. This is done through the other changes in the volume of assets in the Statement of Other Economic Flows.
- The creation of an asset such as the electromagnetic spectrum. Electromagnetic spectrum has always existed but it has only recently become an asset. Before the advent of cellular communication there was no economic use for electromagnetic spectrum. Once cellular communications came into existence the electromagnetic spectrum became an asset of the government which could be sold to telecommunication companies who require the electromagnetic spectrum to sell cellular phone services. The electromagnetic spectrum comes onto the government balance sheet through the other changes in the volume of assets in the Statement of Other Economic Flows.
- Governments may choose to seize an asset or unilaterally exert ownership rights over an asset. Since the government is doing this unilaterally this flow would be recorded in the Statement of Other Economic Flows rather than the Statement of Operations.
Finally, the volume of assets may change on the government’s balance sheet due to changes in the way institutional units or assets (or liabilities) are classified. For example, overtime a government unit may change the amount of control it exercises over a private corporation. If it increases the control there would come a point in time where the entity is no longer a private corporation. At such time the assets and liabilities associated with the corporation would need to be recorded on the government unit’s balance sheet. The other changes in the volume of assets account would be used to record the flows necessary to record this change.
As can be seen from above the compilation of the Statement of Other Economic Flows is a major undertaking and source data does not always exist. Often times the other economic flows represents the value of the closing balance sheet less the transactions less the opening balance sheet. From here the other economic flows need to be split between holding gains or losses and other changes in the volume of assets or liabilities.
The Statement of Other Economic Flows is not available in the current CGFS. Flows are compiled and breakout between transaction, holding gains or losses and other changes in the volume of assets in the CGFS. However, further work is required to increase the quality and precision for each of those flow categories. The Statement of Other Economic Flows will be available in the future.
C. The balance sheet
The balance sheet represents the value of the stock of assets and liabilities of a government unit and the government’s resulting net worth. Government assets represent those instruments for which governments can exercise ownership rights and from which the government can derive economic benefits. The benefits of an asset can be obtained in one of two ways – the using up of the asset in the production of goods and services or the income (interest, dividends and rents) received by owners of an asset that is lent to another institutional unit. In principle, all assets on the balance sheet should be valued at market price. However, for debt instruments other than debt securities (SDRs, currency and deposits, loans, insurance, pension, and standardized guarantee schemes, and other accounts receivable/payable), the lack of generally available market values means that these values are estimated by using the nominal value.
The classification of assets on the government balance sheet follow the same classification of assets as found in the Statement of Operations and Statement of Other Economic Flows. At a high level assets are classified into one of two categories – non-financial assets and financial assets. Non-financial assets are stores of value which are generally used up in the production of goods and services. Non-financial assets come into existence by means of a production process, are naturally occurring such as natural resources or are constructs of society such as patents and leases. Non-financial assets are subsequently divided into the following categories:
- fixed assets;
- inventories;
- valuables; and
- non-produced assets.
Within the Canadian System of Macroeconomic Accounts valuables are not included in the asset boundary and therefore not recorded on the CGFS balance sheet.
Financial assets and liabilities are first divided by residency of the counterparty – meaning if the government holds securities of another country it would be classified first as a foreign security, second by sector of the counterparty (corporations, households, etc.) and third by type of instrument. The main instrument categories include:
- monetary gold and SDRs;
- currency and deposits;
- debt securities;
- loans;
- equity and investment fund shares;
- insurance technical reserves Insurance, pension and standardized guarantee schemes; and
- other accounts receivable/payable (including financial derivatives).
Furthermore, the liabilities in the CGFS are classified based on the original maturity (and by type of debt instrument) as follows:
- short-term, by original maturity (1)
- long-term, by original maturity of which:
- with payment due in one year or less (2)
- with payment due in more than one year (3)
This information can alternatively by presented on a remaining maturity basis where short-term is defined as (1) + (2) and long-term as (3). Such information permits an assessment of liquidity risk by indicating when public sector debt payments will fall due.
The current presentation of the balance sheet within the CGFS program does not provide a split by residency, sector of the counterparty and maturity. As such, all assets and liabilities represent the stock regardless of whether the counterparty is a resident or non-resident. At a future date the CGFS will release data by counterparty and maturity (liabilities) increasing the overall analytical capability of the product.
