In his 1890 anthropological classic The Golden Bough, Sir James Frazer observed that magic rests on the mistaken belief that human ritual can compel nature to obey. That belief was part of my childhood since I was fascinated by magic tricks. As an adult, I still enjoy it.
One of my sons took a fascination to magic while growing up and started to learn how to perform. But like most good magicians, he wouldn’t reveal his “secrets.” Watching him work reminded me how easily the eye can be fooled and how a well-timed distraction can make something ordinary look extraordinary. The trick is confidence; the audience must believe what they see.
Mark Carney’s new “capital budgeting framework” released by the Department of Finance last week relies on the same principles and was released under the guise of “modernizing” the approach.
During the Liberal Party leadership campaign, Carney said he would separate the federal budget into an “operating budget” and a “capital budget” and the operating budget would be balanced within three years. Now, he’s making good on that promise.
Why is the new approach a trick or a sleight of hand? It’s a blatant attempt to baffle those with low financial literacy to transfer certain expenditures from the overall budget to a capital budget and crow that you are “investing.”
To reduce the impacts of the overall deficit — which some are predicting will be upwards of $100 billion, an unbelievably high number that threatens our country’s future prosperity — he’s trying to focus us on the reduced “operational budget.”
There are two keys to this trick. The first is to define what “capital” is and to do so in a very broad fashion in order to easily justify the transfer of an expenditure to the capital budget. The second, like good magicians, is to do so with confidence by pretending to be the smartest person in the room.
A classic definition of capital assets is property of a lasting nature that is acquired for use in the production of income or for investment, rather than for sale in the ordinary course of business.
But for government, this is modified by section 3150.05 of the Public Sector Accounting Standard (PSAB) — the authoritative source of accounting standards used by governments in Canada — which defines tangible capital assets (there are limited circumstances where governments are able to recognize intangible assets as well) as non-financial assets having physical substance that:
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Are held for use in the production or supply of goods and services, rental to others, administrative purposes or the development, construction, maintenance or repair of other tangible capital assets;
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Have useful lives extending beyond one fiscal year;
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Are to be used on a continuing basis;
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Are not for sale in the ordinary course of operations.
Now, compare those classic and formal definitions with the new definition of capital for budgeting purposes as follows: “capital investment is defined broadly as any government expense or tax expenditure that contributes to public or private sector capital formation, held directly on the government’s balance sheet or on that of a private sector entity, Indigenous community or another level of government. Within this broad definition, the intent is to focus on capital investments that meet the following criteria:
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Conditionality — whether the funding recipient is required to invest in capital formation to receive the benefit.
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Clear linkage — whether the spending encourages or enables capital investment in identifiable sectors or projects.”
First, I challenge any reader — financially literate or not — to make sense of the above. It is truly magical and extremely broad and not reconcilable to the classic or PSAB definitions. The Parliamentary Budget Officer also agrees that it is overly broad.
To include “tax expenditures” in this definition of capital is laughable and misleading. Tax expenditures are foregone taxation revenues of government used to advance policy objectives, not investments that create government-owned assets or enduring service capacity.
For example, if the government introduces a new tax incentive — say, a tax credit for the latest green initiative — estimates will be made as to how much forgone taxation revenues it would annually cost, known as a “tax expenditure.”
Under the new capital budgeting approach, if the government feels the new tax expenditure contributes to “capital formation,” then it will take that estimated cost and put it into the new “capital budget,” away from the “operating budget.” This is blatantly misleading.
This simple accounting trick has a long history. Alberta’s government attempted this kind of budgeting exercise in 2013. Former premier Allison Redford was rightfully roasted for that lame attempt to make the numbers look better. Former United Kingdom chancellor (and later prime minister) Gordon Brown deployed this trick with his version of the Golden Rule from 1997 to 2009, hiding massive overspending and debt accumulation by keeping such amounts away from the operational budget.
Frazer said magic rests on the mistaken belief that ritual can compel nature to obey. Our modern fiscal magicians believe much the same, that by relabeling government spending as “capital,” they can make deficits disappear.
But like any magic act, the trick depends on confidence and distraction. Eventually, the smoke clears, the illusion fades and Canadians are left with the same old out-of-control deficit, only now hidden behind new labels.
It’s a clever performance, but, at its core, it’s a deceptive trick, one that trades transparency for theatrics and leaves Canadians poorer for having believed it. Government spending — capital or operating — increases government debt in the same way. Period. Like Albertans in 2013, Canadians should speak loudly against this tired illusion.
There’s nothing modern about deception; only the costumes change.
Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at [email protected] and his LinkedIn profile is
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