Archived - Department of Finance Canada Quarterly Financial Report for the Quarter Ended December 31, 2017 (unaudited)

1. Introduction

1.1 Authority, Mandate and Program Activities
1.2 Basis of Presentation
1.3 Department of Finance Canada – 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 Directive on Accounting Standards, GC 4400 Departmental Quarterly Financial Reports. 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 Fall Economic Statement;
• 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.

The description of the program activities for the Department can be found in Part II of the Main Estimates and the Departmental Plan.

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 reflects the results of the current fiscal period in relation to the Main Estimates and Supplementary Estimates A and B of 2016-17.

The following graph provides a comparison of budgetary authorities available for the full fiscal year and budgetary expenditures for the first nine months of 2016-17 and 2017-18. 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 increase in the resources available from 2016-17 to 2017-18 and the increase in actual expenditures as at December 31, 2017 compared to December 31, 2016. Full details can be found in Table 1, Statement of Authorities located at the end of this document.

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

Voted budgetary authorities

Total 2017-18 Vote 1 program authorities available as at December 31, 2017 are $131.1 million compared to $101.2 million for the same period in 2016-17, representing an increase of $29.9 million. Through Supplementary Estimates B, $30 million in funding was received for a grant to the Government of Alberta to support provincial actions that will stimulate economic activity and employment in Alberta’s resource sector.

Statutory budgetary authorities

Major transfers to other levels of government increased by $1,693.6 million, primarily due to the net effect of the following factors:

Increases include:

• Canada Health Transfer – An increase of $1,082.0 million reflecting the annual increased funding commitment in the Jobs, Growth and Long-term Prosperity Act, 2012. This program 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;
• Canada Social Transfer – An increase of $400.4 million reflecting the 3% annual increased funding commitment in the Jobs, Growth and Long-term Prosperity Act, 2012;
• Fiscal Equalization – An increase of $373.2 million reflecting the 2.09% gross domestic product-based escalator being applied to the 2016-17 level; and
• Territorial Financing – An increase of $78.8 million reflecting the incorporation of new and updated data for territorial expenditure requirements and revenue capacities into the program’s legislated formula.

Decreases include:

• Additional Fiscal Equalization Offset Payment to Nova Scotia – A decrease of $13.3 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;
• Youth Allowance Recovery – An increase in recoveries in the amount of $36.8 million reflects an increase in the estimated value of personal income tax points that were transferred to Quebec;
• Additional Fiscal Equalization to Nova Scotia – A decrease of $43.9 million is due to new data entering the formula, which uses an average of data for three fiscal years. This program ensures that there is no reduction in combined Equalization and 2005 Offshore Accord Offset Payments relative to the previous Equalization formula (pre-2007); and
• Alternative Payments for Standing Programs – An increase in recoveries in the amount of $146.9 million is a result of an increase in the estimated value of personal income tax points that were transferred to Quebec.

Interest on Unmatured Debt and Interest on Other Liabilities decreased by $1,606.0 million, due to the following factors:

• Interest on Unmatured Debt – A decrease of $1,084.0 million, reflecting in part both lower forecasted Consumer Price Index adjustments on Real Return Bonds and lower projected bond buyback expenses, consistent with Budget 2017; and
• Interest on Other Liabilities– A decrease of $522.0 million, reflecting the forecasted long-term bond rates by private sector economists in Budget 2017, which affects the average long-term bond rate that is used to calculate interest on the public sector pension obligations pertaining to services pre-April 1, 2000.

Direct program expenses increased by $306.8 million, due primarily to the funding for Home Care Services and Mental Health Care Services. Budget 2017 committed to make available to provinces and territories an additional $11 billion over 10 years, starting in 2017-18, to support better home care and mental health initiatives. $300 million was paid to provinces in 2017-18 ($200 million for home care services and $100 million for mental health services).

Non-budgetary authorities

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.

Voted budgetary expenditures

Total 2017-18 Vote 1 program expenditures at the end of the third quarter were $98.2 million compared to $67.6 million for the same period in fiscal year 2016-17, representing an increase of $30.6 million or 45.3%. The increase is primarily due to a $30.0 million grant payment made to the Government of Alberta, to support provincial actions that will stimulate economic activity and employment in Alberta’s resource sector.

