EXPENDITURE REVIEW:EXPENDITURE REVIEW:The Canadian ExperienceThe Canadian Experience

Munir A. Sheikh Munir A. Sheikh Secretary, Expenditure Review CommitteeSecretary, Expenditure Review Committee

Government of CanadaGovernment of Canada March 3, 2005March 3, 2005

Some Canadian FactsSome Canadian Facts

In the International ContextIn the International Context

0

1

2

-1

-2

-3

-4

-5

-6

-7United

KingdomItaly

2004 (OECD estimate) 2005 (OECD projection)

Germany FranceUnitedStates Japan Canada

% of GDP

Total Government Financial Balances (National Accounts Basis)Total Government Financial Balances (National Accounts Basis)

Financial BalancesFinancial Balances

Canada is again expected to be the only G-7 country to record a surplus in 2005 and 2006.

Program SpendingProgram Spending

G-7 avg. United States

Japan United Kingdom

Italy Germany France Canada

per cent of GDP

0

10

20

30

40

50

60

1992 2004 (estimate)

G-7 average in 2004

Program SpendingProgram Spending

Canada’s program spending as a share of GDP is now below the G-7 average.

Total Government Net Financial Liabilities (National Accounts Basis)

Total Government Net Financial Liabilities (National Accounts Basis)

0

20

40

60

80

100

120

G-7 avg. United Kingdom

United States

France Germany Japan Italy Canada

1995 2004 (estimate) 2005 (projection)

per cent of GDP

G-7 average in 2004

Financial LiabilitiesFinancial Liabilities

Canada’s debt burden has declined from the second highest to the lowest among G-7 countries.

Total Government Financial Balances (National Accounts Basis)Total Government Financial Balances (National Accounts Basis)

-6

-5

-4

-3

-2

-1

0

1

2

3

1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05

Canada United States ("on-budget" balance)per cent of GDP

Estimate

Financial BalancesFinancial Balances

The federal government in Canada has maintained a budgetary surplus since 1997-98, unlike the U.S.

Total Government Financial Balances (National Accounts Basis)Total Government Financial Balances (National Accounts Basis)

0

10

20

30

40

50

60

1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05

Canada United Statesper cent of GDP

Estimate

Financial BalancesFinancial Balances

The federal market debt-to-GDP ratio in Canada fell below that of the U.S. in 2003-04.

Why Expenditure Review?Why Expenditure Review?

Given this Performance Given this Performance and the Fiscal Situation,and the Fiscal Situation,

the Question is:the Question is:

… and the answer is… and the answer is

Why Expenditure Review?Why Expenditure Review?

• It is good public policy• Eliminating/reducing programs which are not high

priority would save money• Improving efficiency, reducing cost of programs that

remain would save money• Such savings can be:

• Either spent on high priority programs, or• Used to cut taxes

• The outcome is REALLOCATION that will improve:• Economic outcomes• Social outcomes

Political Challenge• Interest groups

Political Challenge• Interest groups

Bureaucratic Challenge• Continue existing programs

Bureaucratic Challenge• Continue existing programs

But there are ChallengesBut there are Challenges

The government:The government:

Is committed to the expenditure review conceptIs committed to the expenditure review concept

Announced an Expenditure Review Committee of seven senior Ministers to operationalize it

Announced an Expenditure Review Committee of seven senior Ministers to operationalize it

Set up a small secretariat of civil servants to support ERC Set up a small secretariat of civil servants to support ERC

The Canadian Approach The Canadian Approach

Gave ERC 6 months to find first tranch of savings for Budget 2005 (TRACK 1)

Gave ERC 6 months to find first tranch of savings for Budget 2005 (TRACK 1)

Asked ERC to develop a permanent system of expenditure review as part of annual budget cycle (TRACK 2)

Asked ERC to develop a permanent system of expenditure review as part of annual budget cycle (TRACK 2)

ERC PROCESSERC PROCESS

TRACK 1TRACK 1

Overcoming ChallengesOvercoming Challenges

Political Challenge• Prime Minister’s commitment

• ERC to look at programs not in an absolute sense but relative sense

• Focus on program efficiency and administrative efficiency• Reallocate

Bureaucratic Challenge• Prime Minister’s commitment• The 5% method for identifying priorities

Role of ERC SecretariatRole of ERC Secretariat

• Collected all the facts

• Undertook analysis of different programs

• Developed options with pros and cons

• Provided support to ERC Chair, followed his guidance

• Presented options to DM group chaired by the Head of the Public Service to get concurrence

