Chapter 2
Historical background

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2.01 The first formal report on government finance was issued by the Dominion Bureau of Statistics (now Statistics Canada) for the year 1919. The report dealt with municipal statistics for 50 municipalities with populations over 10,000. In the preface to this report, R.H. Coats, Dominion Statistician, wrote: " … the first essential for comparative statistics is the adoption of a uniform system of municipal accounting and reporting. A memorandum outlining a system, and looking to co-operative action between the Dominion Bureau of Statistics and the provincial departments, was drawn up in the Bureau in 1918 and submitted to the provinces. It was recognized, however, that the matter was complex and far reaching in scope, and that definite action would not be feasible without careful discussion of details, such as might take place at a conference of Dominion and provincial officials."

2.02 For many years thereafter the Bureau had two goals in the field of public finance, which it pursued simultaneously: (i) the production of a set of consistent and compatible series of financial and employment statistics for all governments in Canada and (ii) the development and implementation of a common accounting and financial reporting system by these governments. Developments in each are discussed separately.

2.03 The first Dominion-Provincial Conference on Government Finance Statistics was held in 1933. It asked the Bureau to prepare a standard classification of accounts for use by the provinces. Reporting schedules were devised and work on the development, revision, and improvement of uniform classification systems and reporting forms continued through a series of Dominion-provincial meetings in 1943, 1945, 1947, 1952, 1953, and a series of committee meetings during the period 1954 to 1960. The first conference on municipal statistics took place in 1937 and was followed by others in 1940, 1947, 1948, 1953, 1958, and by a series of seven meetings during the period 1967 to 1970. Annual meetings on municipal statistics began in 1971. Standard reporting schedules for the provinces were issued and revised as appendices to the reports on the meetings. For municipal purposes, a manual of instructions was first issued in 1942 and subsequently revised in 1950 and 1960. A new manual was issued in 1970¹ and this version still serves as the main guide for municipal respondents.

2.04 Nevertheless the goal of a uniform system of accounting and financial reporting for all governments in Canada remains as elusive as ever. This is confirmed by an examination of federal and provincial public accounts (PA) and municipal financial statements. Some provinces provide supplementary tables in which the data in their PA are recast into approximations of the FMS framework.

Although the annual reports provided by municipalities to provincial governments are heavily influenced by the same framework, the accounting systems and records from which they are derived remain as individual as ever. This is not surprising given that the primary purpose of such systems and records is to report to the government or council that its financial affairs are being conducted in accordance with the relevant statutes and regulations; in addition the systems and records must clearly relate financial activities to administrative responsibilities. In view of the variety in size, organization and roles of governments in Canada, it is doubtful that a uniform accounting system will ever be instituted.

2.05 To provide comparable statistics, Statistics Canada has developed the FMS as the basis for its series on government financial and related statistics. Indeed, the concepts and classifications that governments rejected for their internal purposes are now recognized by these same governments as suitable for their external dealings. This is seen, not only in the secondary reporting formats referred to previously, but also in the selection of the FMS as the most appropriate system for the work of the Tax Structure Committee of the 1960's, the Tri-level Task Force on Public Finance (1974 to 1976), and above all, by its embodiment in the successive Federal-Provincial Fiscal Arrangements Acts.

2.06 The modern FMS began with resolutions adopted at the 1933 Dominion-Provincial Conference on Provincial Finance Statistics. These included agreements that "revenue should be primarily classified by source" and that "expenditures should be reported on the basis of the several functions of government." These resolutions confirmed the approach taken by the Dominion Bureau of Statistics in its series on municipal and provincial government finance statistics which commenced with data for 1918 and 1921 respectively.

2.07 Statistical systems are constructed to facilitate the analysis of major areas of concern. Over time, the relative importance of topics changes as does the way those topics are perceived. Consequently the classifications used to identify and describe the components of a statistical system must also change.

2.08 In its earliest form, prior to World War II, the FMS depicted provincial and local governments as independent entities, but federal activities were not included in the system until 1953. Attention was focused on current spending of own source revenues and on departmental activities. Transactions of special purpose agencies were reflected only to the extent of their net contributions to, or receipts from, their parent governments. Following the conferences of the early 1940's and the work for the Conference on Reconstruction, the government universe was more clearly delineated. A number of administrative and special agencies were included for the first time and a new classification framework was introduced to provide more detailed information on government operations. In addition, the concept of "general" revenue and expenditures (i.e., the consolidation of current and capital transactions) was introduced in keeping with the revised concept of the government universe which was comprised of departments and ministries; boards, commissions and agencies performing functions similar to those of departments; agencies engaged in "industrial" or "commercial" type of activities primarily to service the requirements of their own governments; government-owned institutions such as those engaged in education, health or welfare services or the administration of justice; social insurance schemes of a universal nature [Canada Pension Plan (CPP) and Quebec Pension Plan (QPP)]; public service pension plans operated by governments; working capital funds.

