A new report from Parliamentary Budget Officer Kevin Page finds federal spending cuts affecting front-line services, not back-office administration. A report yesterday suggested the Harper government may spring good deficit news just in time for the next federal election. (Sean Kilpatrick/Canadian Press)

A new report from the Parliamentary Budget Office finds that the Conservative government's spending restraint program is focusing on front line services, while back office spending continues to rise.

That's exactly the opposite of promises made by Finance Minister Jim Flaherty, who said last year that the majority of Ottawa's $5.2-billion austerity program would target administrative and support costs without impacting service to the public.

The PBO reviewed actual government spending from April to September 2012, along with main and supplementary spending estimates, to arrive at its calculations.

Overall, the independent budget office found that Ottawa's spending was down $800 million, or 0.6 per cent, through the first six months of the current fiscal year, which ends March 31.

Direct program spending fell four per cent, mostly because almost 11,000 civil service jobs were eliminated in the first half of the year.

But spending on internal services — such as communications, information technology, human resources and financial management — rose by eight per cent to $5.3 billion, according to the PBO.

"The continued increase in Internal Services expenditure suggests that spending growth on overhead has not been curtailed, as suggested in Budgets 2010 through 2012, and the focus of restraint exercises has instead been on reduced spending to front line services," said the report.

The PBO notes that capital expenditures, in large part driven by Defence spending, also climbed in the first half of 2012-13, up almost seven per cent.

Austerity from 'internal efficiencies'

The Conservative budget, delivered last March, promised to cut $5.2 billion in spending over five years, but asserted that 70 per cent of the austerity would come from internal efficiencies.

"The majority of the spending review reductions relate to back-office operations of government," Flaherty said in his 2012 budget speech. "They don't relate to service delivery by government."

Kevin Page, the parliamentary budget officer whose five-year term is almost over, undermined that claim in November when he reported that departmental reports indicated just 15 per cent of planned savings would come from internal services.

Treasury Board President Tony Clement, who is overseeing the government's austerity measures, insisted at the time that Page was wrong, and did so again Thursday.

"This report underestimates the savings from operational efficiencies because it does not include all back-office savings measures," Clement spokesman Matthew Conway said in an email.

"These savings will be implemented over a three-year period, and so full savings will not be realized in spending estimates until 2014-2015."

Clement's office said internal savings not recognized by the PBO "run the gamut from consolidating corporate services across government departments and introducing new productivity-enhancing technology solutions, to increasing the use of video-conferencing over travel and replacing paper publications with online content."

Treasury Board's own definition of "internal services" was used by the PBO to track government spending, Page responded in an email.

"The current high (actual) growth rates for 'internal services' likely represent an inconvenient truth," Page wrote.

It remains unclear where all the government's planned cuts will be made, and how much each cut will save, he added. "There are no spending plans by departments consistent with Budget 2012 restraint measures."

Page's office has been attempting to get that information in order to put it in front of parliamentarians for their consideration.

The latest PBO report, which is based on actual spending to date, ends with a note on the lack of transparency:

"As such, it is difficult to determine whether the substantial changes in year-over-year spending are a result of planned spending reductions/program eliminations or some other factor."

Feds 'in a good spot right now'

In a separate report released yesterday, the budget watchdog said federal government's finances are on track over the long haul, but Ottawa would be wise to compile a cumulative accounting of provincial and territorial finances as well.

Changes to provincial health transfers and old age security will dramatically reduce Ottawa's debt-to-GDP ratio by 78 per cent by the year 2050, according to the independent report released Wednesday.

Fiscal sustainability means the federal debt ultimately won't grow faster than the economy, the report concluded.

"The take-away from this is, federally, we're in a good spot right now," Kevin Page, the parliamentary budget officer whose five-year term expires March 25, said in an interview.

The PBO, created by Stephen Harper's Conservative government after it came to office in 2006, has been creating "fiscal sustainability" reports since 2010 — reports that have drawn the ire of Finance Minister Jim Flaherty.

When Page first reported a long term "fiscal gap" in 2010, Flaherty dismissed the study as academic.

After Ottawa unilaterally moved to cap health transfer payments to the provinces in December 2011, the PBO revised its long-term outlook to say federal finances were sustainable.

And when the 2012 Conservative budget raised the eligibility age for old age security to 67 from 65 — using the rationale that the pension system is in crisis — the PBO disagreed, again using long-term sustainability models.

That prompted Flaherty to call Page's report "unbelievable, unreliable, incredible."

Sustainability numbers now line up

Last October, the Finance Department finally released its own projections for long term fiscal health. They matched the PBO model almost exactly.

"When you go back (now) and look at their analysis, they had the same analysis we did — the same methodology, same assumptions, almost identical numbers," Page said in an interview.

There were no slings or arrows directed at the PBO by Finance following Wednesday's report.

But the independent budget office projects that Ottawa actually has a little more wiggle room to increase spending or cut taxes over the long haul than Finance predicts.

And that's where the provinces come in.

The health transfer has been climbing six per cent annually, and few provinces think they'll be able to hold health-care cost increases to Ottawa's limit of nominal GDP growth — between three and four per cent.

In short, more of the cost of health care will fall on provincial ledgers, said Page.

"We're all in this together," he said. "The fiscal burden isn't eliminated. We move that fiscal burden a little bit, going forward, from the federal books and we put it onto the provincial-territorial books."

Almost $60 billion a year, raised by Ottawa from Canadian taxpayers, is transferred to provinces and territories.

Page said the fact that the Finance Department's sustainability numbers of last October line up so well with his office's ongoing reports is a good sign.

"If you're a parliamentarian, whether on the opposition side or the government side, this kind of gives you a sense of confidence — two data points saying the same thing. We have some room to manoeuvre."

Rather than attacking his office, said Page, the government should routinely respond to his reports with its own data that either refutes, clarifies or corroborates the PBO's findings.

"The problem for me is they made (the sustainability numbers) available after they made all the decisions," said the budget officer.

"We do front-end due diligence. You want this analysis to support a decision."