Archived - Department of Finance Canada Quarterly Financial Report for the Quarter Ended June 30, 2016 (unaudited)

1. Introduction

1.1 Authority, Mandate and Program Activities
1.2 Basis of Presentation
1.3 Department of Finance – Financial Structure

2. Highlights of fiscal quarter and fiscal year-to-date (YTD) results.

2.1 Authorities Analysis
2.2 Expenditure Analysis

3. Risks and Uncertainties

4. Significant changes in relation to operations, personnel and programs

5. Approval by Senior Officials

This quarterly financial report has been prepared by management as required by section 65.1 of the Financial Administration Act and in the form and manner prescribed by the Treasury Board Accounting Standard 1.3. This quarterly financial report should be read in conjunction with the Main Estimates and Supplementary Estimates of the Department of Finance Canada.

The quarterly financial report has not been subject to an external audit or review.

The Department of Finance Canada (the ‘Department’) provides the Government of Canada with high quality advice on appropriate economic, fiscal, tax, social, security, international and financial sector policies and programs with the goal of strengthening the Canadian economy and maintaining sustainable fiscal policy and social programs.

The Department's responsibilities include the following:

• Preparing the Federal Budget and the Falls Update of Economic and Fiscal Projections;
• Preparing the Annual Financial Report of the Government of Canada and, in cooperation with the Treasury Board of Canada Secretariat and the Receiver General for Canada, the Public Accounts of Canada;
• Developing tax and tariff policy and legislation;
• Managing federal borrowing on financial markets;
• Designing and administering major transfers of federal funds to the provinces and territories;
• Developing financial sector policy and legislation, and;
• Representing Canada in various international financial institutions and organizations.

This quarterly report has been prepared by management using an expenditure basis of accounting. The accompanying Statement of Authorities includes the Department’s spending authorities granted by Parliament and those used by the Department, consistent with the Main Estimates and Supplementary Estimates for both fiscal years as well as transfers from Treasury Board central votes that are approved by the end of the quarter. This quarterly financial report has been prepared using a special purpose financial reporting framework designed to meet financial information needs with respect to the use of spending authorities.

The authority of Parliament is required before monies can be spent by the Government. Approvals are given in the form of annually approved limits through appropriation acts or through legislation in the form of statutory spending authority for specific purposes.

The Department uses the full accrual method of accounting to prepare and present its annual departmental financial statements that are part of the departmental performance reporting process. However, the spending authorities voted by Parliament remain on an expenditure basis.

The Department has three major categories of expenditure authority. These categories are:

• Voted budgetary authorities: included in this category are the operational expenditures of the Department itself as well as authorized expenditures under grants and contribution programs. These expenditures must be specifically approved by Parliament through an appropriation act.
• Statutory budgetary authorities: included in this category are expenditure authorities that are granted through an existing Act of Parliament. Further parliamentary approval is not required for expenditures related to statutory amounts and it is within the normal course of business that statutory expenditures may in some cases exceed planned spending estimates. Departmental statutory payments include those made under the Federal-Provincial Fiscal Arrangements Act as well as interest incurred in connection with the public-debt of Canada.
• Non-budgetary authorities: included in this category are disbursements made by the Department which do not have a direct budgetary impact to the Government. This includes the value of loans initially disbursed to Crown Corporations participating in the Crown Borrowing Framework.

This Departmental Quarterly Financial Report (QFR) reflects the results of the current fiscal period in relation to the Main Estimates and Supplementary Estimates A of 2015-16.

The following graph provides a comparison of budgetary authorities available for the full fiscal year and budgetary expenditures for the first three months of 2015-16 and 2016-17. Non-budgetary authorities related to the value of loans disbursed to Crown Corporations participating in the Crown Borrowing Framework are not reflected in the Estimates.

