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Public Sector Financial Management

Ryerson UniversityNovember 18, 2008

Steve Orsini

Assistant Deputy Minister

Office of the Budget and Taxation

The Making of theOntario Budget

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Table of Contents

Overview Budget Decision-Making Stakeholder Engagement Fiscal Plan Tabling the Budget Budget Secrecy

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Budgets…….from the past

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1874 - Hand written Budgets!

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Budgets………..of Today

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Overview The Budget presents the government's multi-

year economic and fiscal plan:– Updates the province’s economic outlook;– Announces expected revenue and program

expenditure intentions; and– Outlines the government’s borrowing plan

Developing the Budget is a year-long process that reflects input from several sources, including:– Ontario Legislature and committees (e.g. Standing

Committee on Finance and Economic Affairs) – Broader public sector entities, community and business

leaders, government stakeholders and the public– Government ministries through the Results-based

Planning process, and– Inter-governmental discussions

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Overview (Cont’d) The Budget is an essential element of the government’s fiscal

transparency and accountability commitment to Ontarians Fiscal Transparency and Accountability Act, 2004 (FTAA) outlines

the following principles that govern Ontario’s fiscal planning and budgeting process:

– Responsibility – should be based on cautious assumptions– Flexibility – should be able to respond to changing circumstances– Equity – should recognize impact on different groups and on future

generations– Transparency – should be clearly articulated and information about it

should be readily available to the public

• Prior to every election, FTAA also requires the release of a pre-election report about Ontario’s finances, to be reviewed by the Auditor General. The pre-election report (drawn primarily from the Budget) is required to include:

– macroeconomic forecasts and assumptions– an estimate of Ontario’s revenues and expenses– details about the reserve required to provide for unexpected adverse

changes in revenues and expenses, and– information about the ratio of provincial debt to Ontario’s gross

domestic product

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Overview (Cont’d) The Minister of Finance, in consultation with the Premier,

determines the direction and content of the Budget The Minister of Finance prepares the fiscal plan of the

Province for the current and at least the next two fiscal years including forecasts of:

– Economic growth and revenue

– Program expenditures and interest on debt expense

– Size of the reserve The expense forecast is built using the expense plans

from all government ministries, agencies and broader public sector enterprises (hospitals, colleges and school boards)

The government’s platform, Speech from the Throne and key policy directions help shape the strategic themes for the Budget

Taken together, these products form the core of the Budget for the province

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Stakeholder Engagement

The Standing Committee on Finance and Economic Affairs (SCFEA) is empowered to consider and report to the Legislative Assembly its observations, opinions and recommendations on the fiscal and economic policies of the province

SCFEA assists in the pre-Budget consultation process and provides a report to the Minister outlining its findings from its public consultations, which contributes to the development of the Budget

Minister of Finance typically appears before SCFEA as well as conducts his/her own province-wide pre-budget consultations (PBCs)

SCFEA tables its report in the Legislature, usually in mid-February to early March

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Stakeholder Engagement (Cont’d) The Minister’s Pre-Budget Consultations (PBCs) provide an

opportunity for individuals, organizations and various stakeholders across the province to meet with the Minister to discuss a variety of issues, including expenditure and tax policies and programs

– Some questions that the Minister has put forward to help solicit input for the Budget include (see page 73 of the 2008 Ontario Economic Outlook and Fiscal Review):

• During this period of global economic uncertainty and fiscal challenges, what should the Ontario Government’s top priorities be for the 2009 Budget?

• What further steps can the Ontario Government take to promote economic growth and job creation?

