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2006 November Report of the Auditor General of Canada Chapter 1—Expenditure Management System at the Government Centre
2006 November Report of the Auditor General of Canada
Chapter 1—Expenditure Management System at the Government Centre
1.1—The average percentage of Supplementary Estimates to total Estimates more than doubled when the budget went into surplus
1.2—An example of how departmental reference levels for ongoing programs are updated from year to year
What we examined
The Treasury Board Secretariat, the Department of Finance, and the Privy Council Office ("central agencies" of the federal government) have key roles and responsibilities in the government's Expenditure Management System (EMS). These include providing Cabinet with information to support spending allocation decisions and monitoring spending to ensure that it complies with authority and achieves the intended results. We examined the processes and procedures used by the central agencies to carry out their roles in the management of government spending. The main focus of the audit was the Treasury Board Secretariat, given its central role in the overall management of government resources.
However, we could not fully audit how the Treasury Board Secretariat reviews and challenges new spending proposals submitted to the Treasury Board. The Secretariat denied us access to the information and analysis it collects and prepares, citing Cabinet confidence of a type that cannot be disclosed to us. The government has effectively imposed a limitation on the scope of the Auditor General's examination.
Why it's important
The EMS is at the heart of government operations. The processes and procedures by which the central agencies of government support Cabinet in allocating and managing government spending are key components of the EMS. They are designed to help align resources with priorities, oversee spending, and establish the policies that departments will follow to manage and deliver their programs.
A sound and effective system for managing spending is central to the government's ability to carry out its fiscal responsibilities, fund its programs, control spending, and report financial and performance information to Parliament and the public. A system that works well promotes efficient, responsive, and accountable government. Without a good system, nothing that individual departments and agencies can do will result in sound overall management of government spending.
What we found
- Spending levels for existing programs and for new spending initiatives are approved on two separate tracks, making comparisons difficult. Spending on ongoing programs normally continues as a matter of course; new spending proposals are ranked among themselves without reference to existing programs. As a result, potential trade-offs and reallocation of resources between existing and new programs are not normally considered, except through ad hoc reviews of programs.
- The annual update of reference spending levels for ongoing programs is primarily a technical exercise that incorporates new spending approvals and adjustments for certain cost changes. It is not designed to review whether existing programs are still relevant, efficient, and effective.
- Under the current process, in effect since the late 1990s, departments may submit for Cabinet approval their proposals for new spending without specifying how the spending will be funded or put into effect. Cabinet committees therefore often approve spending initiatives without having this information before them. It is the Prime Minister and the Minister of Finance who subsequently decide on the funding of those initiatives. Details on program design and implementation are decided at the Treasury Board submission stage. The opportunity to affect spending levels at that stage is limited, however, because allocation decisions have already been made.
- The Expenditure Management System is not fully integrated with performance results. The current EMS does not require that departments submit data to demonstrate that they have used their funding effectively. The Treasury Board Secretariat has a limited capacity to monitor departments' compliance with the conditions and allotments imposed by the Treasury Board.
The government has responded. The Treasury Board Secretariat, the Department of Finance, and the Privy Council Office are in general agreement with our recommendations. Their detailed response follows each recommendation throughout the chapter. The government's overall response, included at the end of the chapter, indicates that the findings are generally consistent with its view of the present Expenditure Management System.
Role of central agencies in the Expenditure Management System
1.1 Canada's central budgeting function is carried out by three central agencies: the Treasury Board Secretariat, the Department of Finance, and the Privy Council Office. The Treasury Board Secretariat plays a key role in managing government expenditures after Cabinet approves the allocation of funds. The other two are the key agencies involved in setting policy and spending priorities. The Department of Finance is mainly responsible for ensuring the integrity of Canada's finances and the Privy Council Office is responsible for ensuring that the allocation of resources is in line with the government's priorities.
1.2 Role of Treasury Board Secretariat. The Secretariat's role is to give the Treasury Board advice and support as it approves spending and oversees the financial management of departments and agencies. Specifically, the Secretariat reviews spending proposals and makes recommendations on the funding levels required to run government programs and meet government objectives. In addition, the Secretariat monitors government programs and advises the Board on whether the plans to deliver the programs are appropriate.
