Changing of the Guard: What the new Expenditure

Management System should look like

Sean McConnachie

200 270 499

GSPP 804 Research and Writing

Dr. Ken Rasmussen

Tuesday, November 11, 2008

Word Count: 6,624

Index:
 Page
Numb
er
Policy Issue 1
Methodology of Analysis 1
Primary Actors 2
Guiding Principles 3
Policy Background 4
History of Expenditure management in Canada
The Development of the Expenditure Management System
Assessment Expenditure Management System 9

Quantitative Analysis
Qualitative Analysis
Conclusion and Recommendations 17
Recommendations
References 21
Bibliography 23
Appendices
Appendix A – The Design of the 1995 Expenditure Management System I
Appendix B – Current Parameters of the new Expenditure Management IV
System
Appendix c – Recommended Redesign of the Expenditure Management VI
System
Appendix D – Expenditure and Economic Outlook IX
Policy Issue:
Based on the current financial outlooks and the expenditure projection of the federal
government of Canada, it is apparent that this government will miss its target of
maintaining expenditure growth rates, on average, below Gross Domestic Product
(GDP) growth rates.

According to the Auditor General, the Expenditure Management System (EMS) is “at
the heart of the operation of government” as it “touches everything that
government does” (Canada 2006). This is echoed by the Standing Committee on
Public Accounts (PAC):

“A sound and effective system for managing spending is central to the

government’s ability to carry out its fiscal responsibilities... Without a
good system, nothing that individual departments and agencies can do
will result in sound overall management of government spending”
(Canada 2008b)

EMS is one of the most important, yet unrecognized, initiatives that

government undertakes. It is the way in which all spending is evaluated and
legitimized. Thus, as stated in Budget 2007, ASPIRE to a Stronger, Safer, Better
Canada, the main mechanism for achieving this goal is through the proper
implementation of a new EMS.

As the Treasury Board of Canada Secretariat (TBS) is still awaiting approval for
the new EMS, this paper will examine the current EMS and will provide
recommendations on how the government should design and implement this
system in light of its newly defined mandate and the economic environment in
which it will exist.

Methodology of Analysis:
Since its initial conception, there has been little direct analysis conducted on EMS
outside the realm of government. Due to this fact, the qualitative analysis that can
be conducted on this system is significantly limited to the information that is readily
provided by the federal government.

The three tools of analysis that will be used to examine and provide
recommendations for the construction of a new EMS are:
 1. Contextual Analysis: an examination of the background and the external and
historical influences that lead to the conception of the program. This will also
examine whether or not the program is reflective of the contemporary
environment in mandate, scope and implementation.
2. Quantitative Analysis: an examination of both budgetary and economic data
to provide projections in the short-term to highlight the possible fulfillment of
the federal government’s expenditure commitments.
3. Technical Analysis: an examination of the needs and requirements of
adequate programming based on the contextual analysis. This will examine
to a large extent what are the structural needs of the program to fulfill its
mandate.

For the quantitative analysis all government accounts and economic output values
will be evaluated based on their real price levels based on real (not nominal) values.

Primary Actors:
In his 2007 work, David A. Good provides a categorization of the main players that
are involved in the budgetary and expenditure processes of the federal government
that is useful for the examination of EMS within this paper. It is important that clear
definitions of these groups of actors are provided so that clarity as to the current
and proposed roles of each budgetary player can be provided. Though Good
provides an excellent classification of the budgetary actors involved, placement and
definition of roles will also largely reflect the classification system currently used by
the Auditor General (Canada 2006).

This classification system, as based on current categorization, is provided in table 1.

Table 1:Current categorization of primary actors

Category Actors Description
Guardians – Department of These actors, within this capacity,
Finance are concerned with the spending
– Treasury Board effectiveness and efficiencies
Secretariat associated with government
– Departments programming and administration.
Spenders – Departments Concerned with the provision of
– Agencies quality and timely goods and
– Cabinet services to meet the growing
demands of their client.
Priority Setters – The Prime Minister The setting of overall government
– Cabinet priorities and the adjudication of
 – Minister of Finance the financial demands of
– Privy Councils Office departmental spending and overall
government direction.
Financial – Department senior Focus on the enforcement of
Watchdogs officials current accountability legislation
– The Auditor General and holding all government and
– Parliament political officials accountable for the
spending under their authority.