Each financial asset on the balance sheet has a counterpart liability except monetary gold. The financial asset represents the financial claim one unit has on another unit. Viewed from the debtor – a liability represents the obligation the debtor has to the unit holding the financial claim. Across the entire economy the sum of all financial claims must match the sum of all obligations or liabilitiesNote 4.
The net worth of a given sector represents the difference between the sectors assets (non-financial and financial) and their liabilities. Net worth can also be viewed as stock position resulting from the transactions and other economic flows of all previous periods. While the concept of net worth for a given government sector is important – given that the non-financial assets are not always marketable a more useful stability indicator is net financial worth which represents the difference between the sector’s financial assets and their liabilities.
In addition to items such as net worth and net financial worth a number of important memorandum items are presented as an addendum to the balance sheet. These include:
- Government debt which represent all the liabilities of government requiring payment or payments of interest and/or principal at a date or dates in the future. In practice, debt is measured by excluding the values for financial derivatives and equity and investment fund shares in liabilities recorded in the balance sheet. Government debt can be presented at both market (creditor point of view) and nominal (debtor point of view) values – both of which provide useful information.
- Obligations for social security benefits represent the outstanding liability governments have incurred as a result of government run social security schemes. In the case of the CGFS this would include the outstanding liability of the government with respect to the Workers Compensation Boards benefits.
- Employer future benefits represent financial obligations government have to their employees some point in the future. Examples include severance, vacation and sick leave benefits and employer sponsored health and dental plans
- Environmental liabilities represent costs that the government will incur in order to decontaminate and restore a parcel of land. Environmental liabilities also include future costs for nuclear decommissioning.
While the later three items are not included in the CGFS government balance sheet they should be viewed as an extended picture of the governments liability associated with its current operations, social programs and policies. Only actual liabilities (and assets) are included in the balance sheet within macroeconomic statistical systems. As such, the CGFS balance sheet also excludes contingent assets and liabilities.
To summarize, the balance sheet paints a picture of how the government’s actions and interactions with the rest of the economy impact its stock of assets and liabilities from one period to the next through either transactions or other economic flows. The government balance sheet is a critical element in fiscal sustainability. It should be viewed as well as the accumulated wealth or debt that future generation will inherit.
4. Classification of the Functions of Government
Expenses within the CGFS program are classified according to two different classification systems: the economic classification system, as presented earlier, as well as a functional classification, the Classification of the Functions of Government (COFOG). The economic classification system classifies each expense according to the type of expenditure occurred in the course of delivering the good or service to the public (compensation of employees, use of goods and services, social benefits, etc.). COFOG is a detailed classification of the functions, or socioeconomic objectives, that government units aim to achieve through various kinds of outlays.
Presenting expenditures by function provides an additional perspective and helps users of CGFS data understand the role of government in society. In addition, given the COFOG data are produced for the different levels of government, it provides insight into the different roles each level of government plays in the Canadian economy. Statistics on health, education or social protection, for example, can be used to assess the effectiveness of government programs in those areas. Before the adoption of the GFS, Statistics Canada was using the Financial Management System (FMS). Under the FMS, Statistics Canada has produced government expenditures by function for several decades. Since the FMS was unique to Canada, the adoption of the COFOG will improve the data comparability with other countries.
The COFOG classification system is an international standard developed by the Organization for Economic Co-operation and Development (OECD). It has been designed to allow international comparisons regardless of the organizational differences of governments. The same principle holds true for comparability of expenditures by level of government and/or by province in Canada.
As with the GFS, a Canadian COFOG (CCOFOG) has been developed to better reflect the Canadian experience. The COFOG classification system has three levels. The highest level is referred to as the division and has 10 separate categories. The second level is referred to as the group and the lowest level is referred to as the class. In the current CGFS, COFOG is available at the division level:
- general public services;
- defense;
- public order and safety;
- economic affairs;
- environmental protection;
- housing and community services;
- health;
- recreation, culture and religion;
- education; and
- social protection.
In the future, the CCOFOG will be expanded to produce statistics at lower subdivisions.