1.3 Role of the Department of Finance. As described in the Overview, the Department of Finance establishes the government's fiscal framework, which forecasts expenditure and revenue. The Department is involved in many expenditure management functions, including
- advising the Minister of Finance on overall spending priorities;
- reviewing proposals that departments and agencies bring before Cabinet committees to assess their fiscal impact, and to determine whether they are consistent with broad government objectives and how they will help improve economic growth and productivity;
- working with other central agencies and advising departments and agencies on their proposals; and
- ensuring that Cabinet ministers have adequate information on the comparative costs of proposals and their possible social or economic impact.
1.4 Role of the Privy Council Office. The Privy Council Office works closely with departments and agencies, the Prime Minister's Office, the Treasury Board Secretariat, and the Department of Finance to ensure that new proposals comply with the government's overall objectives and policies and to ensure that those that may be affected are consulted. The Privy Council Office also reviews new spending initiatives to determine whether policy proposals are sound, and cost estimates are reasonable. Once Cabinet reaches a decision, the Privy Council Office is responsible for ensuring that the departments and agencies are informed of the decision.
1.5 Expenditure Management System review. While we were conducting our audit, the government announced, in its May 2006 budget, that it was reviewing the Expenditure Management System. This review was led by the President of the Treasury Board, and a report on a new approach was scheduled to be published by the fall of 2006.
1.6 The budget reported that the new approach to manage expenditures will respect the following principles:
- Government programs need to focus on results and value for money.
- Government programs must be consistent with federal responsibilities.
- Government programs that no longer serve the purpose for which they were created need to be eliminated.
Focus of the audit
1.7 We focused on the procedures that the central agencies use to support funding decisions and to monitor spending. We wanted to assess whether the central agencies' current Expenditure Management Framework is appropriately designed and implemented to support decisions made about the allocation and reallocation of resources and to provide effective oversight of expenditures.
1.8 We attempted to review the processes and procedures that the central agencies (primarily the Treasury Board Secretariat, but also the Department of Finance and the Privy Council Office) follow to give Cabinet the information it needs to make decisions on the allocation of funds and management of government spending.
1.9 We intended to include four areas of the expenditure management in our review:
- review of reference levels,
- assessment of new or enriched spending proposals,
- control and oversight of expenditures, and
- alignment of funding commitments and their timing with actual funding requirements.
1.10 We were unable to fully determine how the Treasury Board Secretariat reviews and challenges new spending proposals. This is because the Secretariat, citing Cabinet confidence of a type that cannot be disclosed to us, denied us access to the information and analysis it collects and prepares.
1.11 The Auditor's General reporting obligations are set out in section 7 of the Auditor General Act. Under section 13 of the Act, we have a right of access to all the information and explanations necessary to fulfill these obligations. We are required to report to Parliament when we do not receive all the information and explanations we require. By denying us access to the documents we need, the government has effectively imposed a limitation on our audit scope that could diminish Parliament's fundamental role of holding the government to account. This could be viewed as an infringement of the privileges of the House of Commons. However, only the House itself can determine whether such a breach has occurred.
1.12 More details on our audit objectives, scope, approach, and criteria are in About the Audit at the end of this chapter.
Observations and Recommendations
Expenditure management during times of budget surpluses
The Expenditure Management System has become less effective since the budget went into surplus
1.13 As mentioned in the Overview, a system set up when resources are limited does not always work well when there is a budget surplus. The current Expenditure Management System was designed in the mid-1990s when the government was trying to control its spending to deal with the budget deficit. Departments and agencies had to operate in a fiscal environment that restricted new funding as much as possible.
1.14 The Expenditure Management System was designed to include a strong review and challenge component and, if possible, to get departments and agencies to reallocate money from existing programs to new programs. When surpluses began to accumulate, the pressure to reallocate resources lessened.
1.15 Since 1997, the availability of resources has led to more incremental budgeting—increasing departmental budgets each year to respond to new demands rather than reallocating from existing budgets. These decisions on spending increases are often made too late in the budget cycle to be included in the Main Estimates.
1.16 To be included in the Main Estimates for the following fiscal year, spending decisions must normally be made before November. Therefore, unless they are submitted to Treasury Board much earlier, decisions announced in the February Budget cannot be incorporated in the Main Estimates and have to be approved through Supplementary Estimates or specific legislation.
