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Falling funds: How finance revisions resulted in a downgrade for the territories

The headline was about the loss of funding for all three territories; the explanation, that there had been a change in how the Territorial Formula Financing (TFF)—how much each territory gets from the federal government—is calculated.

This isn’t exactly the case.

Certainly, the territories are faced with a significant decrease in anticipated federal funding starting next fiscal year. In Yukon, the changes mean $23 million less than expected; in Nunavut, $34 million less; and in the Northwest Territories, an actual decrease of $34.2 million.

That said, the formula itself has not changed, said a spokesperson for the federal Department of Finance. Rather, the data used to calculate territorial incomes and expenditures has been updated and revised.

So, why the drastic change?

Major revision looked at data from 1981

For one thing, there was a lot of data—the window of revision was 32 years. Provincial and territorial economic accounts were scrutinized starting in 1981 through to 2013.

The changes in the TFF amounts relative to previous projections stem from revised provincial-territorial-local expenditures data from Statistics Canada. These revisions incorporate more accurate measures of government revenue, expenses, operating balances, assets, and liabilities.”

In March 2015, Statistics Canada announced this major revision to the Canadian System of Macroeconomic Accounts (CSMA). Taking both national, and provincial, and territorial jurisdictions into consideration, the CSMA depicts economic activity across various sectors.

The revisions saw updates across the board, though many only impacted national data. The provinces and territories, however, saw changes in four areas: Supply and Use Tables, GDP by Industry, Labour Productivity, and GDP by Income and Expenditure.

Regular revisions occur more frequently to include current information on the economy gleaned from censuses and annual surveys. These reviews have a shorter timeframe, limited to a few years. The larger revisions have only taken place in 1986, 1997, and 2012, according to Statistics Canada.

New finance model used for first time

The other reason for the big change goes back to the idea of a formula. In 2014, Statistics Canada adopted a new framework for accounting government financials: the Government Finance Statistics Model, used by the International Monetary Fund to compile such information. This was the first comprehensive revision under which such a model was utilized.

“These revisions improve the international comparability of Canadian data, incorporate the latest advances in methodology in the area of economic measurement, and integrate updated and higher quality source data and statistical techniques, adding detail and relevance to economic estimates,” a StatsCan spokesperson said in an email.

The result was an update of quarterly estimates for National Income and Expenditure Accounts from 1981 right into the second quarter of 2015.

“The impact on the transfer amounts once the revisions were completed, the magnitude, and direction of the associated impacts were not known in advance of the public release of the revised data by Statistics Canada on Dec. 1, 2015.”

As noted by the territorial governments, each respective gross expenditure base was decreased by more than two per cent from what was expected. Starting in April, Yukon will now be receiving $930 million in federal transfer payments, or $24,333 per capita; the NWT will receive $1.256 billion in federal transfers, or $28,352 per capita; and Nunavut is set to receive $1.154 billion in federal transfers, or $40,364 per capita.

Impact of revisions unforeseen

Each year, the Department of Finance uses the latest data from the CSMA, combined with other information, to determine transfer payments to the territories, as outlined in the Federal-Provincial Fiscal Arrangements Act.

“Statistics Canada has no role in determining the formula used in these fiscal transfers and does not carry out the calculations of amounts transferred,” said a spokesperson.

That formula is set by legislation passed in 2013, and has not changed.

“The changes in the TFF amounts relative to previous projections stem from revised provincial-territorial-local expenditures data from Statistics Canada. These revisions, published on December 1, 2015, incorporate more accurate measures of government revenue, expenses, operating balances, assets, and liabilities.”

Over the past three years, there has been consultation with all levels of government on the areas and timing of the revision. However, the “impact on the transfer amounts once the revisions were completed, the magnitude, and direction of the associated impacts were not known in advance of the public release of the revised data by Statistics Canada on Dec. 1, 2015,” a Finance spokesperson said in an email.

In his letters to the YukonNorthwest Territories and Nunavut governments, federal Finance Minister Bill Morneau acknowledged the impact the revisions would have and said financial officials had been directed to work with their territorial counterparts on the issue. But just what will come of the talks is yet undecided.

“Officials have started discussions as the Minister requested and it would be premature to discuss the options until further talks take place,” according to the department.◉


Photo credit: istockphoto/francisLM

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