The consultations also help generate broad public awareness of the key issues the Government is considering as part of the Budget

In 2007-08, more than 750 individuals or groups attended 14 PBCs held across the province over several weeks

Ontarians also have a variety of means to provide their input, including e-mail, fax, telephone, letters and new on-line submissions and questionnaires

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Fiscal Plan The Budget presents a comprehensive overview of the

government’s fiscal plan: minimum of current year and two future years

FTAA imposes certain requirements on Budget making, including requirements for: – Balanced budgets and/or recovery plans to achieve

balance;– Multi-year fiscal plan including:

• Estimates of Ontario’s revenues and expenses;• Macroeconomic assumptions;• Details of the reserve, to provide for unexpected

adverse changes in revenue and expense;• A comprehensive discussion of risks that might

impact the revenue and expense outlook; and• Information about the Debt to GDP Ratio

– Pre-budget consultations; and– Role of the Economic Forecasting Council

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Economic and Revenue Forecasting

• The growth of the economy provides the underlying foundation for the government’s fiscal plan – increased economic growth provides the government greater flexibility to invest in priority areas, reduce taxes or pay down the accumulated deficit

• Ontario’s real GDP planning growth outlook is normally slightly below the private sector average, resulting in an economic and revenue plan that is prudent, reasonable and accountable

• Ontario’s economic forecast is based on a combination of private-sector forecasts, advice from the Economic Forecasting Council, macro-econometric models and professional judgment in interpreting model results and external conditions

• The revenue outlook is based on the best use of available information, including the Ministry of Finance economic outlook and policy decisions to date

• Taxation revenue forecasting is based largely on revenue receipts to date, the latest economic forecasts and incorporates tax policy decisions (e.g., tax changes)

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Global Economic Climate• The liquidity crisis in financial markets has undermined

business and consumer confidence around the world– Liquidity challenges in the investment and banking sectors– Equity markets have experienced sharp price declines– Central banks have lowered interest rates

• Governments around the world are forced to re-examine their expenditures and adjust their growth projections

• The Ontario government has lowered its projection for 2008 real GDP growth to 0.1 per cent from the 1.1 per cent released in the 2008 Budget last March. - Short-term outlook is heavily influenced by external factors

such as oil prices, the Canadian dollar exchange rate, interest rates, U.S. economic growth and global financial market turmoil

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Per Cent

1.4

2.52.7

2.5

2.2

0.7

0.1

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2003 2004 2005 2006 2007 2008e 2009p

Ontario Real GDP Growth

* Based on information as of October 16, 2008 e = estimate; p = projection.Source: 2008 Ontario Economic Outlook and Fiscal Review, October 22, 2008, pg 23.

Projection*

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Key Economic IndicatorsOntario’s Economy*:

Projected Real GDP Growth, 2008 0.1%

Avg. Private-Sector Forecasts for Real GDP Growth, 2008 0.1%

Avg. Private-Sector Forecasts for Real GDP Growth, 2009 0.7%

Jobs since October 2003 Approx500,000

Jobs Created from January to September 2008 104,100

Real GDP (annual average between 2003 and 2007) 2.3%

Real Disposable Income (annual average between 2003 and 2007)

1.8%

Real Machinery and Equipment Investment (annual average between 2003 and 2007)

9.0%

Source: 2008 Ontario Economic Outlook and Fiscal Review, October 22, 2008, pages 23-30.* Based on information as of October 16, 2008

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Expenditure Planning Process

• Ministry Results-based Plans (RbP) are subject to expense limits provided by the previous year’s Budget

• In preparing for the next Budget, Ministries submit multi-year RbPs to Treasury Board/Management Board of Cabinet

• Ministries are guided through the RbP process through the RbP Guidelines (which reflect Cabinet direction)

• Policy direction and key priorities are set by Cabinet

• Once RbPs are submitted, Treasury Board Office, in conjunction with Ministry of Energy and Infrastructure and Cabinet Office, review and comment on the plans

• Treasury Board/Management Board make RbP decisions based on expense limits developed through the budget process

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Program Expenditure Planning Cycle

vvvv

Budget*Budget*

Economic Outlook & Fiscal Review Q2Economic Outlook & Fiscal Review Q2

Q1 FinancesQ1 Finances

Public AccountsPublic Accounts

Q3 FinancesQ3 Finances

Summer

Winter Fall

Q1 Q2

Q3Q4

Results-based Plans Reviewed & Approved by

Treasury Board/Management Board of Cabinet (TB/MBC) -

Operating and Capital

Results-based Plans Reviewed & Approved by

Treasury Board/Management Board of Cabinet (TB/MBC) -

Operating and Capital

Results-Based Plans Submitted

Printed Estimates**Printed Estimates**

Budget Consultations

Spring

Ongoing - Ministries report on a quarterly basis to Treasury Board/Management Board of Cabinet

*Treasury Board/ Management Board of Cabinet approve expense portions of the Budget in the morning on the day of the Budget. 

