This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 OTTAWA 002931 
 
SIPDIS 
 
SENSITIVE 
 
DEPARTMENT FOR EB/IFD, EB/OMA, WHA/EPSC, AND WHA/CAN 
TREASURY FOR STEPHEN GOOCH 
STATE PASS FEDERAL RESERVE BANK FOR CHUGH 
STATE PASS SEC FOR JACOBS 
PARIS ALSO FOR USOECD 
 
E.O. 12958: N/A 
TAGS: EFIN EAID ETRD KTFN ECON PREL CA
SUBJECT: CANADA'S DISAPPEARING BUDGET SURPLUS 
 
REF: A. OTTAWA 1960 (BUDGET BILLS PASS PARLIAMENT) 
     ¶B. OTTAWA 640 (2005-06 BUDGET) 
     ¶C. 04 OTTAWA 2779 (2003-04 SURPLUS) 
 
¶1.  (U) Introduction and summary:  Canada's 2004-05 budget 
surplus came in at C$1.6 billion (about US$ 1.36 billion), 
almost C$8 billion lower than conventional wisdom had 
expected.  The GOC attributes the discrepancy to an 
unanticipated change in accounting procedures for one-time 
expenditures and to the uncertainties of full accrual 
accounting.  In May, 2005 a Finance Canada publication 
projected a surplus of C$9.8 billion, and without the 
one-time expenditures the 2004-05 surplus would have topped 
C$10 billion. According to the Conference Board of Canada, 
the 15.1% increase in program spending is the highest since 
1974-75.  (That was also the last time Canada had a Liberal 
majority government supported by the NDP.)  The Department of 
Finance counters that, as a percent of GDP, spending is in 
line with previous years.  Strong revenue growth this year 
and the pre-payment of pending one-time charges bode well for 
the fiscal situation in 2005-06 -- and for the Liberal 
Party's ability to spend generously in the run-up to an 
election in which they hope to win a majority and a freer 
hand to govern.  Note: The GOC's Annual Financial Report and 
Fiscal Reference Tables are available on the Finance Canada 
web site at www.finance.gc.ca.  End Note; end Introduction 
and Summary. 
 
Revenues strong; expenditures stronger 
-------------------------------------- 
 
¶2. (U) Revenues were up 6.6% last year while program 
expenditures increased 15.1%.  Excluding one-time expenses, 
80% of which comprised transfers to provinces and 
territories, program spending was up 7.6%.  (Note:  Which is 
still well above inflation of around 2%.  End note.) 
Compared to estimates for 2004-05 in the February 2005 
budget, actual revenues were C$2.6 billion higher, public 
debt charges were C$0.6 billion lower, and program expenses 
were up C$4.5 billion than forecast. 
 
The unanticipated 2004-05 spending since February included 
the following items (in C$ billions): 
 
--  2.7  to finance the offshore revenue agreement signed 
February 2005 with Newfoundland and Labrador, and with Nova 
Scotia, in in one year instead of over the life of the 
agreement as initially anticipated; 
 
--  1.0  announced March 29, 2005, just before the end of the 
fiscal year, to cover immediate assistance to cattle 
producers and other farmers; 
 
--  0.8  to cover additional environmental liabilities for 
the GOC-owned Atomic Energy Canada Ltd., bringing the total 
to C$2.3 billion.  The charge for environmental liability had 
been anticipated, but its scope was unknown until near the 
end of the period. 
 
The increased spending was mitigated by one-time revenue: 
 
-- 2.6  sale of the last of the GOC's shares in the 
integrated energy firm Petro-Canada. 
 