The current structure of the roles and responsibilities of expenditure players is the
foundation of the problems that are current plaguing EMS and will need to be
addressed in order for a new program to achieve it newly defined mandate. As will
be analysed and addressed below, the new system will require an overhaul of the
current institutional structure so that more clarity and reduced complexity in these
roles can be achieved.

Guiding Principles of Analysis:

There has been a major shift in complexity and multi-linear relationships in
government budgeting and expenditure management since the implementation of
the recommendation of the 1962 Royal Commission on Government Organization
(to be referred to as the Glassco Commission from this point forward). As will be
highlighted below, there has been a steady movement away from the simplistic
relationship between spenders and guardians towards multilateral relationships
among all the actors. Through this increase in complexity of the roles, the
responsibilities of each have become blurred and over lapping, resulting in the loss
of traditional responsibility and power.

As will be noted, the progression of federal expenditure management systems were

initially focused on increasing the rationale of spending, resulting in the
discretionary powers being invested in departments with regards to expenditures.
The powers and responsibilities of spenders have continued to increase with the
demand for more prudency while placing priority setters as the arbiters of centre
expenditure management. This system has also increased in complexity due to the
introduction of the Accountability Act as spenders are now expected to be financial
watchdogs.

Through the examination of the above categorization and the outlining of the
Auditor General’s definition of the inputs and outputs of the key expenditure
management players (Appendix A) it can be seen that there is a strong disconnect
between what is actual and what is optimal. This increase in role complexity of
some actors and the decrease or removal of responsibility for others is currently
leading to suboptimal results.

The optimal system of expenditure management is guided by two main principles:

(1) allow managers to manage by reducing their current guardian and watchdog
responsibilities; and (2) re-establish and strengthen the roles of guardians within the
system. The purpose of these principles is for the design and implementation of an
EMS that is simpler, more precious, and more defined in its operations and
objectives.

Policy Background:
In order to understand the difficulties that are currently plaguing EMS, it is of merit
to see how these came about. This examination is also of value as it will provide
useful insight n to the suggested recommendations that will be provided later on.

History of Expenditure Management in Canada:

In the context of Canada’s ongoing experiment to curb and, in some instances, reduce
government expenditure, numerous budgetary systems have been attempted with limited
success. The relatively constant renewal of expenditure management programs within the
federal government has largely been precipitated not by the lack of success of a program based
on its establishing mandate, but by the changing demands of the public and the ideological
context of the governing.

Though Canada is a unique case, with regards to the design of expenditure systems and their
role within the budgeting process, it should be noted that all advanced western governments are
constantly in a cycle of examining expenditure management renewal (Premchand 2005). As
Premchand alludes to, there is a continuous desire for governments to move towards more
rational budgeting systems that will increase the efficiency of government spending and possibly
reduce overall expenditure growth.

The systems that the federal government has implemented in the after-war period have been as
progressive as they have been varied. They have all been implemented with the goal of
achieving a higher rationalefor spending, while controlling it. These systems all had a different
focus and shifted power among the different budgetary players.
The first true endeavour into rational-based expenditure management in the Canadian federal
government was the implementation of Management by Objectives (MBO). MBO, as
popularized by Peter Drucker, was a movement away from the historical centralization of
decision making. It allowed managers at the program level to make decisions based on their
unique insight (Dunn 2002), but constrained by the overall objectives of the government and
their department. This movement to more decentralised management, as recommended in the
Glassco Commission’s Report of 1962, put more power in the hands of the spenders without
reflectively placing similar power in the hands of guardians and priority setters (Ross 2003). This
program was where the term “let the managers manage” developed and established itself as a
principle within the public service (Ross 2003). This system, however, created serious problems
which were manifested in the form of ballooning budgets and principle-agent conflicts.

From this, there was a desire to move towards a system of expenditure management that would
establish proper oversight mechanisms that would hopefully, to one degree or another, ensure
that spending met government priorities and was not increasing at uncontrollable rates. One
attempt to achieve this was the establishment of the TBS in 1966.