** Tabled within 12 sitting days of the Budget.

Strategic PlanPolicy Approval of

Overall Direction to Ministries

Supply Act for the previous fiscal year

and the Interim Appropriation Act for the coming fiscal year

Supply Act for the previous fiscal year

and the Interim Appropriation Act for the coming fiscal year

Ministries’ Results-based Plan Briefing Books for new

fiscal year

Ministries’ Results-based Plan Briefing Books for new

fiscal year

Ministries’ Results Reporting to TB/MBC

on previous year

Ministries’ Results Reporting to TB/MBC

on previous year

January

July

April

October

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Debt and Borrowing Plan• Interest on debt (IOD) makes up a large, non-discretionary

component of total expense (i.e., 10% of total expenditures)

• Three major components of IOD:– Public Debt Interest (e.g., accumulated deficits, capital

borrowing)– Ontario Electricity Financial Corporation Interest

Expense – Elimination and consolidation adjustments (primarily

sourced from Provincial Controller)

• IOD Forecast– Conservative assumptions protect against adverse

conditions in capital markets

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Risk Mitigation and Prudence

• The fiscal plan includes key elements of prudence each year to help protect the government’s overall fiscal objectives and the achievement of fiscal targets including:

– Prudent economic assumptions

– A reserve to protect against adverse changes in the Province’s revenue, expense or economic performance

– Contingency Funds to mitigate against expense risks

– Risk Impact Table (sensitivity analysis)

– Expenditure Management

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Expenditure Management• Over 2004-05 to 2007-08, the government has achieved

$806 million of reportable savings, exceeding the target of $750 million.

– Savings were made through possible streamlined purchasing processes, reduced administrative costs, reduced energy and accommodation, improved use of IT, and better harmonizing and coordinating government operations.

• The government continues to implement efficiencies across the broader public sector through such initiatives as OntarioBuys, a supply-chain management program, that is expected to save up to $100 million across the hospital and education sectors.

• The government is taking further action to save $108 million in 2008-09 by:

– Delaying the implementation of and slowing down some new spending;– Restraining internal government expenditures including reducing

government staff travel costs and government use of management and IT consultants; and

– Requiring ministries to focus on the highest-priority programs during their 2009-10 planning process.

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Source: 2008 Ontario Economic Outlook and Fiscal Review, October 22, 2008, pg 3.

(6.0)

(4.0)

(2.0)

0.0

2.0

2003–04 2004–05 2005–06 2006–07 2007–08 2008-09

Fiscal Balance ($ Billions)

(5.5)

(1.6)

0.3 0.6

2.3

Actual

Ontario’s Fiscal Performance

Current Outlook

(0.5)

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Financial Reporting Requirements

• The Public Sector Accounting Board (PSAB) of the Canadian Institute of Chartered Accountants (CICA) is the body responsible for setting accounting standards for all levels of government

• PSAB accounting requires accrual and consolidation reporting in the government’s financial statements– To ensure consistency and public understanding

between Budget and Public Accounts (actual results), the Budget presents its financial information in a similar manner as Public Accounts

• Accrual transactions: recorded when events giving rise to their recognition occurred, not when cash is paid or received.– Revenues: recognized when earned– Expenses: recognized when incurred

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Reporting Entity Consolidations Governments carry out their policies and deliver

services through various government organizations

The purpose of consolidation is to provide a complete picture of the full nature and extent of the financial affairs and resources which the government controls

Ontario’s Budget and Consolidated Financial Statements currently include: Ministries

Government business enterprises (e.g., Ontario Lottery and Gaming Cooperation)

