This paper examines economic developments and policies in Canada during 1990–95. Spurred by the robust growth in the United States and the easing of monetary conditions between 1991 and 1993, economic growth in Canada continued to strengthen during 1994. Real GDP grew by 4.5 percent in 1994 after growing by 2.2 percent in 1993 and 0.6 percent in 1992. Economic growth in 1994 was led by exports and investment in machinery and equipment. However, growth was more broadly based in 1994; private consumption strengthened, and there was a rebound in residential and nonresidential construction.

Abstract

This paper examines economic developments and policies in Canada during 1990–95. Spurred by the robust growth in the United States and the easing of monetary conditions between 1991 and 1993, economic growth in Canada continued to strengthen during 1994. Real GDP grew by 4.5 percent in 1994 after growing by 2.2 percent in 1993 and 0.6 percent in 1992. Economic growth in 1994 was led by exports and investment in machinery and equipment. However, growth was more broadly based in 1994; private consumption strengthened, and there was a rebound in residential and nonresidential construction.

XI. Federal Spending on Government Operations and Defense 1/

1. Overview

Federal spending on government operations and defense rose by 1 1/4 percent in 1993/94 to $31.3 billion (roughly one quarter of total noninterest spending). Of this amount $18.7 billion was for personnel. Estimates for 1994/95 indicate that expenditure for defense and other government operations declined to $30.8 billion, with both defense and nondefense spending registering declines (see tabulation below).

Federal Spending on Government Operations and Defense 2/

(In billions of dollars)

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The decline in these two spending categories was due in part to measures to contain personnel spending and the purchase of goods and services, as well as to an effort to improve the quality and effectiveness of public services that began in 1992 after the publication of the White Paper Public Service 2000 and of the Federal-Provincial Study on the Cost of Government Expenditure Management. This process culminated in a comprehensive review of government programs during 1994/95--the Program Review--and led to many of the spending reduction measures contained in the 1995/96 budget.

2. Defense

Defense spending reached an estimated $10.8 billion in 1994/95 (1 1/2 percent of GDP). Operating costs account for 75 percent of this spending, including 45 percent for wages, salaries, and benefits for about 73,000 military and 33,000 civilian personnel; 28 percent for nonpersonnel operating expenditures (including fuel, maintenance, and supplies); and 2 percent for grants, contributions, and statutory pension payments. Capital costs account for the remaining 25 percent of total defense spending.

The activities of the Canadian forces are defined by the Defense Services Program, which is articulated over eight activities. Of these, the Maritime Forces, Land Forces in Canada, Air Forces in Canada, and Canadian Forces in Europe are aimed at providing direct combat capabilities, and were responsible for almost three-quarters of total expenses; the remaining four activities provide command, logistic, and other support functions (including assistance of civil authorities in dealing with illegal drug trade, oil spills, the use of natural resources, and local emergencies), and were responsible for the remaining expenses.

Defense spending has been on a declining trend in real terms in recent years, reflecting the reduced involvement of Canadian forces in Europe, 1/ measures to reduce defense operating budgets, and cancellation of planned purchases of military equipment. The February 1994 budget projected a 5 percent reduction in defense spending in 1994/95 compared to the reference level for 1993/94, and called for subsequent annual reductions of 1 percent through to 1998/99. 2 The budget also aimed at increasing the ratio of capital spending over total defense budget to a target of 26 percent by increasing the 1994/95 ratio to just under 25 percent. Defense expenditure is estimated to have fallen to $10.8 billion in 1994/95, roughly the amount projected in the February 1994 budget.

Following the release of the 1994 Defense White Paper, additional cuts in defense spending have been introduced. The February 1995 budget projected that defense outlays would fall to $10.3 billion in 1995/96 and to $9.7 billion by 1996/97, or less than 1 1/4 percent of GDP. The reductions were to be achieved by personnel reductions of 6,700 full-time equivalent Regular Force members, of 5,200 civilians, and of 6,400 Primary Reservists; closure of two bases and four detachments and reductions in defense facilities across the country; streamlining the command structure (aimed at a one-third reduction in Headquarters expenditure; reduction in resources devoted to combat operations, including a 25 percent cut in fighter aircraft activities; and spending reductions in most other aspects of the defence programs, including operations, maintenance, and capital. Capital spending, in particular, is expected to fall by an average of $1 billion per year in the next 15 years, as a variety of infrastructure and equipment acquisition programs are to be delayed, reduced, or canceled altogether.

