Canada’s budget watchdog is set to issue a report on an unprecedented examination of the single biggest operating expense in the federal government — the $50-billion spent on personnel costs every year.

Parliamentary Budget Officer Jean-Denis Frechette will release the report on Tuesday. It is the first of two reports examining what many consider the “black hole” of federal spending: direct program expenses.

MPs have long complained that they have been unable to get a firm grasp on direct program expenses. These two reports are aimed at opening for scrutiny all the pieces that contribute to those costs so MPs can make better sense of how they impact the bottom line.

Whenever governments are looking to save money, the first place they turn to are operating costs, which are buried in the $130-billion pot known as direct program expenses. Program expenses are divided into two broad areas: operating costs and transfers.

According to the budget, the federal operating budget is growing to nearly $96 billion, jumping more than eight per cent more than projected in the 2017 budget, even though the number of public servants working in government has largely remained flat since the Harper government’s downsizing.

Just last week, the PBO chided the Trudeau government for giving little explanation for decreases in direct program expenses that added an extra $16 billion to the bottom line.

The PBO is planning two reports to drill into in operating costs and provide some clarity on program spending for Parliament. Tuesday’s report will provide a 10-year snapshot of the cost of personnel, as well provide a five-year forecast.

It will examine the $50-billion wage bill and all its constituent parts: salaries and wages; pension contributions; health, dental and disability benefits and all other employer costs, such as employment insurance or workers’ compensation.

A second report, expected later this month, will zero in on remaining operating costs, from contracting and consultants to technology and office accommodation.

The PBO personnel report will look at all the cost drivers, including those management can control, such as new hires, overtime, classifications and negotiated wage agreements with unions and those it can’t, such as inflation and interest rates.

The report will show that the biggest wild card for government operating costs is interest rates and the impact on the pension and benefit liabilities of federal employees.

When interest rates go down, the valuation of pension and benefit liabilities go up and similarly when rates increase these costs go down.

The previous Conservative government, for example, took aim at operating costs as its main restraint strategy. The Harper government froze operating budgets, whacked accumulated severance pay benefits, health benefits, pensions and targeted sick leave for savings.

About a third of the $15 billion in savings the Conservatives had booked for 2015-16 came from public-service compensation — $3 billion of that from forcing departments to absorb wage increases; $1 billion from making public servants and retirees pay a bigger share of their health benefits and $900 million from abolishing unused sick leave. (The Liberals reversed those sick leave savings.)

But the Conservatives faced persistently low interest rates, which drove up the costs of pensions and benefits by billions of dollars – more than what they shaved off by cutting jobs and shutting down programs.

With interest rates on the rise, the headwinds that hampered the Conservatives are now poised to become a tailwind that could give the Liberals all kinds of extra fiscal room.

The government faces pension and benefit liabilities totalling more $300 billion. The $80 billion liability for disability insurance for Canada’s military, RCMP and public servants are the most sensitive to changing interest rates because of the accounting method the government uses.

These liabilities are so large that even the slightest change in interest rates can have a major impact on the government’s books. They are also out of management’s control and will affect the financial decisions of whatever government is elected in the 2019.

Auditor-General Michael Ferguson has warned about these liabilities for years and urged the government to update the way it uses interest rates when determining estimates for long-term liabilities.

Ferguson, who audits the government’s financial statements, noted in his observations of the Public Accounts that a one per cent decrease in the discount rate used to calculate future pension obligations would increase the government’s liability by $7.7 billion.

The government sets discount rates that are used to estimate the value, in today’s dollars, of long-term pension and benefit liabilities. The government has been examining its methodology and is expected to announce a new way to determine its discount rates for 2017-2018.

The PBO’s two studies on operating costs will be central to the fiscal projections that PBO will make as part of its expanded mandate to cost political party platforms for elections.

Within three months of the election date, the PBO must produce a five-year economic and fiscal projection as a common baseline for all the parties.

The last major review of compensation was a 2006 landmark study by former senior bureaucrat James Lahey. Former PBO Kevin Page examined the wage bill in a 2012 report and found the average public servant cost $114,100 with pensions and benefits, and, at that rate, could hit nearly $130,000 by 2015.

The Lahey report tracked a 20-year boom and bust cycle in federal compensation. Government seesawed between healthy raises during the good times when surpluses were rolling in and wage freezes, job cuts and layoffs during the bad times of creeping deficits. It was a pattern that was predicted to continue unless the government took steps to better manage the drivers influencing pay.