Other government organizations (e.g., GO Transit)

BPS sectors (hospitals, school boards and colleges)

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TP Accountability Guidelines

• Transfer payment (TP) recipients are responsible for delivering provincially funded services and are accountable to ministries and classified agencies for the funds they receive and the results achieved

• Transfer payments may only be provided:

– according to program criteria approved by Treasury Board / Management Board of Cabinet;

– in amounts not exceeding requirements for the fulfillment of approved program objectives; and

– in accordance with commitments made in ministry results-based plans

• Risk assessment is used in the design of transfer payment programs, the selection of eligible transfer payment recipients to deliver programs, and the choice of appropriate accountability requirements for transfer payment recipients

• Value for money is expected in the expenditure of government funds

• Specific reporting requirements must be in proportion to the needs of the ministry, the capacity of the recipient, and the risks related to the program

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Investing in Ontario Act, 2008

• Previously, all year-end surpluses went toward the reduction of the accumulated financial deficit regardless of the size of the surplus

• In 2008, the government introduced the Investing in Ontario Act, 2008.

• The Act permits the use of a portion of unanticipated year-end surpluses to address priority public needs, such as municipal infrastructure, as well as to reduce the province’s accumulated deficit

• In the 2007-08 regulation under the act, the government designated municipalities as the recipient of any funding from the Investing in Ontario Act, 2008. The surplus for the fiscal year ending March 31, 2008 was $0.6 billion after $1.1 billion was provided to municipalities under the regulation.

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Net Debt-to-GDP

18

20

22

24

26

28

30

32

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1998–99 2000–01 2002–03 2004–05 2006–07 2008–09

Actual Current Outlook

Per Cent

32.9

29.1

27.3

24.425.2

26.5

24.5

Net Debt = difference between total liabilities and total financial assets

Source: 2008 Ontario Economic Outlook and Fiscal Review, October 22, 2008, pg 44.

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Tabling the Budget

• The Budget is tabled in the Legislative Assembly of Ontario and presented with the Budget Speech

• The Budget Speech and its papers become public documents as soon as the Budget is tabled with the Clerk of the Legislative Assembly

• The Minister of Finance begins the Budget Speech at that point, typically at 4:00 after the markets close

• Any statutory amendments required to implement the initiatives contained in the Budget may be introduced as a Bill in the Legislative Assembly on the same day that the budget is tabled or may be included in a bill introduced on a later day

• Like any other provincial legislation involving the raising of revenues, a Budget bill must be accompanied by a Royal recommendation, approved by the Legislative Assembly and receive Royal Asset in order to take effect. It is not uncommon for Budget bills to be made effective as of the date of the Budget

• As a statement of the Province’s economic and fiscal position and outlook, as well as the Government’s key policy priorities, the budget is often a reference point for public policy discussions in the Legislature

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Tabling the Budget (Cont’d)• The Printed Estimates are tabled annually in the Legislative

Assembly of Ontario no later than 12 sitting days after the presentation of the Budget

• The Estimates, known formally as the “Expenditure Estimates,” set out details of the operating and capital spending requirements of ministries and constitute the Government’s annual formal request for approval of the expenditures involved

• The Estimates are the basis for the legal spending authority for each ministry provided in the Supply Act

• Upon tabling, the Printed Estimates are referred to the Standing Committee on Estimates

• If no budget has been presented by the first sitting day following Victoria Day, the main Estimates shall be tabled at the next available sitting day

• Upon Tabling, the Estimates shall be deemed to be referred to the Standing Committee on Estimates

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Budget Secrecy

• Ministry of Finance develops the Budget under a veil of “Budget Secrecy”

• Budget secrecy is both a political and parliamentary tradition, inherited from the British parliamentary system

• Historically, ministers have, in other jurisdictions, resigned as the result of Budget leaks

• The purpose of Budget secrecy is to protect the integrity of financial markets

– Ensures no disruption to the marketplace or unfair access to market information as all information is disclosed at the same time

– Ensures individuals are unable to profit from Budget information at the expense of others