The main purpose of this newly established department was to directly oversee the promotion of
effectiveness and efficiency in the delivery of programming while ensuring sound fiscal
management (Strick and White 1970). In order to assist it in its role, TBS implemented a new
expenditure management system called Planning-Programming-Budgeting System (PPBS) in
1969 with the goal of establishing “operationalized rationalism“ withinthe budgeting process. As
Donald Sovie notes (1989), this was initially heralded as a breakthrough in government
operations as it established direct priority budgeting and multi-year funding initiatives.

Though this program was a significant step forward, by bridging TBS into departmental and
overall budgeting processes, it was unable to achieve its main objective. The main problem with
the program was that it did not solve the asymmetric information difficulties that persisted
between Guardians and Spenders. The onus was still on departments and their senior officials
to identify cuts and spending increases within their respective jurisdictions (Kernagahan and
Siegel 1999). This resulted in priorities being set by both Priority Setters and Spenders outside
the privy of Guardians and the budgetary allocations of government.

In 1982 an attempt to overcome this dilemma was embodied in the creation of the Policy and
Expenditure Management System (PEMS). The mandate of this expenditure management
system was to link government priorities to predetermined budgetary allocations. This program
established the envelope budgeting system which was inherited by EMS. Under this system, the
Cabinet Committee on Planning and Priorities would assess departmental expenditure
envelopes based on the policy priorities and associated costs presented by each department
(Good 2007). Through PEMS it was up to each individual department to finance their new
initiatives under their envelope; meaning that if they needed new funds for a program, they
would have to find overhead in another.

The Achilles heel of this program was its lack of focus on current government operating and
provision expenditures. Though this program did evaluate new expenditures, it completely
overlooked current expenditures. PEMS did not provide authority to Guardians to examine
current expenditure levels within departments.

Near the end of the 1980s it was becoming quite apparent that the deficit spending that had
almost become the hallmark of the federal government was no longer sustainable. As can be
seen in Graph 1, between 1982-83 and 1992-93 deficit spending was on average 4.4% of
national GDP while the federal net debt increased from 23.1% to 62.7% of real GDP. Though
this was recognized as a major problem behind government doors and within academic circles,
it did not gather political weight until the 1993 election.

Though all political parties mentioned means by which they would control
government spending in order to fight the mounting deficit, it is only of value, for
the purposes of this paper, to examine the Liberal Party of Canada’s platform, or the
Red Book, to see how the Expenditure Management System was manifested. It was
perceived by the Liberal Party that implementing a program that would work
towards reinvigorating the Canadian economy would create a more inviting
investment climate.

The foundation of such an expenditure management program would be that new

programming would only be implemented if “they can be found within existing
expenditures” and that current spending would be “reordered” in order to achieve
the maximum return for the initial investment (Liberal Party of Canada 1993). This
was to be the vehicle to achieve their election promise of reducing government
deficit spending from 5.2% to 3.0%.

Thus, based their platform the newly elected government established the
Expenditure Management System in their 1995 Budget. The main objective of this
new program was to “deliver quality programs and services, described in
departmental service standards, within the resources that Canada can afford”
(Canada 1995). This was to be the means, coupled with Program Review, of a
achieving the 3.0% target of GDP deficit spending by 1996-1997, as outlined in the
same budget.

EMS was extremely successful in fulfilling both its stated objectives within the
allotted timeframe. By the end of the fiscal year of 1996-1997, federal government
deficit spending was 1.0% of GDP and overall government expenditure growth on
average was reduced to -2.1%. Though this program was perceived as a success by
the public and the leadership of the governing party, staggering problems were
created that still affect EMS.

The Development of the new Expenditure Management System

Though EMS within its original form was quite successful in its early stages, it
became apparent by the 2000s that the program was no longer able to control the
rate at which government expenditures grew. As Good (2007) explains “since the
mid-1990s direct program expenditure has more than doubled”. The inherent
weakness of EMS began to show as governments began holding surplus in the
excess of $20 billion by 2000-01 and government expenditure growth was 7.6% for
that same fiscal year. It became apparent that EMS was only as affective as the will
of priority setters to use it.