1.17 Since the federal budget went from a deficit to a surplus, the reliance on Supplementary Estimates to seek parliamentary approval of spending has increased significantly. For example, between 1989–90 and 1996–97, years in which there were deficits, Supplementary Estimates made up an average 4.5 percent of the total Estimates submitted to Parliament. Between 1997–98 and 2005–06, years in which there were surpluses, that percentage more than doubled to 10.4 percent (Exhibit 1.1).
Funding for existing programs
The Treasury Board Secretariat annually updates funding for existing programs, without a systematic review
1.18 Every year, the Treasury Board Secretariat updates funding levels totalling tens of billions of dollars for departments and agencies. These levels forecast the direct spending that the Treasury Board will approve, and Parliament will appropriate.
1.19 As described in the Overview, departments and agencies make a Treasury Board submission each year, asking the Treasury Board to approve their reference levels through the Annual Reference Level Update (ARLU) process. The Treasury Board Secretariat and the departments review the funds that the Treasury Board approved in the previous year and establish reference levels for the next fiscal year and the two following planning years. The Department of Finance updates the forecasted public debt charges and statutory program expenditures for the ARLU process.
1.20 It is important to note that the ARLU process is not designed to consider past performance and results of programs. Reviews and evaluations do take place on occasion outside the ARLU process, but performance information is not integrated with the regular annual process used to renew spending for ongoing programs. Each year, the Treasury Board Secretariat recommends that the Treasury Board approve ongoing funding for programs, without assessing whether they remain effective and relevant, or whether they still represent value-for-money.
1.21 For example, the Treasury Board approved approximately $64 billion for 2004–05 and $66 billion for 2005–06 in "Direct Program Spending" (funding of existing programs that is approved annually by Parliament). Little program information was available at the government centre to provide assurance that these programs remained relevant, effective, and efficient.
1.22 Occasionally, program funding will be linked to performance and results. For example, the Secretariat will consider past performance when it decides whether to recommend that the Treasury Board renew funding for a program whose funding commitment is about to end. There is also a requirement that grants and contributions programs be reviewed every five years.
1.23 The ARLU process is a technical exercise that updates the reference levels and is not a mechanism for departments to request new funding. Reference levels for ongoing programs of departments or agencies are updated from year to year. Exhibit 1.2 shows how approved increases to reference levels of ongoing programs may accumulate as part of the reference levels for future years—it is a hypothetical example, not based on an actual department. Reference levels may also decrease.
1.24 Under the existing Expenditure Management System, there is no comprehensive or systematic review to assess the effectiveness or relevance of ongoing programs. Efforts to reallocate resources are linked primarily to ad hoc expenditure reviews, which may take place several years apart. In recent years, there have been a number of government-wide exercises to reallocate and cut expenditures, including
- the 1994 Program Review,
- the 2003 initiative to reallocate $1 billion,
- work by the Expenditure Review Committee in 2004 that reported prospective savings of $11 billion, and
- the $1-billion review announced in the 2006 Budget.
1.25 Because demands for resources are constantly evolving, programs need to be reviewed on a regular basis. The central agencies need these reviews to assess whether spending and shifting priorities remain aligned, and whether the programs still represent value for money. For information about the expenditure management practices that some other public sector jurisdictions use, see Appendix A.
1.26 Considering the Secretariat's stewardship responsibilities, the large amount of spending on programs, and the importance of using public funds effectively, the Secretariat needs better information on program results and performance. Such data would facilitate the review of reference levels for ongoing programs and help identify programs that are not producing the intended results.
1.27 Recommendation. The central agencies (the Treasury Board Secretariat, the Privy Council Office, and the Department of Finance) should ensure that ongoing programs and reference levels are reviewed systematically to assess whether these programs and their funding remain relevant, and whether they still represent value-for-money.
Central agencies' response. Designing and implementing a process of systematic review of existing programs is one of the priority areas of concern of the government. The government has committed to the following:
- programs should focus on results and value-for-money,
- programs must be consistent with federal responsibilities, and
- programs that no longer serve the purpose for which they were created should be eliminated.
The Secretariat lacks necessary financial and performance information to perform its expenditure oversight
1.28 Expenditure oversight and control are designed to provide reasonable assurance that resources are used efficiently and effectively, in compliance with authority, and that the expected results are achieved. To perform its expenditure oversight, the Secretariat must have access to timely, comprehensive, and reliable information on program costs and performance. Currently, the information available to the Secretariat, and the other central agencies, is weak, especially information on how effective the programs are.
