Finance takes it on the chin

Assailed by auditor for lack of tax monitoring

The auditor general has pilloried Finance mandarins for their failure to adequately manage the tangled web of tax exemptions, deductions and credits the Conservatives have woven throughout the tax system in successive budgets.

For a department that holds itself up as world-class, the damning judgment that it “fell short on managing tax-based expenditures” will have a bitter sting.

It’s not clear exactly how much revenue the Canadian government forgoes every year — the department identifies 140 tax expenditures that would qualify but does not estimate a total cost. Yet it’s clear that every year, tens of billions of dollars of potential tax revenue are left in the hands of individuals and companies.

Such measures as the low rate for small business, at $2.9 billion; the Age Credit, $2.8 billion; and the Charitable Donations Tax Credit, $2.2 billion, reduce general revenues that could be spent on other things.

This is not in itself a bad thing. In fact, it might be a very good thing. The auditor general’s point is that the Finance department often has no idea whether the specific policy goals that prompted the exemption or credit are being met because it has not properly evaluated the measures.

Parliament is meant to review direct spending (even if it does a pretty lousy job) but it plays no role in reviewing tax-based expenditures once the budget has been voted through.

Michael Ferguson, the auditor general, said that the information provided by the Finance Department “does not adequately support parliamentary oversight,” even if it were to take on the role.

Finance does provide an annual Tax Expenditures and Evaluations report, but the auditor said it falls short of information supplied in such other countries as Australia and France, where the future cost of expenditures, the administrative expense and the number of beneficiaries are included. There is no requirement to table the report in the House of Commons.

As worrying as the lack of parliamentary oversight is the lack of systemic evaluation of particular tax credits.

Ferguson found Finance did analyze most of the measures prior to adoption for need, efficiency, effectiveness and foregone revenue. But there was no consideration of spending alternatives — perhaps born from years of knocking heads with a government not known for taking advice.

And there is no ongoing evaluation equivalent to the Expenditure Management System that monitors direct program spending. The EMS was developed by the Conservatives in 2009 to help manage its spending cuts. It’s ironic that if the same rigour had been applied to the tax expenditure side, there may have been no need to cut military spending to the bone.

One table in the auditor’s report sums up the shortcomings admirably.

Direct program spending requires a memorandum to Cabinet and a Treasury Board submission; for tax-based expenditures, a briefing note prepared for the finance minister and prime minister suffices.

Direct program spending must be approved by Parliament in the Estimates every year; tax measures are approved only once in the budget implementation act.

Finally, direct spending is evaluated every five years, according to Treasury Board policy; there is no such requirement for tax measures.

And since there is no requirement, Finance takes a laconic view on whether the billions of dollars in foregone revenue are being used for the proper purpose.

Ferguson’s office looked at eight tax measures and found four of them were not evaluated.

In the case of the First Time Home Buyers’ Tax Credit, it found Finance identified some risks regarding the credit, which was introduced by the government to stimulate housing demand during the financial crisis in 2009. But, despite claxons going off, Finance did not evaluate the credit in the years after its implementation.

“The Department does not have complete information to determine if these tax measures are relevant and performing as intended,” Ferguson’s office concluded.

While it is the reputation of Canada’s venerable Department of Finance that will take the hit from the auditor’s report, the blame lies squarely with a government that has made a Swiss cheese from the tax code for political advantage.

Years of intense political pressure appear to have beaten down whatever challenge function used to exist at Finance. Hard questions are no longer asked about measures the Harper government would like to see enacted.

More fundamentally, Finance was never conceived as an audit department, evaluating tax credits in the same way that the Treasury Board tracks program spending. That burden has grown in line with the number of tax credits introduced in recent years.

Parliament should take back control of tax-based expenditure — demanding a full picture of what is being spent and what money spent through the tax system is accomplishing.

At the very least, there should be a review mechanism imposed on tax credits, similar to the five-year review under the Financial Administration Act for all grants and contributions.

As it stands, when it comes to tax-based expenditures, the Finance Minister has a great deal of power and very little accountability.

Hard questions are no longer asked