Because there are two classifications associated to expenses within the CGFS framework the cross classification of CCOFOG data by economic classification will be possible. This powerful tool will provide insight into how governments deliver the goods and services to the public, that is, whether they are delivered via grants, social benefits, government public servants, the purchases of goods and services or other expenses.
| COFOG / Economic classification | Compensation of employees | Use of goods and services | Grants | Social benefits | Other expenses | ..... |
|---|---|---|---|---|---|---|
| General public services | ||||||
| Defense | ||||||
| Public order and safety | ||||||
| Economic affairs | ||||||
| Environmental protection | ||||||
| Housing and community amenities | ||||||
| Health | ||||||
| Recreation, culture and religion | ||||||
| Education | ||||||
| Social protection | ||||||
|
Note: This table represents a framework. The final column represents additional columns not shown. Source: Statistics Canada |
||||||
5. Canadian Government Finance Statistics data sources
Public sector statistics are built primarily from publicly available sources of data. The primary data sources for the CGFS are quarterly electronic accounting files (general ledgers) extracted from the administrations’ accounting systems. Not only is this a timely source of data but these files contain a wealth of detail for all financial dimensions. For the vast number of jurisdictions, this information is also reported at the program level – an important component which allows us to properly align expenditures by functions of government.
The following table illustrates the primary sources of data by CGFS sector used to produce the CGFS estimates.
| Sector | Primary source of information for CGFS |
|---|---|
| Core federal government | Quarterly general ledger electronic files extracted from government accounting systems |
| Federal government autonomous organizations | Annual financial statements coded to the CGFS classification and captured in electronic format. |
| Core provincial and territorial government | Quarterly general ledger electronic files extracted from government accounting systems |
| Provincial and territorial government autonomous organizations | Annual financial statements coded to the CGFS classification and captured in electronic format. |
| Local government | Annual reports issued by provincial and territorial departments of municipal affairs Financial reports for larger municipalities Quarterly survey data |
| School boards | Financial reports issued by provincial and territorial departments of education and annual financial statements coded to the CGFS classification and captured in electronic format. |
| Health | Annual financial statements of health boards and other organizations Survey data |
| Colleges and universities | Annual financial statements coded to the CGFS classification and captured in electronic format. |
| Federal, provincial and territorial government business enterprises | Annual and where available, quarterly financial statements coded to the CGFS classification and captured in electronic format. |
| Local government business enterprises | Annual financial statements as well as survey data that are subsequently coded to the CGFS classification and captured in electronic format. |
| Social security funds (CPP and QPP) | Quarterly financial statements coded to the CGFS classification and captured in electronic format. |
| Aboriginal government | Aboriginal Affairs and Northern Development Canada (AANDC) and CSMA data related to aboriginal governments |
| Source: Statistics Canada | |
6. Canadian Government Finance Statistics data products
With the initial release of the CGFS eight new tables will be published in CANSIM from which hundreds of new data series can be constructed. The tables are presented below. The detail associated with each table can be accessed by clicking on the table number.
The CGFS product is presented by sector, where for each sector revenues, expenses, and balance sheet are released – all integrated together in a single table. This presentation is chosen to show the link between the operations of government, how the operations are financed and the resulting change on their positions – specifically their assets and debt positions. A classification of the functions of government (COFOG) table is also presented for each government sub-sector.
| Table number | Table title |
|---|---|
| 385-0033 | Canadian government finance statistics, statement of operations and balance sheet for the federal government |
| 385-0034 | Canadian government finance statistics, statement of operations and balance sheet for the provincial and territorial governments |
| 385-0035 | Canadian government finance statistics, statement of operations and balance sheet for health and social service institutions |
| 385-0036 | Canadian government finance statistics, statement of operations and balance sheet for education institutions |
| 385-0037 | Canadian government finance statistics, statement of operations and balance sheet for the municipalities and other local public administrations |
| 385-0038 | Canadian government finance statistics, statement of operations and balance sheet for the Canada and Quebec pension plans |
| 385-0039 | Canadian government finance statistics, statement of operations and balance sheet for government business enterprises |
| 385-0040 | Canadian government finance statistics, the classification of functions of government |
| Source: Statistics Canada | |
Notes
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