1.29 Monitoring existing programs for their cost and their effectiveness is a standard requirement in government. However, the Expenditure Management System does not require that departments and agencies submit performance data to demonstrate that they have used their funding effectively. This gap in information exists even though the Secretariat is currently modernizing the program evaluation policy and uses a considerable number of resources and effort to help departments and agencies evaluate the performance of their activities.
1.30 As the Treasury Board Secretariat noted in its recent Review of the Responsibilities and Accountabilities of Ministers and Senior Officials, the information management systems and data collection processes are not serving the Treasury Board and the Secretariat well, as they perform their oversight role. The Secretariat's program analysts perform most of the oversight and rely on limited information provided by departments and agencies.
1.31 To perform its expenditure oversight responsibilities, the Treasury Board Secretariat needs to have access to and needs to use timely, comprehensive, and reliable financial and performance information. The Expenditure Management System does not use performance reviews as evidence and does not give the Secretariat the program information that it needs to identify possible problems.
1.32 The Treasury Board Secretariat has recently introduced the Management, Resources, and Results Structure (MRRS) policy and is implementing a new Expenditure Management Information System (EMIS). The EMIS is a government-wide information system that is designed to improve the expenditure decision-making process. The MRRS policy is a new approach that is designed to improve the analysis and quality of the information on programs and spending.
1.33 These initiatives are underway and have not yet been fully implemented. Important challenges still need to be addressed (see Chapter 3, Large Information Technology Projects). It is still unclear how successfully these government-wide initiatives will provide expenditure data by program and support the allocation and reallocation decisions. The Secretariat is also reviewing the program evaluation policy that the departments use.
1.34 Recommendation. The Treasury Board Secretariat should collect and use comprehensive information on program costs and performance to perform its spending oversight responsibilities.
The Treasury Board Secretariat's response. The Treasury Board Secretariat agrees with the recommendation: Accurate, timely, relevant, and reliable financial and non-financial information, on programs objectives and results, is critical to all functions of an effective Expenditure Management System. The Secretariat also recognizes that financial information must be integrated with performance information. Indeed, that is the purpose of the Management, Resources, and Results Structure Policy that the Treasury Board put in place April 2005. In addition, the Federal Accountability Act proposes to improve performance information through the strengthening of the evaluation function in departments in respect of grants and contributions.
New or enriched spending initiatives
Opportunities for trade-offs between new and ongoing spending may be missed
1.35 Two expenditure management processes exist: one for renewing spending for existing programs and another for reviewing new spending initiatives. As explained earlier, spending on existing programs moves forward automatically, through the ARLU process. Funding decisions are, therefore, mostly about how to allocate increases in aggregate spending among new initiatives. As a result, potential trade-offs between new and ongoing spending initiatives may be missed. Existing programs do not regularly compete with new spending initiatives for resources.
1.36 In 2004–05, planned spending on new programs totalled $19 billion—$14 billion in statutory spending and $5 billion in voted spending. In that same year, planned spending on existing programs totalled $144 billion—$64 billion in voted program spending and $80 billion in statutory spending (Exhibit 1.3).
1.37 Reallocating spending from less to more valued programs is also difficult because spending decisions are often approved in principle at the Memorandum to Cabinet stage, even though important program details are often missing, including how spending initiatives will be designed and delivered, and how much they will cost. These program details are developed later at the Treasury Board Submission stage.
1.38 A large proportion of new spending in recent years consisted of spending initiatives adopted outside the regular budget cycle. Each year, as projected revenues grow, new or enriched spending initiatives are announced, on top of spending already approved in the previous Budget or Estimates process. Circumstances will sometimes dictate when spending decisions are made. For example, soon after the December 2004 Tsunami in South Asia, the government announced new funding—totalling $265 million—for assistance.
1.39 However, other off-budget cycle spending decisions have been made that cannot be attributed to unanticipated events. For example, in February 2003, the government announced $600 million for the Canada Health Infoway. In September 2004, it announced that $4.75 billion in payments would be made to the provinces for the purchase of medical equipment and the reduction of health care wait times. In February 2005, the government announced $165 million in funding for Genome Canada. The funding for these announcements was accounted for or expensed in the year that the announcements were made.