Sections 2.1 and 2.2 below highlight the significant items that contributed to the decrease in the resources available from 2015-16 to 2016-17 and the decrease in actual expenditures as at June 30, 2015 compared to June 30, 2016. Full details can be found in Table 1, Statement of Authorities found on page 12 of this document.

The following table provides a comparison of cumulative authorities by vote for the current and previous fiscal years.

Authorities available in fiscal year 2016-17 are $89,463.8 million at the end of the first quarter as compared to $89,646.4 million at the end of the first quarter of 2015-16, representing a decrease of $182.6 million.

Starting in 2016-17, departmental operating expenditures and grants and contributions are consolidated into Vote 1 – Program Expenditures. This change provides a more efficient approach to the management of voted expenditures.

Total 2016-17 Vote 1 program authorities available as at June 30, 2016 are $90.7 million compared to $103.0 million for the same period in 2015-16, representing a decrease of $12.3 million. This decrease is mainly attributable to the following factors:

• Government advertising – A decrease of $7.5 million;
• Harbourfront Centre Funding Program - A decrease of $3.0 million and,
• Cooperative Capital Markets Regulatory System – A decrease of $1.5 million

Statutory Authorities available in fiscal year 2016-17 are $89,373.1 million at the end of the first quarter compared to $89,543.4 million at the end of the same quarter of 2015-16, representing a decrease of $170.3 million.

This decrease of $170.3 million relates to three broad categories: an increase of $2,677.5 million in major transfers to other levels of government, offset by a decrease in authorities for direct program expenses of $11.8 million and a decrease of $2,836.0 million in Interest on Unmatured Debt and Interest on Other Liabilities. Additional details are provided below.

Authorities for major transfers to other levels of government as at June 30, 2016 are $65,989.9 million compared to $63,312.4 million for the same period in 2015-16. The increase of $2,677.5 million is due to the net effect of the following increases and decreases in transfers:

Increases include:

• Canada Health Transfer (CHT) – An increase of $2,041.5 million reflecting the annual increased funding commitment in the Jobs, Growth and Long-term Prosperity Act, 2012. This program will increase by 6% per year until 2016-17, after which it will grow based on a 3-year moving average of nominal gross domestic product, with funding guaranteed to increase by at least 3% per year;
• Fiscal Equalization – An increase of $539.1 million reflecting the 3.1% gross domestic product-based escalator being applied to the 2015-16 level;
• Canada Social Transfer – An increase of $388.8 million reflecting the 3% annual increased funding commitment in the Jobs, Growth and Long-term Prosperity Act, 2012;
• Statutory Subsidies – An increase of $8.0 million is due to Newfoundland and Labrador's Term 29 payments under the Newfoundland Additional Financial Assistance Act;

Decreases include:

• Additional Fiscal Equalization Offset Payment to Nova Scotia – A decrease of $3.5 million due to a decline in Nova Scotia's offshore oil and gas revenues. The Nova Scotia 2005 offshore arrangement provides offset payments equal to the decline in Equalization due to the inclusion of these revenues in the program;
• Territorial Financing – A decrease of $24.7 million as a result of new and updated data used to calculate territorial expenditure requirements and revenue capacities entering the formula for Territorial Formula Financing. The Budget Implementation Act, 2016 No.1, contained amendments to this program to address the impact of certain public sector data revisions. Upon passage of this legislation on June 22, 2016, the Territorial Formula Financing amounts were re-determined, and consequently, and additional $67.0 million will be provided in 2016-17;
• Youth Allowance Recovery – An increase in recovery of $37.6 million as a result of an increase in the estimated value of personal income tax points;
• Additional Fiscal Equalization to Nova Scotia – A decrease of $63.3 million due to Nova Scotia’s lower offshore oil and gas revenues. This program ensures that there is no reduction in combined Equalization and 2005 Offshore Accord Offset Payments relative to the previous Equalization formula that was in place at the time it signed its 2005 Offshore Arrangement; and
• Alternative Payments for Standing Programs – An increase in recoveries in the amount of $170.8 million as a result of an increase in the value of personal income tax points.