In the lead up to the 2006 election the Conservative Party of Canada made it one of
their main objectives to scrutinize the current government of Paul Martin on its
frivolous spending habits. Nevertheless, there was no mention of the expenditure
management within their platform, as they were primarily concerned with the
‘vertical fiscal imbalance’ and government fiscal accountability (Conservative Party
of Canada 2006).

However, in their first budget plan the Conservative Government announced their
reviewing of EMS with a focus on limiting expenditure growth through improved
fiscal management. Shortly after the tabling of the 2006 Budget, the Hon. Flaherty
stated that the current levels of expenditure growth are “neither sustainable nor
desirable”. To restrain government expenditure growth, the Minister provided three
guidelines under which this was to occur: (1) that all government programs be
focused on results and efficiency; (2) that the federal government only spend in
those areas that of the core responsibility of that government; (3) that programs
that no longer serve their purpose be terminated (Flaherty 2006). This was the
premise for placing a redesigned EMS on the government’s agenda.
Based on this announcement, the Auditor General of Canada, Sheila Fraser, made
EMS a focal point of her report to the House of Commons in November 2006. In this
report she highlighted areas that needed to be taken into consideration in the
evaluation process of the current EMS.

In Budget 2007, the federal government provided the mandate and the principles
that are to guide the designing of a new EMS. The government outlined that the
new system would focus on four main items. First, departments and agencies will
submit new spending proposals to Cabinet with clearly defined results and assess all
spending based on these defined results. Secondly, TBS will conduct fiscal reviews
of each department’s spending on a four year cycle basis. Third, based on the
previous two points, Cabinet will systematically review program funding and spend
to ensure that that all programming is in line with government priorities. Lastly, all
results generated through this will be integrated into the budget planning process
(Canada 2007).

Though Budget 2007 provides the normative parameters of change, it did not
provide a timeline or specifics for implementation. Similarly, while there has been
some movement towards implementation (Canada 2008a), little has been publicly
divulged. Nevertheless, one component of the new program has already been
undertaken. In Budget 2008 the results of the first Strategic Reviews were
announced (See Appendix B). As congruent to its stipulated goals in Budget 2007,
TBS, through the Strategic Review, was able to find $1billion in efficiency and
effectiveness savings in the 15 departments that were under review for the fiscal
year of 2007-2008. The implications of how this money was then utilised will be
provided below.

Further, the government is currently in the process of fully implementing the long
awaited Expenditure Management Information System (EMIS). This digital
mechanism from inter-department data collection and storage was designed in
2005 as an integral component for the Management, Resources, and Results
Structure (MRRS). The EMIS was initially designed to be utilized as the main tool of
TBS in the construction of the Main Estimates and the preparation of Plans and
Priorities Reports for Parliament.

More information has been provided by TBS as to the possible design of the new
EMS through its response to the recommendations made by the PAC (Canada
2008a). Within this document the government fleshes out the structural bones
provided in Budget 2007 (see Appendix B). This document, among other things,
outlines the three pillars which the new system will be built on:

1. Managing for Results: benchmarking and evaluating programs while

demonstrating results;
2. Up-Front Disciple: the provision of critical information to Cabinet so that they
can better asses proposals against priorities and current expenditures;
3. Ongoing Assessment: the ongoing evaluation of all direct program
expenditures to ensure that government spending is efficient, effective and
aligned with priorities (Canada 2008a)

Though this document provides some information on the possible structure of the
new EMS, it does not address many of the main issues currently plaguing EMS.

Assessment of the Expenditure Management System:

The previous section provides the context to be taken into account for the
evaluation of expenditure management within Canada. This provides an assessment
of the environment in which any expenditure management must operate while
holding that many conditions and actors will influence the successful achievement
of any given mandate. As if designing an expenditure management program based
on the principles provided above was not enough, the new EMS has a specific goal
to achieve, “limiting the growth in program spending, on average, to below the rate
of growth of the economy” (Canada 2007).

In order to understand what is needed of the new EMS, it is necessary to understand

the current expenditure and economic conditions that will affect its effectiveness.