2.09 Over the following decades interest focused on the development of statistical series embodying the concepts of the FMS. This culminated in the publication of a chapter on government finance in the Historical Statistics of Canada (M.C. Urquhart, Editor, K.A.H. Buckley, Assistant Editor, Cambridge/Macmillan, 1965), and of the publication Historical Review, Financial Statistics of Governments in Canada, 1952 to 1962 [Dominion Bureau of Statistics (DBS) (now Statistics Canada (StatCan)) Catalogue no. 68-503, 1966], the latter being the principal statistics prepared for the Tax Structure Committee. These publications, together with the annual series of FMS statistics for each level of government and for consolidation of all levels, signaled the maturing of the FMS.

2.10 At the same time, major changes were occurring in the field of public finance which were to have significant effects on the FMS. Federal, provincial, territorial and local levels of government were beginning to co-operate more and more as joint programs involving varying degrees of participation by two and sometimes all three levels of government were initiated along with programs receiving most of their funding from one level of government with the service being delivered by another. Not all developments, however, were in the direction of increasing co-operation. In 1965, Quebec "opted out" of several joint federal-provincial programs and received federal income tax abatements and other fiscal compensation in lieu of the transfers specific to these programs.

2.11 These changes in government operations and relationships resulted in a major shift in emphasis in the FMS. Attention was no longer focused on the activities carried out by a government using its own resources—known as the "net general" approach. Instead the FMS concentrated on the total activities of a government—the "gross general" approach—including activities carried out in co-operation with or on behalf of other governments as well as contributions to other governments to perform activities on its behalf. Thus the focus shifted from the activities directly attributable to a particular government (or group of governments) to the total impact of that government's operations.

2.12 At the same time, a comprehensive review of the system's classifications was launched. Earlier reviews had been initiated by Dominion-Provincial Conferences on Provincial Finance Statistics (see paragraph 2.03) which appointed working parties of provincial and federal officials for the purpose. On completion of the task a new conference reviewed the work, modified it where necessary and then promulgated the results. The procedure adopted in 1965 was quite different. The vehicle chosen was the eighth Federal-Provincial Conference on Municipal Finance Statistics held in 1966. These Federal-Provincial conferences were held annually until 1970. The working party consisted of the Governments Division of DBS (later Public Finance Division of Statistics Canada (StatCan) and now Public Institutions Division of StatCan). The first session of the conference assigned certain tasks to the working party. The second session reviewed the work and assigned further tasks. In all, the complete review of the classifications and of the reporting formats required seven sessions.

2.13 The immediate results of this conference was embodied in "A Financial Information System for Municipalities" (Catalogue nos. 12-532, 12-533 and 12-534, 1970), which described the FMS in terms of municipal finance. This manual provided the impetus for the production, in 1972, of the publication "The Canadian System of Government Financial Management Statistics" (Catalogue no. 68-506, 1972, amended in 1974 and 1984), the first general description of the system.

2.14 The use of the FMS in analyzing and describing government financial transactions continued to expand throughout the 1970s. The continuing changes in all aspects of government finance and in types of government organizations created the need for a further updating of the FMS manual. A first draft of a revised edition was circulated within StatCan as well as to federal, provincial and territorial finance officials in 1980. The revision process lasted four years. At the March 1984 meeting of the Federal-Provincial Committee on Government Statistics (in the same year the committee was re-named "Federal-Provincial Committee on Public Sector Statistics"), formal approval was given to a third draft of the FMS manual. This manual was subsequently published as "The System of Government Financial Management Statistics" (Catalogue no. 68-507).

That latest edition included a more complete statement of the conceptual basis of the FMS and refined a number of definitions—notably that of a government business enterprise. It also expanded the classification system used for revenue and expenditures and modified the economic categories employed for cross classification of expenditures.

2.15 Government finance and statistical systems continued to change after the 1984 update of the FMS. With the1997 historical revision, increased harmony between the FMS and the Canadian System of National Accounts (CSNA) and to other statistical systems increased. Better ways to measure the development in government finance have been achieved. Details on changes implemented are presented in Appendix A. The 1999 revision of the manual reflects these achievements by presenting:

(a) The results of harmonizing the CSNA and FMS concepts which has been implemented to eliminate differences between the two systems and to simplify reconciliation with other statistical systems.

(b) The results of implementing, throughout StatCan, the entire coverage of the Canadian public sector.

(c) The development in all aspects of government finance since the last revision of the manual in 1984.

(d) The incorporation of the harmonized revenue classification resulting from the harmonization of CSNA and FMS concepts.

Major relevant issues encountered during the review process and more particularly during the 1997 historical revision of the CSNA have been discussed at the 1996, 1997 and 1998 meetings of the Federal-Provincial Committee on Public Sector Statistics. Also, StatCan's experts in the field, met in 1996 and 1997 with federal government officials to discuss a number of topics and to assess the impact of the proposed revisions on the federal-provincial fiscal arrangements.

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Note

1. A Financial Information System for Municipalities (Catalogue nos. 12-532, 12-533 and 12-534).