1.40 The timing of these off-budget cycle announcements makes it difficult for government to comprehensively assess spending initiatives. A sound principle of public expenditure management is for spending proposals to be assessed together early in the budget cycle. This would allow decision makers to compare all policy proposals together and consider trade-offs between the available resources and outstanding priorities.
1.41 Under the Expenditure Management System, as it operated before 1998, departments and agencies were required to identify a source of funds for all new policy proposals that they submitted in memoranda to Cabinet. That is no longer the case. Departments can now submit spending proposals without identifying the source of funds. The source of funds will be identified later (from a reallocation of resources from the existing reference levels or the fiscal framework, at the prerogative of the Prime Minister and the Minister of Finance). This means that departments are encouraged to submit unfunded proposals and are less likely to consider reallocation as a source of funds.
The central agencies cannot always properly assess new proposals
1.42 Memoranda to Cabinet. Memoranda to Cabinet are what departments use to request that Cabinet approve new spending proposals; they usually indicate the total resources that will be required, but do not contain details of specific funding requirements for individual aspects of the policy. It is important that new spending proposals be rigorously reviewed and challenged before Cabinet approves them. The central agencies and Cabinet need complete and accurate information to thoroughly review the proposals and make sound decisions.
1.43 According to the central agencies, information in memoranda to Cabinet is not always complete:
- The Secretariat noted that memoranda to Cabinet sometimes lack measurable objectives and results commitments and that information on costing alternatives and evaluating and measuring results for existing programs is not always adequate.
- The Department of Finance noted that the quality of memoranda varies widely.
- The Privy Council Office noted that analyses that support the memoranda is uneven, that fundamental questions are not always addressed, that savings are not routinely identified, and that credible alternatives are not always researched.
1.44 These problems with memoranda to Cabinet occur despite the guidance the Privy Council Office gives to departments and agencies. These problems limit the central agencies' ability to review new spending initiatives effectively and can affect the quality of Cabinet's decisions.
1.45 The central agencies told us that they do not always have enough time to assess memoranda to Cabinet. The Privy Council's Office sets a standard time of two weeks for the Treasury Board Secretariat and the Department of Finance to review the memoranda. However, the central agencies told us that they are sometimes forced to complete their reviews within a few days.
1.46 Treasury Board submissions. A Treasury Board submission is an official document that a department or agency submits to seek approval from Treasury Board ministers to carry out a proposal. As explained in the Overview, even after Cabinet approves a policy initiative, the department or agency still requires Treasury Board approval to carry out the initiative. A submission includes details of the program's design and delivery, how much it will cost each year, expected results and outcomes, and other required information.
1.47 The Treasury Board Secretariat is responsible for reviewing the submissions, focusing on "how to spend and implement the policy initiative." This is an iterative process involving the Secretariat's experts and program sector analysts, and experts from the departments and agencies.
1.48 According to the Secretariat, once a source of funds has been identified, its program sector analysts assess and review the submissions, using the following criteria:
- conformity with authorities,
- fit with government priorities,
- program delivery,
- performance measurement, and
- safeguards to protect public funds.
1.49 When all of the Secretariat's concerns have been addressed, its analysts recommend that Treasury Board ministers approve the final submission as proposed by the department. Reviews at the Treasury Board submission stage have little impact on resource allocation because funding decisions have already been made. The question Treasury Board typically decides is how the allotted funds will be spent, not how much it is appropriate to spend.
1.50 One of our audit objectives was to determine whether there are adequate systems and procedures to assess new spending proposals. The Treasury Board Secretariat has denied us access to the information and analysis it collects and prepares on Treasury Board submissions, citing Cabinet confidence of a type that cannot be disclosed to us. As a result, we were not able to assess how the Secretariat reviews and challenges new spending initiatives.
1.51 The weaknesses at the memoranda to Cabinet and Treasury Board submission stages limit the central agencies' ability to review the merits of spending proposals and determine opportunities for trade-offs between existing and new programs. As the central agencies review the Expenditure Management System and develop a new approach to managing expenditures, they need to consider these problems.
1.52 Recommendation. The central agencies (the Treasury Board Secretariat, the Department of Finance, and the Privy Council Office) should ensure that they have complete and accurate information that
- supports the review and approval of new spending initiatives, and
- allows new spending initiatives to be assessed against existing programs to determine whether funding should be reallocated.