Quantitative Analysis
In its 2007 budget the government projected that it would have expenditure growth
rates that were below the growth in the economy. Based on real GDP growth rates
of 1.8% in 2008-09, 2.4 % in 2009-10, and 2.5% in 2010-11, the government
highlighted that there expenditure growth rates would be below the average.
However, in Budget 2008 the government estimated that they would see a steady
progression in total government expenses which would actually place government
expenditure growth at a rate which is higher, on average, the their predicted
economic growth rates (see Graph 2). Though it seems that the situation is grim
indeed, it becomes even bleaker when you examine the most recent economic
growth projections.

Though there are numerous reliable sources on Canadian economic forecasting, TD

Bank Financial Group’s projections will be used to analyze the surmountable
difficulties that currently face the federal government. Based on TD`s projections
(Appendix D, it becomes quite apparent that the outlook for the government in
achieving this goal under current circumstances is quite dim. Between the years
2006-07 to 2011-12 it is predicted that economic growth will be an average of 1.7%
while expenditure growth will be 4.3%; that is a difference of 2.6%.

As the government does not define what the parameters of the average of
evaluation will be, it is of value to examine GDP growth and expenditure growth
rates over the long-term. Graph 3 shows the differences in these variables over a
thirty year period beginning in 1981-82 and ending in 2011-2012. As is seen below,
since 1999-00 government expenditure has consistently outpaced economic growth.
It should be noted that in 2005-06 the dissolving of parliament prevented all
proposed expenditures from being passed, resulting in the sharp decrease evident
in Graph 3. Though government expenditure growth could decrease in the short-
term, it is quite evident that it will continue to remain above medium-term
economic growth rates.

As the government is attempting to control expenditure growth rates, it can be

assumed that one of the goals associated with this objective is the reduction of the
size of the federal government relative to provincial governments and the economy
as a whole. Graph 4 shows that as GDP growth slows, the relative size of
expenditure as a portion of GDP will continue to expand.

Though we cannot suppose what effect the new EMS will have on the expenditure
levels of government, we can examine the short–term implications and
achievements of the Strategic Review component. Table 2 provides the savings and
the reallocations that have been planned based on the initial review in 2007-09.
 Table 2: Anticipated Strategic Review Savings
(millions of dollars)
Type of Savings Fiscal Year
2008 2009 2010
-09 -10 -11
136. 258.
Strategic review reinvestments* 3 216 3
Budget 2008 reinvestments in review
departments 39.1 83.8 81.5
Other investments in Budget 2008
priorities 23.4 10.8 46.5
198. 310. 386.
Total Reinvestments 8 6 3
198. 310. 386.
Total Identified savings** 8 6 3
Source: Department of Finance Budget Plan
2008
*includes reinvestments in the International Assistance Envelope
** Most of the review has not been finalized. Expected savings from
unfinalized review incorporated in totals

Based on the identified efficiency savings provided from the first round of Strategic
Reviews alone, it is estimated that the government could reduce the difference
between GDP and expenditure growth rates by 0.1% over a three year period. If
equivalent savings are found in the second round of Strategic Reviews, the possible
reduction could be 0.3% (Appendix D. Though this seems small, these savings are
based on single year audits undertaken with a great deal of autonomy provided to
departmental managers.

Through the implementation of a new EMS, continued expenditure efficiency and

effectiveness auditing would occur within all areas of government. Coupled with
short-term targeted Strategic Reviews, the government would most likely be able to
substantially cut spending growth rates by limiting new spending, increasing current
program efficiency, and realigning project funding.

However, in order for this program to have an effect on total government

expenditure, a newly designed EMS would have to be privy to those components of
government expenditure that have the largest influence on total growth rates. As
Graph 5 shows, programming and operating expenditures that are privy to EMS are
also the most influential on the total rate of expenditure.
This data provides us with two important realities. First, the current EMS is not
adequate to achieve the new mandate established in Budget 2007 as it is unable to
control spending in the decade after Program Review. Secondly, a newly designed
EMS needs to be structured in a way that will provide guardians and agenda setters
with adequate tools to find substantial expenditure efficiencies and control the
demands for new program spending.

Though it is one thing to show that the current EMS has failed, but still has the
ability to achieve its newly defined objective, it is another to explain why this
system has failed and what needs to be done.

