Earlier this month, Ottawa unveiled details on what it is calling its capital budgeting framework, a new approach to delivering the annual federal budget that aims to differentiate between operational and capital spending. First proposed during the election campaign as part of Prime Minister Mark Carney‘s platform, the Liberals have argued the new split budget process will give a more accurate picture of federal finances as the government focuses investment on growing the Canadian economy over the longer term. Critics and the opposition, however, have questioned whether the changes amount to fiscal sleight of hand. Ahead of the Nov. 4 budget, the Financial Post’s Jordan Gowling breaks down what we know about the new framework, how it is supposed to work and the controversy surrounding the move.

What is Ottawa’s new budget framework?

Under the new budget, government spending and revenues will be divided into two categories, operational and capital. The primary justification for the split is that capital and operational spending are fundamentally different: while operating spending is used up and recurs from year to year, capital spending should help grow the economy and eventually yield a return over the longer term. Companies already make a similar distinction in their accounting, by capitalizing and depreciating certain expenditures. In theory, the government would be able to balance or even run a surplus on the operating side, and make the argument that it is operationally efficient, while running large deficits on the capital side. But the government has said the budget on Nov. 4 will maintain the practice of including one overall number for the deficit.

What constitutes capital spending?

According to Finance Canada, capital spending will include any government expenditure or tax “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.” Two main criteria will be used to make this determination: conditionality and clear linkage. Conditionality means the funding recipient is required to invest in capital formation to receive the benefit and clear linkage means the spending encourages or enables capital investment in “identifiable sectors or projects.” Finance Canada has listed a number of categories under capital spending, including capital transfers — which are transfers to other levels of government intended to be used for infrastructure or other productive assets — capital-focused corporate income tax incentives, amortization of federal debt, direct funding or tax incentives for private sector research and development, measures that grow the housing stock and contractual agreements with proponents that lead to large-scale capital investments.

What constitutes operational spending?

Finance Canada has defined operational spending as transfers to individuals, health and social transfers and costs associated with running day-to-day government operations, such as salaries and benefits. The Public Accounts of Canada issued for 2024 gives some insight into the operational footprint of government expenses, subtracting expenses allocated to

COVID-19 era programs. Transfers to other levels of government, which include the Canada Health Transfer and the Canada Social Transfer, accounted for 19.2 per cent of government expenses; major transfers to persons represented 23.1 per cent; and “other expenses,” which represents the operating expenses of 135 government departments, agencies and crown corporations, represented 26.9 per cent of total government expenses. That adds up to just under 70 per cent of government expenses.

Has anyone else tried this?

The United Kingdom currently practices a similar fiscal model of dividing capital spending from what it calls resource spending. Capital spending is defined as money spent on assets that last several years (i.e. buildings, vehicles) and resource spending is defined as money spent on things that are used up (i.e. salaries). Notably, capital spending accounts for just five per cent of overall government expenditure in the U.K. and has remained roughly at that level since 2005. Capital spending is expected to account for a much greater share of Ottawa’s budget. In a note, the

Parliamentary Budget Office warned Canada’s definition of capital spending was “overly expansive” and goes beyond the U.K.’s definition, with the inclusion of tax incentives, subsidies and measures that increase the housing stock. More specifically, it said Ottawa’s definition risked including the “fiscal cost” of measures related to capital formation, not necessarily the actual amount of capital formation that would result.

Why is it controversial?

The new budget process has prompted questions and raised concerns from several quarters. The PBO has questioned the breadth of the definition of capital spending and warned it would “likely overstate” the amount of spending that actually builds capital. There are also questions about how “clear linkage” will be evaluated and presented in the capital budget and whether there will be any constraints in place on spending in this category. For example, Desjardins Group deputy chief economist Randall Bartlett has suggested the government should provide assessments in future budgets that show how the capital investments contributed directly or indirectly to economic growth and whether this outperformed the government’s cost of borrowing. Conservative leader Pierre Poilievre has been more direct in criticizing the split, accusing the federal government of “cooking the books” for political advantage. The PBO also noted that it did not yet have a full picture of the changes and that it would “provide a more in-depth assessment when additional details … are disclosed.” Finance Minister François-Philippe Champagne has said the federal government plans to balance the operational side of the budget in three years, even if the overall deficit is projected to persist over the medium-term.