Central agencies' response. The Privy Council Office, the Department of Finance, and the Treasury Board Secretariat agree with the recommendation: Accurate, timely, relevant, and reliable financial and non-financial information on programs objectives and results is critical to all functions of an effective Expenditure Management System. Cabinet documents and supporting processes should provide the cost and results information needed for all aspects of decision making and allow for the integration of decisions on allocation and reallocation across existing and new proposals.
1.53 Recommendation. The central agencies (the Treasury Board Secretariat, the Department of Finance, and the Privy Council Office) should also clarify their roles—particularly the Treasury Board Secretariat's role and its ability to challenge and influence funding decisions more effectively—in the Expenditure Management System.
Central agencies' response. The central agencies agree that clarity of roles and responsibilities is essential.
Program funding does not always align with the financial requirements over time
1.54 The timing for funding new spending initiatives varies. Programs with short life expectancies are usually funded with temporary funding, considering the short-term time frames over which the projects are planned to be completed. Other programs have longer-term funding requirements—meaning funds need to be committed for a longer period.
1.55 Programs do not always receive funding that meets their long-term financial requirements. The Treasury Board Secretariat told us that temporary funding can protect the government's fiscal position. The central agencies need to consider the government's long-term fiscal position when they decide how long to fund new spending initiatives.
1.56 The Secretariat also told us that temporary funding forces departments and agencies to assess programs periodically. For example, these assessments help to ensure that program needs and financial requirements are still justified, program costs are kept under control, and the desired program results are achieved.
1.57 Finally, the Secretariat stressed that temporary funding allows the central agencies more flexibility as they make decisions about allocation and reallocation of funds, which makes it easier for them to adjust to changing government priorities.
1.58 Temporary or short-term funding can serve a variety of purposes. However, unpredictable funding can jeopardize the delivery and sustainability of long-term government projects or activities. For example, research and development work that continues for long periods of time benefits from stable, long-term funds.
1.59 If funding does not align with what the program actually requires, planning can be difficult. In addition, because temporary funding requires frequent adjustments to departments' budgets, it can lead to increased reliance on Supplementary Estimates.
1.60 In the following chapters, we reported on the need for predictable funding for government activities with longer-term financial requirements:
- December 2000 Report, Chapter 31, Fisheries and Oceans—Fleet Management, paragraph 31.69
- December 2001 Report, Chapter 3, Recruiting for Canada's Future Public Service—Changing the Practices, paragraphs 3.59 and 3.73
- December 2002 Report, Chapter 11, Other Audit Observations: Atomic Energy of Canada Limited, paragraphs 11.133 and 11.135
- April 2005 Report, Chapter 1, Natural Resources Canada—Governance and Strategic Management, paragraph 1.13
1.61 In Chapter 2, Expenditure Management System in Departments, we report that the funding given to programs does not always reflect their financial requirements. We also report concerns raised by departments that the timing of funding for programs may adversely affect their ability to manage programs.
1.62 Balancing the program requirements with the need to protect the government's fiscal position to review and evaluate programs, and to respond to changing priorities may cause tensions between the central agencies and the departments.
1.63 These tensions do not necessarily mean that the expenditure management process has failed. They may be the result of central agencies' attempts to control the flow of funds, to promote restraint, or to make departments and agencies more efficient. Nevertheless, in our view, the expenditure management process needs to acknowledge that short-term funding can adversely affect programs that have long-term financial requirements and must seek ways to minimize these adverse impacts.
1.64 Recommendation. The central agencies (the Treasury Board Secretariat, the Department of Finance, and the Privy Council Office) should review how they determine and recommend funding of programs with long-term financial requirements. The funding for these programs should be as predictable as possible and aligned to program requirements.
Central agencies' response. Enhancing the information in Cabinet documents so that it better supports the decision-making process is a key objective of the new Expenditure Management System. Improved information, including comprehensive costing information, as well as rigorous exploration of the benefits and risks associated with identified options, are key to enabling sound decisions. Clear initial funding decisions, based on comprehensive information in memoranda to Cabinet, should lead to clear alignment between program funding and objectives.
There are many instances where the government may decide not to provide funding on an ongoing basis. The need and objectives themselves may be time-limited or innovative programming approaches may be used that must be assessed to ensure the program is achieving the desired objectives. Responsible and accountable stewardship of taxpayers' dollars requires the continual reassessment of the value of existing programs and the ongoing search for new, more cost-effective ways to deliver government programs that achieve results for Canadians and maximize value-for-money. The need for continuous reassessment must be balanced with the need for stability and predictability for sound program management.