Big, but not unprecedented 
-------------------------- 
 
¶3. (SBU) An expert at the Department of Finance tells us that 
this scope of adjustment is not unprecedented and notes that 
revenues in 2004-05 were about half the C$5 billion received 
at the end of the previous year.  The adjustment was 
exacerbated by a decision in mid-summer to change accounting 
for the offshore revenue sharing agreement, taking the full 
charge last fiscal year rather than spreading it over several 
years as originally anticipated. According to Finance, the 
Auditor General first questioned the accounting for offshore 
revenue in June, but discussions did not conclude until late 
July or early August. In response to a query, we were told 
that had the Department known of the change in booking the 
offshore revenue expenditures, they would have notified 
Parliament (implying that since the decision occurred after 
Parliament recessed, there was no way to convey the word to 
the opposition parties). 
Debt reduction 
-------------- 
 
¶4.  (U) Net federal debt, at C$499.9 billion, was 38.7% of 
GDP (down from C$529.9 billion or 68.4% of GDP in 1996-97).In 
2004-05, debt servicing costs were 17 cents per dollar of 
revenue, down from a high of 39 cents in 1990.  Finance 
estimates that the reduction in debt service has freed up 
over C$3 billion a year in interest savings. Collectively, 
the provinces and territories enjoy a fiscal surplus (boosted 
by Alberta and British Columbia), and their combined net debt 
as a share of GDP continued to decline, reaching 22.2% from 
23.8% in 2003-04. 
 
Political impact 
---------------- 
 
¶5.  (SBU) The Conservative Party finance critic blasted the 
lower-than-expected surplus as an example of "junk 
accounting" and accused the Liberal Party of cooking the 
books.  Private-sector forecasters are left scratching their 
heads at the swings and feeling somewhat exposed.  According 
to Finance, this reveals their lack of understanding of the 
"risks of accrual accounting." 
 
¶6. (SBU) Last year's surplus of C$9 billion, which was 
automatically allocated to debt repayment, exceeded forecasts 
by over C$7 billion.  Expectations (Ref C) that this year's 
surplus would be even higher amplified calls by opposition 
parties for a more transparent forecasting and greater 
flexibility in using the surplus for tax cuts or program 
spending, rather than only for debt reduction. 
 
¶7. (SBU) The sharp discrepancy between actual and estimated 
surpluses in the past two years is likely to increase calls 
from opposition parliamentarians for greater forecasting 
transparency.  Finance will respond by agreeing to more 
frequent appearances by the minister and top officials before 
the parliamentary committees and by providing more detail in 
the monthly Fiscal Monitor.  (Comment: However, cooperation 
does not seem to extend to sending word to opposition leaders 
when a major change in accounting policy has been adopted. 
End Comment.) 
 
Looking forward 
--------------- 
 
¶8. (SBU) The 2005-06 budget tabled in March (Ref B), had an 
estimated fiscal impact of C$7.4 billion (about US$6 
billion).  The NDP deal for C$4.6 billion in supplemental 
spending over 2 years  (Ref A) does not take effect until 
this fiscal year and it is not yet clear whether it will be 
split over two years or front-loaded this year.  Finance also 
flagged for us a GOC agreement with aboriginal communities 
that will lead to supplementary spending this fiscal year. 
The Finance Canada monthly Fiscal Monitor for July, 2005 
shows continued revenue growth this fiscal year and estimates 
a fiscal surplus in 2005-06 of C$7.1 billion (C$2.8 billion 
ahead of the level at this time last year).  Program expenses 
have been increasing more slowly than revenues, even with the 
additional transfers to the provinces and territories for 
health care and other payments, and public debt charges were 
lower than last year.  This should bode well for the ruling 
Liberal Party's ability to spend generously in the run-up to 
a campaign, but this year's results show the folly of 
second-guessing the budget maestros. 
 
Comment 
------- 
 
¶9.  (SBU) This budget maneuvering screams "upcoming 
election."  As Parliament resumes this week, the minority 
Liberal Party government (which currently holds 133 of 308 
seats in the lower house) will be conducting a virtual 
campaign while trying to avoid an accidental no-confidence 
vote.  That caution has led Finance Minister Ralph Goodale to 
announce that plans to reinstate corporate tax cuts deleted 
from last year's budget as part of the bargain with the NDP 
will not proceed and has slowed anticipated movement on 
announcing a policy on bank mergers. 
 
Visit Canada's Classified Web Site at 
http://www.state.sgov.gov/p/wha/ottawa 
 
WILKINS