One Comment About Taxation – The Deceptive Accounting Trick of the Canadian Government to Separate the Federal Budget into an “Operating Budget” and “Capital Budget”

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. Such a mistaken belief was part of my childhood since I was fascinated by magic tricks. As an adult, I still enjoy it.

 

When one of my sons was growing up, he also took a fascination to magic and started to learn how to perform. But as most good magicians, he wouldn’t reveal his “secrets”.  Watching him work reminded me how easily the eye can be fooled — how a well-timed distraction can make something ordinary look extraordinary. The trick to good magic 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 released under the guise of “modernizing” the approach. But first, a little context. During the Liberal Party leadership campaign, Mr. Carney announced that if he became Prime Minister he would separate the federal budget into an “operating budget” and a “capital budget” and the operating budget would be balanced within three years. And 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”. And 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 – by trying to focus on the reduced “operational budget”.

 

There are two keys to this kind of trick. The first is to define what “capital” is and to do so in a very broad fashion so as to easily justify the transfer of an expenditure to the capital budget. The second key, like good magicians, is to do so with confidence by pretending to be the smartest person in the room. This is quite easy to do when you are preaching to a large population of financially illiterate voters.

 

Let’s explore the first key a bit further. 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 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:

 

1. are held for use in the production or supply of goods and services, for rental to others, for administrative purposes, or for the development, construction, maintenance or repair of other tangible capital assets;
2. have useful lives extending beyond one fiscal year;
3. are to be used on a continuing basis; and
4. 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. It states 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:

 

• Conditionality – whether the funding recipient is required to invest in capital formation to receive the benefit.
• 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” into 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, a tax credit, for, say, the latest “green” initiative, estimates will be made as to how much forgone taxation revenues this new provision would annually cost – known as a “tax expenditure”. Under the new capital budgeting approach, if the government felt that this 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 provincial 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 wrote that 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.

 

One Comment About Leadership – Leaders,  Are You “Looking Up”?

 

This past weekend, my wife and I hosted Thanksgiving dinner for our four sons and our only daughter-in-law. Two of my sons and my daughter-in-law decided to go for a hike in the mountains outside of Calgary. The trail we chose was fairly steep – one section climbed over 300 metres in just over two kilometres. It was technical enough that every step required attention to footing to avoid slipping.

 

On the way back down, given the steepness and uneven terrain, our heads were often bent toward the ground, focused on the next safe step. Every so often, my daughter-in-law would remind us: “Don’t forget to look up!” She was right. It was easy to get caught in the mechanics of the trail and forget to soak in the beauty around us.

 

Her simple reminder stuck with me. Leaders often find themselves on steep trails too – navigating complex issues, managing details, and avoiding missteps. And rightfully so. You don’t want to trip by ignoring the terrain in front of you. But there’s a balance to strike. If you spend all your time looking down, you risk losing sight of where you’re headed.

 

“Looking up” means remembering the bigger picture: your vision, your purpose, your people. It’s about ensuring that the details you’re focused on are actually leading you somewhere worthwhile.

 

So, leaders – keep your footing sure and your eyes sharp. But every now and then, don’t forget to look up. The view might remind you why you started climbing in the first place.

One Comment About Economics – Statistics Canada’s  Report on Labor – September 2025

 

Statistics Canada’s September labour data showed a net increase of 60,000 new jobs, with unemployment steady at 7.1 %, and full-time work driving the gain.

 

Notably, manufacturing rebounded by ~28,000 jobs (+1.5 %) – its first positive month since January.

 

Meanwhile, Alberta led the country with a 1.7 % gain – an increase of 43,000 jobs – a strength that coincides with surging oil & gas output (crude up ~7.2 %, natural gas ~4.4 %) – likely contributing to the province’s labour rebound.

 

Prime Minister Carney was quick to tout the gains on X:

 

“We’re building this country — creating new opportunities for workers.”

 

Let’s unpack that. A government can certainly influence the conditions for growth — infrastructure, incentives, regulatory clarity — but it doesn’t force businesses to hire. Markets – investors, consumers, entrepreneurs – still make the call.

 

Carney’s earlier framing of U.S. tariff threats as the “greatest crisis of our lifetime” was a political gambit.  Now he leans on a single month’s data to claim ownership of momentum. That’s narrative engineering and great political spin.

 

On the surface, the manufacturing gains look good but as always, the details matter:

 

• The +28,000 jump in manufacturing came after months of decline and maybe as much rebound as forward momentum;
• The broader labour market remains flat: weak net growth over the year, unchanged unemployment, rising underemployment;
• Real wages (after inflation) – especially in non-resource sectors – are under pressure; and
• The energy gains (oil, gas) suggest some of the “good news” is commodity-driven, not new structural hiring.

 

Carney can frame the story. But he can’t manufacture the engine. Canada has lots of work to do to improve conditions for growth.

 

Bonus Comment – Quote From Me – Kim  G C Moody – About Keeping Your Head Up

 

“The view’s always better when your head’s up — and so is your leadership.”

 

Hope you enjoyed this edition of 1-1-1. If you’re not already part of the In the Mood Network, now’s the time. Please sign-up today.  Whether it’s through consulting, coaching, speaking, or writing, my work is about planting acorns: deliberate, principled actions that challenge the status quo and grow into something far bigger. The goal? Bold reform. Stronger foundations. And a country that values hard work and common sense.