The Treasury Board Secretariat does not adequately monitor conditions that the Treasury Board attaches to departmental spending
1.65 Normally departments or agencies may reallocate funds between different activities within an approved vote, without seeking parliamentary approval. The government encourages them to do so to deal with spending pressures. However, in certain circumstances, when departments and agencies reallocate funds between programs, they may limit their ability to reach program objectives and to stay consistent with government priorities.
1.66 The Treasury Board sometimes uses special purpose allotments to restrict the use of a portion of funds to a specific purpose. The Secretariat does not review the use of special purpose allotments to provide assurance to the Treasury Board that departments and agencies are using the funds for the specified purpose. The Secretariat is of the view that departments and agencies are responsible for ensuring that the special purpose allotments are only used for their specified purpose. At the end of the year, departments and agencies provide the Treasury Board with expenditure information that shows how they used the special purpose allotments. This information is published annually in the Public Accounts of Canada—the government's annual report on how it spent the funds appropriated by Parliament.
1.67 The Treasury Board can control how departments and agencies use funds by attaching financial conditions to individual decisions at the Treasury Board submission stage. "Frozen allotments" are used to limit access to the full spending authority provided by Parliament in a particular vote. For example, frozen allotments could be created pending a department's fulfillment of outstanding conditions imposed by the Treasury Board. The Secretariat is responsible for ensuring that those conditions are met before they recommend that frozen allotments be released to the department or agency.
1.68 In some cases, funding is approved with non-financial conditions attached (for example, reporting or evaluation requirements). The meeting of the non-financial conditions by the department or agency is not a prerequisite for the Treasury Board to approve the funds. The Treasury Board Secretariat has a limited capacity to monitor departments' and agencies' compliance with these conditions.
1.69 Recommendation. The Treasury Board Secretariat should track the conditions that the Treasury Board attaches to its spending decisions to determine whether those conditions are all being met.
The Treasury Board Secretariat's response. The Treasury Board Secretariat currently tracks all financial conditions. This functionality, along with improvements to the tracking of non-financial conditions, will be built into the new Expenditure Management Information System.
1.70 The Expenditure Management System is at the heart of the operation of government. Effective expenditure decision making is critical to ensure value-for-money and effectiveness of government spending. This requires a process that promotes rigorous review of spending and facilitates the reallocation of funds from low priorities or ineffective programs to higher priorities or more effective programs. The current Expenditure Management System, designed when Canada was in a budget deficit, is less effective in a time of surpluses.
1.71 Our audit identified a number of weaknesses in the Expenditure Management System:
- The Expenditure Management System does not appropriately support the allocation and reallocation of funds. The Annual Reference Level Update (ARLU) is not designed to take into account performance results and does not allow the Treasury Board Secretariat to challenge the allocation of resources using evidence on program effectiveness. Therefore, except for the ad hoc expenditure reviews, reference levels are not reviewed at the centre of government. The adequacy of funding and value-for-money of ongoing programs cannot be ensured.
There are two expenditure management processes: one for recommending the reference levels of existing programs and one for reviewing new spending initiatives. Spending on ongoing programs essentially moves forward automatically; new spending proposals are ranked independently and are not assessed against existing programs. As a result, trade-offs and reallocation of funds between existing and new programs are not considered systematically. Furthermore, the detailed consideration of spending proposals at the Treasury Board submission stage has little impact on resource allocation because funding decisions are made earlier. Finally, funding decisions made at the government centre do not always align the program funds with longer term financial requirements.
- The Treasury Board Secretariat's oversight of expenditures is limited. The Secretariat does not have adequate access to quality program information, which limits its ability to oversee expenditures and intervene when deficiencies are identified. The Secretariat is also limited in its capacity to monitor compliance with the conditions and special purpose allotments imposed by the Treasury Board.
1.72 We could not fully review how the Treasury Board Secretariat performed its function of assessing and challenging spending proposals submitted to the Treasury Board. The Secretariat denied us access to the information and analysis it collects and prepares, citing Cabinet confidence of a type that cannot be disclosed to us. The government has effectively imposed a limitation on the scope of the Auditor General's examination.