Authorities for direct program expenses at the end of the first quarter of fiscal year 2016-17 are $601.2 million as compared to $613.0 million at the same period in 2015-16, representing a decrease of $11.8 million. This decrease is primarily due to the following factor:

• Domestic Coinage – A decrease of $12.0 million largely due to the recently amended Royal Canadian Mint Act, which stipulates that the Mint can no longer anticipate profit with respect to the provision of circulation coins.

Authorities for the Interest on Unmatured Debt and Interest on Other Liabilities as at June 30, 2016 are $22,782.0 million compared to $25,618.0 million at the same period in 2015-16. The decrease of $2,836 million is mainly due to the following factors:

• Interest on Unmatured Debt – A decrease of $2,300.0 million due to a downward revision of interest rates by private sector economists for 2016-17, consistent with the 2015 Update of Economic and Fiscal Projections; and
• Other Interest Costs – A reduction of $536.0 million, mainly due to a decline in the average Government of Canada long-term bond rate used to calculate interest on the public sector pension obligations pertaining to service pre-April 1, 2000.

Non-budgetary authorities related to the value of loans disbursed to Crown Corporations participating in the Crown Borrowing Framework are not reflected in the Estimates. The gross borrowing requirements for Crown Corporations are driven by the need to match the term and structure of the borrowing requirements of corporations’ clients. These activities are influenced by current and expectations of future, economic conditions and can vary greatly over a short period of time. For example, if clients of the Crown Corporation are seeking short-term, floating rate loans, the Crown Corporation will seek to match that with short-term borrowings from the government. This will result in the loan being refinanced several times through the year, with higher gross borrowings associated with a smaller net borrowing amount. This can change very quickly should market conditions suggest interest rates are going to rise and their clients seek to lock in their borrowing costs through longer term borrowings. As such, there can be very large and significant variances both inter-year and intra-year. Given the risk of forecast inaccuracy and that the gross advances to Crown Corporations are a non-budgetary item and do not impact on the net-debt of the government, the Department only reports on actual borrowings by the Crown Corporations.

The following table provides a comparison of cumulative spending by vote for the current and previous fiscal years.

At the end of the first quarter of the 2016-17 fiscal year, total expenditures were $35,445.4 million compared to $35,525.9 million reported in the same period of 2015-16, representing a decrease of $80.5 million or 0.2%.

Total 2016-17 Vote 1 program expenditures at the end of the first quarter were $23.7 million compared to $26.2 million for the same period in fiscal year 2015-16, representing a decrease of $2.5 million or 9.5%. The decrease is mainly attributable to reduced government advertising expenditures.

Total statutory expenditures at the end of the first quarter of 2016-17 are $22,566.3 million as compared to $22,442.2 million at the end of the first quarter of 2015-16 representing an increase of $124.1 million or 0.6%.

This increase is primarily attributable to an increase of $747.6 million in major transfers to other levels of government, offset by a decrease of $33.4 million in direct program expenses, and a decrease of $590.1 million in Interest on Unmatured Debt and Interest on Other Liabilities (decrease of $408.6 million and decrease of $181.5 million, respectively).

Expenditures related to major transfers to other levels of government as at June 30, 2016 are $16,846.9 million compared to $16,099.3 million for the same period in 2015-16 representing an increase of $747.6 million. This increase is mainly due to the net effect of the following factors:

• Canada Health Transfer – An increase of $510.4 million;
• Fiscal Equalization – An increase of $134.8 million;
• Canada Social Transfer – An increase of $97.2 million;
• Alternative Payments for Standing Programs – A decrease in recoveries of $9.9 million;
• Youth Allowances Recovery – A decrease in recoveries of $4.9 million; and
• Territorial Financing – A decrease of $9.6 million.

Explanations for the increases in the items listed above are consistent with the explanations found under the statutory budgetary authorities in Section 2.1.

