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Recently, a lot of people have been accusing the Harper government of forcing departments and agencies to spend less than the sums appropriated for them by Parliament in order to meet its deficit targets.

The issue only really exploded last week with news that Veterans Affairs failed to spend — or “lapsed” — $1.1 billion appropriated since 2006, about $140 million per year. The lapse at Veterans ranged from a high of $270 million in 2006-07 to $16 million in 2012-13. In 2013-14, the department lapsed $167 million, of which about $100 million was due to lower spending under various transfer programs.

So what does it mean when a department “lapses” — and what does it tell us about government spending?

Government departments and agencies need parliamentary approval to spend any money. That approval is obtained in one of two forms. First, certain programs, known as statutory programs, are given ongoing parliamentary approval through the legislation establishing the programs. For those programs, funding is automatic; departments don’t have to go back to Parliament annually for renewed funding, unless the parameters of the program change. Statutory programs include, among other things, elderly benefits, employment insurance benefits, most major transfers to the provinces and territories, and public debt charges. They make up about 60 per cent of total government spending.

The second type of spending is “voted” spending. Programs that run on voted funds need Parliament’s approval to spend any money at all. Government departments and agencies are appropriated funds annually by Parliament through the Main and Supplementary Estimates process. If what they’re given is more than what they actually spend, that’s a lapse.

There are several reasons why a departments or agency might fail to spend every dime Parliament gives them. For starters, it’s very easy to tip over the line; departments and agencies that exceed their appropriations get hit with penalties on the following year’s appropriations. So they tend to act very cautiously — and inevitably they end up spending less. That’s just prudent financial management.

Second, Treasury Board guidelines allow departments and agencies to carry forward a certain portion of appropriations into the subsequent fiscal year. That’s also good spending management: It short-circuits the old habit of ramping up a department’s spending at the end of the fiscal year. Some of what isn’t spent this year can be carried forward and applied to the department’s spending next year. There’s a catch: The money must be spent during a certain timeframe, or it’s frozen by the Treasury Board Secretariat and is lost to the department.

Appropriations in recent years have not provided an accurate accounting of how much departments and agencies would be allowed to spend during the course of the year. In effect, Parliament has been forced to approve spending estimates which the government has no intention of obeying.

A third reason behind lapses tends to affect new programs: Their take-up and actual costs sometimes turn out to be lower than the department expected. Delays in signing contracts, slowdowns due to labour disputes, bad weather — any number of factors can lead to a lapse. (It’s also not unusual for a government to publicize a high price tag to shore up a program’s political credibility when it’s first announced.)

Finally, appropriations are rarely, if ever, adjusted downwards. In recent years, the Main Estimates have been tabled before the budget. Recent budgets have contained expenditure restraint measures which were not reflected in the original Main Estimates. And Supplementary Estimates, tabled during the course of the year, are not adjusted to incorporate new restraint measures.

As a result, appropriations in recent years have not provided an accurate accounting of how much departments and agencies would be allowed to spend during the course of the year. In effect, Parliament has been forced to approve spending estimates which the government has no intention of obeying.

The Public Accounts of Canada shows a comparison of the appropriations approved by Parliament during the course of the fiscal year to actual spending for each department and agency, and the resulting lapse. Over the period 2003-04 to 2008-09, the lapse averaged about $6 billion per year. However, over the period 2009-10 to 2012-13, it increased significantly — averaging about $10 billion per year — primarily due to the stimulus programs introduced as part of the Economic Action Plan.

This increase in the lapse was not unexpected. During this period, the federal government significantly increased spending, primarily through the temporary stimulus measures in the Economic Action Plan. Much of the increase in the lapse was the result of delays in signing contracts and starting infrastructure projects. For example, the various infrastructure programs administrated by the Office of Infrastructure Canada lapsed almost $3 billion in 2010-11 — nearly $1.8 billion in 2011-12 and nearly $1.6 billion in 2012-13.

When the stimulus programs ended, the lapses got smaller. In 2013-14, the lapse amounted to $7.3 billion, which is in line with what we saw prior to 2008. As a percentage of total voted spending, it amounted to 8.4 per cent — again, much closer to the norm.

The 2013-14 lapse was concentrated in four departments: Indian Affairs and Northern Development ($0.7 billion, primarily due to delays in claims settlements); National Defence ($1.0 billion, primarily to the reprofiling of capital spending as announced in the 2014 Budget); Office of Infrastructure Canada ($0.7 billion, due to delays in signing contracts); and Treasury Board ($1.5 billion).

That last figure includes a $750 million Contingency Reserve, to manage short-term emergencies during the course of the year prior to receiving official approval from Parliament. Once that approval is received, the fund is reimbursed. As such, this fund is expected to lapse completely at the end of the year. The remainder primarily represents amounts approved for employee benefits and capital carry-forwards, which were not required during the year.

The lapse in spending at Veteran Affairs reflects government operating procedures, which have been in place since before 2006. So no, there’s no evidence in these numbers that the Harper government has been forcing departments and agencies to spend below their appropriations. Lapses are just a side-effect of the process.

Scott Clark is president of C.S. Clark Consulting. Together with Peter DeVries he writes the public policy blog 3DPolicy. Prior to that he held a number of senior positions in the Canadian government dealing with both domestic and international policy issues, including deputy minister of finance and senior adviser to the prime minister. He has an honours BA in economics and mathematics from Queen’s University and a PhD in economics from the University of California at Berkeley.

Peter DeVries is a consultant in fiscal policy and public management issues, primarily on an international basis. From 1984 to 2005, he held a number of senior positions in the Department of Finance, including director of the Fiscal Policy Division, responsible for overall preparation of the federal budget. Mr. DeVries holds an MA in economics from McMaster University.

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