1.73 The government has committed to reviewing the Expenditure Management System. It would be appropriate to introduce changes that will lead to a better system, including
- regular expenditure reviews of reference levels to ensure that existing programs are relevant and represent value-for-money,
- access to and use of performance information in the spending decision process,
- adequate systems and procedures for central agencies to assess new spending proposals and relate them to existing programs,
- timing of funding being appropriately aligned with the program requirements, and
- capacity to effectively monitor the conditions and special purpose allotments being imposed by the Treasury Board.
The government's overall response. The government recognizes that a new ongoing approach is needed to manage overall spending to ensure, as stated in Budget 2006, "...all government programs are effective and efficient, are focused on results, provide value for taxpayers' money and are aligned with the government's priorities and responsibilities." The issues raised by the Office of the Auditor General in this report are generally consistent with those that the government believes a new expenditure management system should address.
The new Expenditure Management System (EMS) will entrench responsible spending. It will require that all new and existing programs go through a systematic and rigorous examination. This will ensure that the government only approves funds that are actually needed to achieve measurable results in a way that is effective, and provides value-for-money on behalf of Canadians.
The EMS renewal is a critical building block for government-wide, results-based management and a stronger accountability regime. Important steps in the renewal process have already been taken, such as the Federal Accountability Act and the Management, Resources, and Results Structure Policy, but further work remains.
About the Audit
Our audit objectives were to assess whether the current Expenditure Management System is appropriately designed and implemented to support the allocation and reallocation of resources and effective expenditure oversight.
Scope and approach
We reviewed the processes and procedures used by the central agencies (primarily the Treasury Board Secretariat, but also the Department of Finance and the Privy Council Office) to manage government spending, to determine whether
- the existing Annual Reference Level Update (ARLU) provides for effective review and challenge of baseline government spending,
- the current systems and procedures adequately assess new spending proposals and relate them to existing programs and commitments,
- the Treasury Board Secretariat is able to monitor spending in departments and agencies to ensure that the spending complies with authority and achieves the desired results, and
- the process used to support resource allocation works effectively to align funding commitments with long-term funding requirements.
We collected most of our evidence by interviewing key officials from the central agencies and by reviewing
- Treasury Board submissions,
- records of decisions,
- memoranda to Cabinet, and
- other related documents and reports.
- interviewed officials in other jurisdictions to better understand processes used to manage expenditures,
- interviewed Expenditure Management System experts in Canada and abroad,
- met with ex-senior officials from the Department of Finance and the Treasury Board Secretariat, and
- reviewed literature on the subject.
We could not fully audit how the Treasury Board Secretariat reviews and challenges new spending proposals submitted to the Treasury Board. The Secretariat denied us access to the information and analysis it collects and prepares, citing Cabinet confidence of a type that cannot be disclosed to us. The government has effectively imposed a limitation on the scope of the Auditor General's examination.
We expected the Treasury Board Secretariat to use financial and non-financial information to review and analyze existing spending to ensure that program needs are met and desired results are achieved.
We expected the Secretariat to ensure that departments and agencies regularly review program spending.
We expected that before new spending initiatives are approved, the Secretariat would assess
- the legality of the spending proposals;
- how new spending initiatives fit with the government's priorities and existing programs;
- affordability and sustainability;
- how intended results will be achieved and assessed (effectiveness);
- how well programs will be delivered and will meet objectives;
- whether public interest is safeguarded (prudence, probity, and equity); and
- the source of funding.
We expected that the central agencies involved in the allocation of resources to coordinate their efforts.
We expected that the Treasury Board to have reasonable assurance that the departments and agencies' management frameworks are adequate to ensure that they use resources efficiently, effectively, and in compliance with authority.
We expected the Secretariat to make use of sound and timely departmental information on program expenditures and performance results.
We expected management frameworks to support allocation decisions that align funding commitments with longer term funding requirements.
Audit work completed
Audit work for this chapter was substantially completed on 11 July 2006.
Assistant Auditor General: Douglas Timmins
Principal: Basil Zafiriou
Lead Director: Richard Domingue
Director: Joe Reperto
Director: Rona Shaffran
For information, please contact Communications at 613-995-3708 or
Reference level —The amount of funding that the Treasury Board has approved for departments and agencies to carry out policies and programs for each year of the planning period. (Return)