Qualitative Analysis
Historically, expenditure management programs within the federal government
have evolved through the incremental changing of micro components. However,
over time, as the demands and the operations of government become larger and
more complex, the macro structure of the system becomes strained and is no
longer able to fulfill new mandates placed in front of it.

Currently, it seems that EMS has been hijacked by Financial Watchdogs as it has
become a mechanism for the provision of more and better information on the
financial process of policy implementation and evaluation. By reviewing TBS’s
responses to the Fourth Report of the Standing Committee on Public Accounts
(Canada 2008a), it becomes evident that the program is more focused on ensuring
accountability, rather than fulfilling its mandate of ensuring that government
expenditure is below GDP growth rate.

Good (2007) notes, in the wake of the federal Accountability Act, expenditure
management for the purpose of efficiency and effectiveness in government
spending has been sidelined once again by the strengthening of discretionary
powers within the hands of non-guardian players – financial watchdogs and
spenders.

Good proclaims in his 2007 work that the success of a new EMS is dependent on
three conditions:

1. The role and focus of Cabinet within the budgeting process to regularly and
informatively review all new spending proposals against current expenditures
and the periodic review of existing allocations.
 2. An increase in the quality of performance and results information for the use
of Cabinet to undertake such reviews.
3. The extent to which budgetary players – spenders, guardians, priority setters,
and financial watchdogs – can produce this information in a way that is
reliable, relevant, and timely for the necessary decisions.

Though conditions of improvement initially outlined by Good are a good starting, the
most important change that needs to occur is the empowerment of TBS within the
budgeting process. Both the Auditor General (2006) and the PAC (2008b) point out
that the role of TBS within the budgeting and allocations process has been
diminished, resulting in budgetary allocations being approved without proper
examination. In the current process (see Appendix A) Memorandums to Cabinet
(MC), and the resources needed, are approved first and then examined by TBS
through Treasury Board Submissions later. Even at the second stage the influence
that TBS has is very limited as in most cases they do not have the proper
information to properly evaluate spending. These examinations can only focus on
how the allocations will be spent and whether these allocations are justifiable
(Canada 2006).

This system is flawed further by the lack of proper examination at the MC stage as
sitting ministers often do not evaluate the spending proposals and pass them with
relative ease (Good 2007). The main check within this system is the examination of
these passed proposals by the Prime Minister and the Minister of Finance before
they are placed within the Estimate documents. This has lead to a less open system
of expenditure management as the criteria of evaluation used by priority setters at
this stage is very opaque. It has been noted that at this stage, new spending
proposals are not examined against current spending and are rarely turned down as
they have already received approval from Cabinet.

One of the main reasons why this system is defective is due to the principle-agent
problem. During the MC stage of expenditure approval and allocation, the decisions
made are only as good as the information which they are based on. As is the goal of
the current EMS, almost all new programming is to be achieved through the
allocation of funds through current financial voting procedures. However, at the
submission stage, in a majority of occurrences, spenders do not provide information
as to where this money will be coming from. The issue here is that in some cases
reallocation is not a viable option and new funds are needed. Whether or not this is
done on purpose by departments is debatable, but it can be noted that it is in their
best interest to not provide this information as it may mean that transfers from
other programming may not be required.

Another principle-agent problem under the current system is the transmission of

quality information. In many instances the information that is provided to TBS for
the purpose of Reports on Plans and Priorities and Annual Reference Level Updates
(ARLUs) is less than adequate for the purpose of evaluation. Currently departments
need not provide adequate information as to how their programming, at the micro
level, is achieving the current priorities of government as it is not required that the
benchmark for results evaluation be defined within these submissions. The main
reason that this occurs is that TBS currently does not have the authority to review
this information for the purposes of effectiveness and efficiency. Even the
establishment of the EMIS is not currently geared towards this purpose and is
currently designed more as a tool of data accumulation for the submission of TBS
documents to parliament. The Auditor General has noted (Canada 2008a) that the
ARLU process is one that is fully mechanised and does not provide any analytical
acumen into the resources being both requested and utilized by departments.

