DND budgets

Excerpts from a paper by Brian MacDonald, Senor Defence Analyst, Conference of Defence Associations (CDA copyright--note the importance of the accounting method change, the "Fairy Godmother"):

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Fiscal Year 2007/8 was already planned to be a year of significant growth ($1.3 billion, or 8.6%) in the Canada First Defence Plan budget, according to the “Main Estimates Planned Spending.”

However, the actual defence budget turned out to be even larger as the government added $960 million (another 5.8%) via the “Supplementary Estimates (A).

This brought the actual defence budget, or the “Total Planned Spending” budget—to use the terminology of the Report on Plans and Priorities—to $17.84 billion, a real increase of 12.1% over the previous year. This, in turn brought the total increase over the two years to 22.2%—a staggering sum to those of us who remember the joys of the Mulroney period when we weredelighted to get the promise of 3% real growth...

Indeed, a quick visit to the NATO-Russia compendium of Financial and Economic Data relating to Defence reveals that Canadian defence spending in 2007/8 moved up from 1.2% of GDP to 1.3% of GDP. No longer are we subject to the catcalls that we are ahead of only Iceland (which has no defence budget)and the Grand Duchy of Luxembourg (at 0.9% of GDP.

Now we’ve also moved ahead of Belgium (1.1%), Spain (1.2%), and are drawing even with Denmark (1.3%) and Germany (1.3%).

Germany at 1.3%?? Honest, that’s what NATO actually reports...

In any event, it seems that the Defence Department is likely to enjoy another good year, with a year/year increase in t h e Main Estimates of $1.3 billion, or 7.7%, plus an additional $700 million in planned “Adjustments,” bringing the “Total Planned Spending up to $18.9 billion.

Now the Bad News

Once again watchful readers will have noticed that the Main Estimates for FY2009/10 have stalled at $18.2 billion, and planned “Adjustments” have only risen by $100 million, so that the “Total Planned Spending for FY2009/10 shows only nominal growth, though Supplementary Estimates (A) 2008 may intervene again.

The Canada First Defence Plan had projected a total of $58.9 billion in increases for the three years FY2008/11,or $19.6 billion on average, so there may be a little more in the offing than is shown in RPP 2007/8.

A Fairy Godmother in the Wings?

The potential Fairy Godmother is called “Accrual Accounting and Budgeting.” While LGen Andy Leslie likes to refer to it as “Cruel” accounting, it is simply the application of standard civilian accounting practices to the public sector...

The big effect will be felt in defence capital budgeting. Up to now, when a piece of equipment was purchased the cash cost paid would be “expensed” entirely in the year of purchase. Under the accrual accounting system the total cash cost will instead be shown as an asset on the Department’s Balance Sheet and will be amortized over the actual service life of the equipment in the form of an annual “depreciation” charge.

The effect is to make a limited capital budget go a lot further since we are expensing” only a small percentage of the capital cost of the equipment each year. Eventually it will stabilize as the total annual capital amortization charges approach and equal the annual capital budget, but in the intervening time frame it can allow us to recapitalize the CF a lot faster than would be the case under the previous “cash-based” accounting system.

Since the Canada First Defence Plan is currently looking at a capital acquisition programme of about $57 billion to cover the big items already announced, the ability to spread those capital dollars further becomes potentially a very valuable development.

So What Should We Be Looking for in Budget 2008?

We’re probably not going to see any dramatic announcements of massive increases to the defence budget in Budget 2008, even though there will be a pretty massive billion dollar real increase.

In an election year, with continuing division over the Afghanistan mission, large increases in the defence budget are not usually viewed as politically advantageous in Canada...

If no election comes along, we should really be looking for the tabling of the Main Estimates 2008 to see if they match the forward looking numbers in Report on Plans and Priorities 2007...