Canada's federal and provincial governments follow a budgetary process, designed to ensure control, accountability and planning in the spending of public money. That process is centered around a government's department of finance, but also involves the Cabinet and members of Parliament or provincial legislatures. The process continues to evolve, according to the desires of new governments.

Purpose

In theory, the annual preparation by the executive or Cabinet of a budget for approval by Parliament or the legislatures, allows for the exercise of popular control over spending.

The budget statement must include all the annual revenues and expenditures. As a planning instrument, the budget, again in theory, allows a government to analyse the revenue and spending implications of its current and proposed programs and the financial relationships among them. Federally, the budgetary process may also serve to stabilize the economy through spending measures.

Revenue Budget

In the Canadian government there are really two budgets – revenue and expenditure – and two budgetary processes. The revenue budgetary process culminates with the presentation of the budget speech to Parliament by the minister of finance. In it and in accompanying documentation, the minister reviews the current and projected state of the economy and the government's financial situation, announces any specific changes in tax rates and tax structures, and sometimes unveils major new spending programs.

Following the budget debate, the House of Commons votes to accept or reject the budget. This vote is a matter of confidence. If the revenue budget is rejected by the Commons, the government resigns and an election may be called, which happened with the minority government budgets of May 1974 and December 1979.

Considering the crucial importance to the ruling government of a budget speech, the process of budgetary preparation is rather odd. Traditionally, the revenue budget is prepared in strict secrecy by the minister of finance and a relatively small group of his officials. With the possible exception of the prime minister, the rest of Cabinet is seldom informed of its contents until just before the budget speech.

The reason for this secrecy and for the lack of consultation is that prior knowledge of a budget's contents might enable some individuals to profit unfairly at the expense of others. However, in recent years ministers of finance have acknowledged the desirability of pre-budget consultations and have begun to ease the secrecy surrounding the budget's preparation. It is now not unusual for the prime minister or the minister of finance to drop broad hints about an upcoming budget, or for their officials to reveal select details from the budget to the news media. However, budget secrecy is still the norm; when the secrets are finally and fully revealed in the minister’s budget speech in Parliament, it is a significant media event, thereby creating a major political opportunity for the government to promote its policies.

Expenditure Budget

The preparation of the expenditure budget is much less secret, at least within the government. Tabled in the House each February for the fiscal year beginning the following April, it is officially called the Estimates, and unofficially the Blue Book. General direction and priority setting in the budget are prepared by the central agencies (eg. the finance and treasury departments and the Privy Council Office) who then negotiate adjustments, reconcile budget submissions of individual departments and prepare the total expenditure budget for submission to Parliament by the president of the Treasury Board.

Before 1971

Prior to 1971 Parliament was asked to approve everything from salaries to supplies, to old-age pensions to travel expenses for public servants. The most important determinant of expenditures on most items was the levels of spending on those items in the previous year. The prevailing view among those who participated in or studied the process was that the expenditure budget did not allow Parliament to exercise meaningful control or allow the Cabinet to plan effectively.

In many cases members of Parliament could not see any links between the planned spending of a particular department and the services the department provided. In addition, information was provided only for the fiscal year under consideration, so MPs were unable to gauge the potential spending implications of a budget item for subsequent years.

The same factors made it difficult for the government and its officials to relate its policy and program planning to its expenditures. It had no satisfactory way of determining the impact on spending of new programs under consideration. The reverse was also true; problems were made worse by the interdependencies among departments, because the spending of one department could reinforce, duplicate or cancel that of another.

Reform -1970s

Significant reform was attempted in the early 1970s by Prime Minister Pierre Trudeau's government, which adopted a "scientific" or "rational" budgeting and decision-making process in the form of a Planning-Programming-Budgeting System (PPBS). As its name implies, PPBS was intended to integrate the policy-planning and budgetary processes. Rather than focusing on inputs or objects of expenditure, PPBS focused on outputs – the ultimate effects of government activities on Canadians.

Departmental activities were classified into programs and subprograms. A program was defined in relation to a particular aspect of social welfare –- eg, health, justice, safety or national security, and all activities with an impact on that area were to be part of that program. In practice, the classification of activities into programs was never clear-cut.