Direct Program Expenditures at the end of the first quarter of fiscal year 2016-17 are $50.3 million as compared to $83.7 million at the same period in 2015-16, representing a decrease of $33.4 million. This decrease is primarily due to the net effect of the following factors:

• Losses on Foreign Exchange – A decrease of $37.4 million due to the revaluation of International Monetary Fund related accounts;
• Purchase of Domestic Coinage – An increase of $3.8 million is attributable to normal variations in the demand for coinage from businesses and consumers and in the timing of costs incurred for coinage procurement throughout the year.

Expenditures for the Interest on Unmatured Debt and Interest on Other Liabilities as at June 30, 2016 are $5,669.1 million compared to $6,259.2 million at the same period in 2015-16 representing a decrease of $590.1 million. The decrease is mainly due to the following factors:

• Interest on Unmatured Debt – A decrease of $408.6 million, largely reflecting lower Consumer Price Index adjustments on Real Return Bonds and lower effective average interest rates on Government of Canada bonds and treasury bills; and
• Interest on Other Liabilities – A decrease of $181.5 million, largely reflecting a decrease in the average Government of Canada long-term bond rate, which is used to calculate interest on public sector pension obligations pertaining to service pre-April 1, 2000.

Non-budgetary expenditures at the end of the first quarter of 2016-17 are $12,855.4 million compared to $13,057.5 million at the end of the same quarter in the prior year representing a decrease of $202.1 million. This decrease is due to the following factors:

• a decrease of $147.7 million related to the value of loans disbursed to Crown Corporations participating in the Crown Borrowing Framework. Gross borrowings by Crown Corporations are based on demand and the business requirements of the participating entities, and also depend on the terms of the Crown Corporation borrowings. As such, amounts can vary significantly from year to year;
• a decrease of $28.3 million in payments under the Bretton Woods and Related Agreements Act – International Organizations and;
• a decrease of $26.1 million in loans made to the International Monetary Fund under the New Arrangements to Borrow (NAB).

Table 2, located at the end of this report, presents Budgetary Expenditures by Standard Object (SO). The main variance in expenditures between 2016-17 and 2015-16 by standard object are as follows:

• Transfer Payments (SO 10) – A net increase of $747.6 million of which the majority is related to an increase in the statutory expenditures pursuant to major transfers to other levels of government;
• Utilities, Materials and Supplies (SO 07) – An increase of $3.8 million in the purchase of domestic coinage; and
• Public Debt Charges (SO 11) – A decrease of $590.1 million.

The year over year variances are explained in detail in the preceding Section 2.2.

Reflecting the ongoing impact of low and volatile crude oil prices and the overall weak and fragile global economic situation, growth in the Canadian economy has slowed considerably since 2014.

With respect to the fragile global economic situation, the Department will continue to monitor developments and risks in key regions and countries. Notable among these are the slowdown in large emerging market economies, the weak European economic recovery, the escalation of geopolitical tensions in the Middle East, slowing short-to-medium-term growth in both advanced and emerging economies, and the challenges associated with the normalization of U.S. monetary policy, which in turn poses risks for emerging markets with long-standing economic and financial vulnerabilities. Over the planning period, the Department will continue to foster international economic policy coordination, contribute to international efforts to mitigate and prevent economic crises, and manage the allocation of scarce fiscal resources.

The Department of Finance Canada’s Corporate Risk Profile provides a snapshot of the Department’s key corporate risks. It focuses the attention and action of senior management on measures to mitigate the adverse effects of global economic uncertainty and their impact on the Canadian economy. The Department monitors its corporate risks and associated risk responses to identify areas of opportunity and to reflect progress made in implementing measures to mitigate risks.

Effective June 27, 2016, Christopher Meyers replaced Randy Larkin as Chief Financial Officer for the Department of Finance Canada.

Approved by:

Ottawa, Canada
August 29, 2016