Defense Budget Reductions in the 1994 and 1995 Federal Budgets

(In millions of dollars)

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3. Other government operations

a. Overview and recent cost-containment initiatives

Outlays for nondefense government operations have remained a roughly constant 17 percent share of noninterest spending in recent years (see tabulation in Section 1 and Table XI -1). Personnel outlays represent roughly two-thirds of total operating expenses, and purchase of goods and services for government consumption and investment account for the rest. A large share of these outlays are directed toward general government services, including Revenue Canada and a cluster of other activities supporting and coordinating the operations of other federal organizations. However, the operating costs of natural resource-based programs and social programs also have been large.

Numerous attempts were made during the past decade to contain the federal civil service wage bill. 1/ However, until 1992 these initiatives appear to have had limited effect. The wage bill rose to about 2 3/4 percent of GDP in 1991/92, as compared to an average of about 2 1/4 percent of GDP in the previous decade. Both increases in salaries and in personnel appear to have been factors in explaining the increase in personnel costs. For example, federal employment increased by about 3 percent between 1988 and 1991 and the average real remuneration of federal employees rose by about 4 1/2 percent over the same period. 1/

Table XI-1.

Canada: Operations of the Federal Government, 1992/93

(In millions of dollars)

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Source: Department of Finance, Canada.

Includes Atomic Energy Control Board, Atomic Energy of Canada, National Energy Board, and Parks Canada.

Including Enterprise Cape Breton.

Includes the Civil Aviation Tribunal and the Transportation Safety Board (826.8 Billion).

Includes the Canadian Radio-television and Telecommunications Commission ($35 million).

Includes the Security Intelligence Service ($226.8 million).

Includes Emergency Preparedness Canada ($26.3 million), the Treasury Board ($95.0 million), other government agencies ($292.1 million), the Auditor General ($56.5 million), and other minor activities.

Measures taken from 1992 seem to have been more effective, however, and have contributed to a small decline in federal wage costs as a share of GDP (from about 2.7 percent in 1992/93 to 2.6 percent in 1993/94). Examples of cost containment measures include a freeze on staffing that was imposed in 1990/91, and the February 1991 budget’s plan to offset negotiated salary increases during 1991/92 by employment reductions, while maintaining a 3 percent cap for wage increases in the subsequent year. A wage freeze also was introduced in 1991/92, and in June 1993 strict controls on hiring into the public service were imposed. These controls were extended indefinitely, and the wage freeze was extended until 1996/97 (with strict limits on within-grade increases) as part of the February 1994 budget. 2/

Nonpersonnel costs classified among “other government operations” include current and capital costs associated with programs delivered directly by the Federal Government. Numerous initiatives aimed at limiting these budgetary outlays were of limited success up to 1992. 3/ As a result the Government committed itself in that year to a major overhaul of the public sector--the first such initiative in over a quarter of a century. Important inputs into this process was the Government’s White Paper Public Service 2000 and a Department of Finance study on the cost of government expenditure management, which called for a restructuring of the civil service aimed at improving both the quality of service and reducing unit costs. 4/

The Public Service Reform Act of December 1992 implemented many of the changes suggested in the White Paper, including mechanisms for faster redeployment of personnel, contracting out, and release of employees. The Government’s December 1992 economic statement and the February 1993 budget called for significant reductions of departmental operating costs. In June 1993 the Government undertook a consolidation and reorganization of functions among departments, reducing departments from 32 to 23, and streamlining administration and management. The February 1994 and February 1995 budgets announced further cuts in operating budgets. These more recent initiatives seem to have resulted in some progress in reducing nonpersonnel/nondefense operating and capital spending from $6.8 billion in 1993/94 to $6.3 billion in 1994/95.

b. Prospects for further savings in other government operations

While some success has been achieved with recent cost-reduction initiatives, the large cost of Canada’s public service and the pressing need for fiscal consolidation have led the Government to seek further budgetary saving via increased efficiency in the provision of existing services and through the downsizing and elimination of specific activities. 1/ In the 1993/94 budget the Government launched a major review of all aspects of government spending to be conducted under the direction of the Minister for Public Service Renewal. This “Program Review,” was intended to be a department-based assessment of all federal programs, including grants and contributions, tax expenditures, and overhead. The following set of guidelines were adopted against which each government activity was to be tested:

  • - Public interest test: Does the program area or activity serve a public interest?

  • - Role of government test: Is there a legitimate and necessary role for government in this area or activity?

  • - Federalism test: Is the current role of the Federal Government appropriate, or should the program be devolved to the provinces?

  • - Partnership test: What activities or programs should or could be transferred in whole or in part to the private or voluntary sector?

  • - Efficiency test: If the program is to continue, how could its efficiency be improved?

  • - Affordability test: Is the program affordable in light of the current fiscal situation?