Another concern that can be raised about the current structure of EMS is that, as
was established by PEMS, spenders are still being entrusted as guardians
overseeing the proper use of the resources allocated to them. Thus their ability to
review and reallocate resources in accordance with government priorities has been
strained by the implementation of the Accountability Act as departments, or rather,
senior officials, have become self auditors. Based on the limited time, treasure and
talent available to departments, if senior officials are focusing more on
accountability frameworks and performance auditing, then less time is available for
policy analysis and program implementation.

The current system is also hindered by its lack of proper expenditure management
foresight at both the government centre and departmental levels. The main issue
here is a lack of alignment between current and new expenditures and the priorities
and fiscal realities of government (Canada 2006). At the department level this
means that there is a lack of foresight with regards to the risks associated with
future expenditure needs and there are difficulties associated with the timeliness in
the provision of funds. This hampers the achievement of program objectives as a
lack of surety in funding in the medium- to long-term will substantially affect the
outcomes of programs. This holds multiplied importance in times of fiscal constraint
as the level of future funding is always in question. The main cause of this problem
is lack of forward expenditure planning at the micro and mesa levels of government
by priority setters and guardians. On the other side of the coin, a lack of medium-
term alignment through government centre planning can result in unanticipated
expenditure increases, which could discredit the government based on the new
EMS’s mandate.

These problems are not significantly addressed by the new guiding pillars
established by TBS. As can be seen in Appendix B, the foundation for the design of
the new EMS is just the strengthening of the status quo with some minor revisions
to TBS’s parliamentary and cabinet information provision services. Though TBS does
state that Strategic Review will be the main tool for the achievement of its
expenditure growth rate objective (Canada 2008a), this alone will not be sufficient.
Larger change needs to occur for the government not to fall short of its target. This
mechanism will most likely fail as it will be plagued by the same principle-agent
issues. It is crucial that the evaluations conducted under this system not be
conducted by departments themselves.

As the Auditor General dually notes, “a system suited to time of fiscal stress is not
necessarily the best one for periods of fiscal abundance” (Canada 2006, 24). Thus in
order to overcome the need for significant future changes in expenditure
management, any newly developed system needs to be both reasonably flexible
and adequate under all conditions. However, this does not mean that in times of
surplus an expenditure management system as a governance tool should be placed
on the back burner. The Hon. Jim Flaherty has stated that expenditure management
“cannot and (should) not be a one-time exercise” (Flaherty 2006). Thus controlling
government expenditure under all scenarios needs to be a priority of the
government and adequate tools to accomplish this are necessary.

Conclusions and Recommendations:

The federal government has come to recognize the various shortcomings of the
current system and has advocated for the changing of the guard (or of the
Guardians). But what should this new system look like based on the analysis
provided above? The following will attempt to provide a new design for EMS, one
which will assist in the achievement of the new mandate of the system within the
principles set up by the federal government of Canada.

One, if not the most important, problem afflicting the current design of the EMS is
the distribution of budgetary powers and influence. Since the establishment of the
Glassco Commission’s decentralization and management empowerment
recommendations, a significant amount of power was placed in the hands of
Spenders (Ross 2003). As outlined above, most of the attempts to change
expenditure management within the federal government have been exercises
designed to shift decision making powers back into the hands of the Priority Setters
by aligning spending with priorities. This was quite evident in the establishment of
EMS in 1995, as the structure of this program solidified not only priority powers, but
also guardian powers within the hands of the Prime Minister and the Minister of
Finance.

The investment of the central budgeting and expenditure powers within the hands
of these two entities was able to achieve significant decreases in overall
government expenditure in the mid 1990s, but there has been little evidence that
this structure has be able to “control” government spending in the long-term. Based
on the expenditure rates over the last decade, it is evident that the current system
is not adequate to restrict, or even control, government expenditure outside time of
crisis.

As it has been shown, the government is currently not going to meet its expenditure
growth commitments as outlined in Budget 2007. Since the economic tides, and
subsequently government account estimates, have changed it is noted that the new
EMS needs to embody this new climate. As the new EMS was being designed based
on the previous estimated budgets of 2007 and 2008 it is recommended that the
system be redesigned to embody the new fiscal realities of the federal government.