• Secretary presented work to ERC for discussion, decision

Reviewed every proposal in a relative context from the perspective of:• Public policy• Political Impacts• Regional Impacts

Reviewed every proposal in a relative context from the perspective of:• Public policy• Political Impacts• Regional Impacts

Met once or twice a week for 4 months Met once or twice a week for 4 months

Made tough decisions, took ownership of packageMade tough decisions, took ownership of package

Role of ERC Ministers Role of ERC Ministers

Chair played a key roleChair played a key role

Recommended package to Cabinet, Prime Minister, Minister of FinanceRecommended package to Cabinet, Prime Minister, Minister of Finance

Reviewed package from:• Public policy perspective• Political perspective• Regional perspective

Reviewed package from:• Public policy perspective• Political perspective• Regional perspective

Role of CabinetRole of Cabinet

Package in Budget 2005Package in Budget 2005

Savings ramping up to 7% of base by year 3Savings ramping up to 7% of base by year 3

89% improved efficiencies in program delivery, corporate overhead 89% improved efficiencies in program delivery, corporate overhead

Service Canada Service Canada

Key Elements of ERC PackageKey Elements of ERC Package

Procurement practicesProcurement practices

Property management Property management

Departmental cuts Departmental cuts

Key Elements of ERC Package Key Elements of ERC Package

SERVICE CANADA• “One Stop-Shopping”• Rationalize regional offices• Increased use of new technology• Workforce to be reduced initially by 20%

SERVICE CANADA• “One Stop-Shopping”• Rationalize regional offices• Increased use of new technology• Workforce to be reduced initially by 20%

PROCUREMENT PRACTICES• Cost of purchases 5-35% higher than others• Target of 7% savings• Changes made:

• New contract rules• New governance structure• Coordinated/bulk purchases

PROCUREMENT PRACTICES• Cost of purchases 5-35% higher than others• Target of 7% savings• Changes made:

• New contract rules• New governance structure• Coordinated/bulk purchases

Key Elements of ERC Package Key Elements of ERC Package

PROPERTY MANAGEMENT• Enforce existing space rules• Outsourcing

PROPERTY MANAGEMENT• Enforce existing space rules• Outsourcing

DEPARTMENTAL CUTS• Cut off lower priority spending• Enhanced program and administrative efficiencies• Examples:

• Pooling of innovation funds (ACOA)• Electronic coding of tax returns (CRA)• Centralization of administrative services (NRCan)• Elimination of subsidies for export promotion (Agriculture)• Reduced assistance internationally in cases where it is ineffetive or not needed (CIDA)

DEPARTMENTAL CUTS• Cut off lower priority spending• Enhanced program and administrative efficiencies• Examples:

• Pooling of innovation funds (ACOA)• Electronic coding of tax returns (CRA)• Centralization of administrative services (NRCan)• Elimination of subsidies for export promotion (Agriculture)• Reduced assistance internationally in cases where it is ineffetive or not needed (CIDA)

Sources and Uses of the Expenditure ReviewSources and Uses of the Expenditure Review

Total ERC savings Examples of priorities funded by ERC savings

(billions of dollars)

Service delivery 3.1 Defence

Procurement 2.6 National security

Property management 1.0 Environment

Departmental initiatives 3.9 Aboriginal Canadians

Employee benefit savings 0.3 Research and development

Total 10.9 Program integrity1

Reduce EI premiums/

increase benefits

Improve CPP account balance

1 Investments needed to address departmental service levels in key areas of federal responsibility and to maintain capital property.

Track 2:Track 2:

Preliminary ThoughtsPreliminary Thoughts

Permanent System of Expenditure ReviewPermanent System of Expenditure Review

BUDGET

PRIORITIES

GAPS

CHOICES

ACTUAL

SPENDING

PROGRAM

EFFICIENCY

CORPORATE

EFFICIENCY

NEEDED

SPENDING

NEEDED

SPENDING

GAPS

OLD

NEW

System part which alreadyexists and works

System part which exists now but needs strengthening

System part that is needed but not in place

SPENDING DECISIONS

Optimal Expenditure Review System:“What we Have and What we Don’t”

EXPENDITURE REVIEW:EXPENDITURE REVIEW:The Canadian ExperienceThe Canadian Experience

Munir A. Sheikh Munir A. Sheikh Secretary, Expenditure Review CommitteeSecretary, Expenditure Review Committee

Government of CanadaGovernment of Canada March 3, 2005March 3, 2005