The Program Review was not published, but its recommendations were reflected in the 1995/96 budget. As a result, department spending was to fall by nearly 7 percent in both 1995/96 and 1996/97. Departments were given the responsibility for determining how best to achieve these savings, but the cuts were said to be equivalent to reducing the federal civil service by about 14 percent (about 45,000 persons, including defense). Specific measures designed to reduce operating costs included: reducing the overlap and duplication of agriculture inspection and regulation; integrating the operations and fleet of the Coast Guard and the Department of Fisheries and Oceans; divesting recreational harbors to municipalities, consolidating forestry centers and offices; rationalizing and reducing government support for environmental research; commercializing weather offices and stations; commercializing the Air Navigation System and transferring ownership of airports to local authorities; reducing overlap of industrial services; rationalizing security and law enforcement systems; and rationalizing the system of food inspection.

Personnel reductions would be achieved by providing early retirement incentives for employees aged 50 or over and with 10 years of more of service. A cash-based early departure incentive program would also be put in place for three years for employees in departments designated as “most affected.” To encourage departures, the Government’s Workforce Adjustment Directive would be suspended for up to three years, so that those declining early departure incentives could be terminated after one year. The Public Sector Compensation Act would also be amended to allow persons to take unpaid leave to look for work. The cost of these initiatives was expected to be about $1.6 billion, which was treated as an accrued cost and was booked as an expenditure in 1994/95.

An Expenditure Management System (EMS) was also adopted in February 1995 to help ensure that management efficiencies were promoted. Under the EMS, departments were no longer able to access pools of central funds for new policy initiatives, but would have to fund such initiatives through existing budgets. The EMS also requires departments to submit forward-looking business plans, which would be presented to Standing Committees of the House of Commons.

References

  • Brown, D.M., “No Sense of Direction: Public/Private Compensation Differentials,” in R.G. Harris, J. Richards, D.M. Brown, and J. McCallum (eds.) Paying Our Way: The Welfare State in Hard Times (Toronto: C.D. Howe Institute, 1994).

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  • Department of Finance, Federal-Provincial Study of the Cost of Government and Expenditure Management, (May 1992).

  • Ministry of Supply and Services Canada, Public Service 2000, The Renewal of the Public Service of Canada, (1990).

  • Ministry of Supply and Services Canada, Public Service 2000, Second Annual Report to the Prime Minister on the Public Service of Canada, Clerk of the Privy Council and Secretary to the Cabinet, (1994).

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  • Richards, J. (1994) “Living Within Our Means: What Will It Take,” in R.G. Harris, J. Richards, D.M. Brown, and J. McCallum (eds.) Paying Our Way: The Welfare State in Hard Times (Toronto: C.D. Howe Institute, 1994).

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  • Trebilcock, M.J. (1994) “The Prospects for Reinventing Government,” Toronto, C.D. Howe Institute, Observation 38.

1/

Prepared by Leonardo Bartolini.

2/

Sources: Government of Canada, Public Accounts of Canada, various issues; 1994/95 Main Estimates; Statistics Canada, Public Sector Employment and Remuneration, various issues; and staff estimates.

3/

Program spending excludes debt service.

1/

With the closing of Canada’s two bases in Germany, Canada completed the withdrawal of its forces in Europe in 1993/94.

2/

This plan excluded the effects of the salary and hiring freezes. In the event, employment fell by almost 4,000 units (including military and civilians) from 1993/94 to 1994/95.

1/

General government personnel costs were roughly one third of total noninterest spending in 1990, the highest among the G-7 countries.

1/

Important changes have been recently implemented in the administration of departments’ and agencies’ operations, making historical comparisons difficult. Effective April 1, 1993, all department and agencies are held to overall operating budgets, with no Treasury Board central control on employment. These changes have also led departments and agencies to alter their procedures for measurement of employment. Civil service employment is now measured in full-time equivalent units, defined as the number of full-time employees that would be required to perform the number of hours actually worked, without reference to the type of employee used (i.e., full versus part-time, permanent versus contract).

2/

Several observers have noted that public-sector remunerations still exceeds that in the private sector, especially when account is taken of job security. Richards (1994), for instance, reviews evidence suggesting an “excess” remuneration of about 10 percent in favor of civil servants, while Brown (1994) reviews similar evidence pointing to an “excess” remuneration in the public sector of about 7 percent for men and 9 percent for women.

3/

See Department of Finance (1992), for review of these initiatives.

4/

Recommended measures included greater managers’ accountability, decentralizing personnel management, transforming many mandatory services into optional services, increasing mobility and the use of casual employment, and easing procedures for separation.

1/

Many observers (e.g., Trebilcock (1994)), have pointed to the need for an ambitious plan of contracting out or privatizing a wider array of public services, including education, prisons, and waste collection. This was expected to result not only in immediate budgetary savings but also, over time, in greater exposure to market forces and hence greater efficiency in the provision of these services.