The success of a new system within the context of the current governing and
economic environment will be largely based on the extent to which, both new and
lost, powers can be held in the hands of financial guardians; most notably TBS. The
design of a new EMS needs to change the current structure of the roles and
responsibilities so that the system becomes more effective and efficient based on
reduced complexity and increased clarity (see table 3).

Table 3: Change in roles and responsibilities of primary actors

Category Current EMS – Actors New EMS – Actor
Guardians – Department of Finance – Department of Finance
– Treasury Board – Treasury Board Secretariat
Secretariat – Cabinet
– Departments
Spenders – Departments – Departments
– Agencies – Agencies
– Cabinet – Cabinet
Priority Setters – The Prime Minister – The Prime Minister
– Cabinet – Cabinet
– Minister of Finance – Minister of Finance
– Privy Councils Office – Privy Councils Office
Financial – Department senior – The Auditor General
Watchdogs officials – Parliament
– The Auditor General – TBS
– Parliament

Based on the issues raised above, it is evident that the current direction that the
government is taking in the design of the new EMS will prevent it from being
effective and efficient in the achievement of its new mandate. Thus it is suggested
that four major recommendations be taken into consideration in the designing of
the current system.

Recommendations

1. The establishment of a Medium-Term Fiscal Framework (MTFF):

This would create a centralized document that would cover all resources, outlays
and liabilities held by the federal government based on its central and departmental
priorities and projections. This would be an annually rolling document that would
increase the sustainability, flexibility and predictability of medium-term government
expenditures (Premchand 2005). The creation of such a framework would undercut
the current issues surrounding alignment by enhancing predictability in funding for
departments and agencies while providing greater centralized control over the
projections and financial confines of program operations in the long-term.

2. The establishment of an Expenditure Review Cabinet Committee

The creation of a permanent expenditure review cabinet committee that is on a
parallel standing with the Planning and Priorities Committee would ensure that
current and new government expenditures are reviewed on a continual basis with
the authority to create the constraints neededto achieve the new mandate of EMS.
As prescribed by David Good (2007a), this committee needs to be chaired by the
Prime Minister to undercut the expenditure wants of other ministers. This committee
should also be vice-chaired by the President of the Treasury Board. This committee
would also have a secretariat largely consisting of senior officials from TBS and
Finance Canada. The EMIS should be refocused to be the primary source of
information of the evaluation of government expenditure by this committee.

It is warranted that this committee become a central player within the budgetary
cycle (Appendix C). This committee should be one of the last mechanisms of
approval of the budget before it is tabled before parliament. The committee would
also provide an annual review of the MTFF.

The committee should also consist of a small group of influential ministers, such as
the minister of finance, with a regional balance in membership so as to be politically
reflective of the country.

3. The creation of a TBS auditing and evaluation system

The creation of TBS performance and priority auditors should be established to

replace the current process of effectiveness and efficiency evaluation within
departments. These auditors would replace or absorb current departmental auditors
for the purpose of ongoing program performance evaluation. These auditors would
work independently from the sectors, branches, and departments they work within
and would be answerable to TBS. All information and analysis conducted by these
auditors would be gathered by TBS through EMIS and then used by TBS and the
expenditure review cabinet committee for the purpose of expenditure deliberation
and planning.

The main objective of this component is to place evaluation and expenditure

information powers into the hands of central guardians. Not only will this allow
guardians to undertake more effective and efficient Strategic Reviews, it will also
provide them greater accuracy in the medium-term planning processes.
Another objective of this is to let “managers manage” by removing their auditing
responsibilities and reducing the number of entities they are both answerable to.

The increase in auditors for TBS has already been approved by the bipartisan PAC
for the purpose of increasing the department’s ability to monitor the spending of
other departments and agencies, thus making this a legitimate transition.

4. The creation of legislation that enshrines the new EMS

The purpose of this legislation would be to clearly define the roles and
responsibilities of all players within the budgetary and expenditure management
process of government. This would also clearly define, in a descriptive fashion, the
processes of EMS.

The main goal of this is to prevent current and future governments from operating
outside the confines of this system to ensure fiscal responsibility in both situation of
surplus and deficit.
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