Statutory budgetary expenditures

Major transfers to other levels of government increased by $1,347.1 million, primarily due to the net effect of following factors:

Increases include:

• Canada Health Transfer – An increase of $811.5 million;
• Canada Social Transfer – An increase of $300.3 million;
• Fiscal Equalization – An increase of $279.9 million; and
• Territorial Financing – An increase of $49.2 million.

Decreases include:

• Youth Allowances Recovery – An increase in recoveries of $18.4 million; and
• Alternative Payments for Standing Programs – An increase in recoveries of $75.5 million.

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

Interest on unmatured debt and interest on other liabilities decreased by $683.9million, due to the following factors:

• Interest on Unmatured Debt – A decrease of $351.1 million, largely reflecting lower Consumer Price Index adjustments on Real Return Bonds and a lower average effective interest rate on the stock of Government of Canada bonds; and
• Interest on Other Liabilities – A decrease of $332.8 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.

Direct program expenses increased by $391.7 million primarily due to the net effect of the following factors:

Increases include:

• Funding for Home Care Services and Mental Health Care Services – An increase of $300 million;
• Losses on Foreign Exchange – An increase of $93.9 million due to the revaluation of International Monetary Fund related accounts; and
• Payment to the Canada Infrastructure Bank (CIB) – The CIB was established by the Canada Infrastructure Bank Act, which received Royal Assent as part of the Budget Implementation Act, 2017, No 1. As part of the Government of Canada's historic Investing in Canada plan the Bank will use federal support to attract private sector and institutional investment to new revenue-generating infrastructure projects that are in the public interest. The payment of $5.6 million is for activities that the CIB will undertake in 2017-18 including the stand-up of the organization.

Decreases include:

• Contributions to Employee Benefits Plans – A decrease of $0.9 million;
• Payment of Liabilities Previously Recorded as Revenue – A decrease of $1.0 million; and
• Purchase of Domestic Coinage – A decrease of $5.9 million.

Non-budgetary expenditures

Non-budgetary expenditures at the end of the third quarter of 2017-18 decreased by $7,386.2 million and is primarily due 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.

Significant changes on the departmental budgetary expenditures by standard object table

Table 2, located at the end of this report, presents the budgetary expenditures by standard object (SO). The main variances in expenditures between 2017-18 and 2016-17 by SO are as follows:

• Transfer Payments (SO 10) – A net increase of $1,673.2 million primarily attributable to an increase of $1,347.0 million in the statutory expenditures pursuant to major transfers to other levels of government; $300 million in direct program expenses related to Home Care Services and Mental Health Services; and a $30 million grant to the Government of Alberta;
• Other Subsidies and Payments (SO 12) – An increase of $98.6 million primarily resulting from gains on foreign exchange; and
• Public Debt Charges (SO 11) – A decrease of $683.9 million.

Quarterly Spending

Variance explanations are in line with year to date variance explanations provided earlier in this section.

The Department of Finance Canada’s plans and commitments respond to, and are shaped by, changes in the global economic situation and the Canadian outlook. The Department relies on the skills and experience of its employees to detect, monitor and respond to changes in the operating environment. The Department continues to focus on employee development, particularly strengthening analytical capacity. The Department also relies on close and effective collaborative relationships with partners and stakeholders to establish priorities, provide high-quality analysis, and ensure coordinated responses to urgent issues.

Planned activities in support of the Department’s objectives are also vulnerable to information technology issues. The Department relies on efficient and effective information management and technology to deliver informed policy advice and operate as an agile and responsive knowledge-based institution, while protecting its highly sensitive institutional information. Cybersecurity incidents and failures in supporting systems have been identified as risks that could cause serious disruptions and affect the Department’s ability to execute critical government operations, including tax and transfer payments, and public debt-related transactions. A Business Continuity Plan is in place to ensure that critical payments are maintained in case of a system failure. Further, the Department is committed to building on recent improvements to increase the security posture of its information technology infrastructure and ensure the effective protection of its information assets.

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.

There have been no significant changes in relation to operations, personnel, and programs.

Approved by:

Ottawa, Canada
February 28, 2018