Theoretically, under the PPBS system, the Cabinet and the relevant central agencies (principally the Privy Council Office) were to plan and decide priorities as programs. Departments were to submit budget requests and conduct analyses showing how their activities contributed to the objectives of the various programs. Unsatisfactory activities could be altered or eliminated and relationships among departments' activities would be taken into account explicitly.

In operation, PPBS never fulfilled its promise, largely because the analysis, integral to the system, required massive quantities of data, including not only financial statistics, which were usually obtainable, but less readily available information on program operations and effects. In many cases the basic social science and other knowledge necessary to evaluate the impact of programs does not exist. For example, it is very difficult to gauge how spending for drug testing, a public medical-care system, the promotion of better nutrition, or health-related education actually affect the population's health, even if a level of health could be measured.

PPBS ignored the political realities of the budgetary process. A budget represents a compromise among competing interests and objectives both inside and outside government. Whether more money is spent on national defence or on social programs is fundamentally a question of social values and requires a political decision. Once these decisions are made, it is extremely costly and disruptive to fight all the bureaucratic and political battles anew each year. That is why, traditionally, budgetary processes have concentrated attention on the margins; except in exceptional circumstances, the bulk of government spending has remained basically undisturbed. Discussion centres on the allocation of new or incremental spending.

PPBS, if it had worked as planned, would have involved negotiating the entire budget every year. PPBS did, however, result in some modest improvements in the budgetary process. Analysis of the impacts of programs and activities is now commonplace. The format of the Blue Book presented to Parliament, while far from perfect, is more useful to MPs and fosters more informed debate.

Reform-1980s

In more recent decades there has been a series of reforms of the expenditure budget process aimed at integrating evaluation of programs, political priority setting and financing. From 1979 to 1989 a system known as PEMS (Policy and Expenditure Management System) was in place. Government programs were grouped into sectoral areas (eg, economic development, social policy) and each area was assigned an expenditure limit or envelope.

It was then left largely to committees of ministers with responsibilities in each area to determine how the total envelope was to be allocated to departments and programs within that area. The intent was to permit (and force) ministers in a common policy area to set priorities jointly, and to determine how expanded or new programs should be financed by reducing or eliminating others within their sector.

Reform-1990s to present

Since PEMS, changes in the budget process (and corresponding changes in the Cabinet structure) have been made to support government efforts to restrain spending and reduce the budget deficit. Generally, these changes have been designed to concentrate the power to authorize spending in the hands of key central agency ministers, most prominently the minister of finance. Expenditure control appears to be exercised most effectively when authority to spend is restricted in this fashion. In the Liberal government of Prime Minister Jean Chrétien, centralized structure was known simply as the Expenditure Management System (EMS).

Under the Conservative government of Prime Minister Stephen Harper the budgetary process has, if anything, become even more centralized. Consistent with the overall concentration of decision-making in the Prime Minister’s Office (PMO) under Harper, virtually all budgetary directives come from the Department of Finance which closely co-ordinates with the PMO.

The centralization of decision-making authority has allowed changes to the budget structure under Harper. Generally these have been to reduce government spending relative to the size of the economy and to lower tax rates accordingly. The major exception to this trend was the period beginning in late 2008 when the government reluctantly engaged in major infrastructure spending to stimulate the economy, which along with most other western industrial countries had entered a serious recession and financial crisis.

This episode is interesting from a budgetary perspective because it shows the pressures that governments face from their electorates (and, in this case, from their international trading partners as well) to respond to short-term crises – especially high unemployment – even though the government’s primary focus might be on changing the long-term structural fundamentals of spending and taxation.

Students of government and the media appropriately focus much attention on budgetary processes. Often this attention is mainly on the “nuts and bolts” of changes in processes. What is often overlooked is what underlies these changes. They do not simply appear “out of thin air’; nor are they exercises to replace poor systems with better ones. Budgetary processes are put in place and are changed to better serve the goals and priorities of the government of the day. Thus, for example, when a government is determined to reduce its spending or tightly control its rate of increase, it may establish a highly centralized system that limits the discretionary room of ministers to make expenditure commitments. A government designs the budgetary process to facilitate the pursuit of the goals it sets and to achieve the results it desires.

See also Fiscal Policy.