Go to the Globe and Mail homepage

Jump to main navigationJump to main content

Report on Business

Economy Lab

Delving into the forces that shape our living standards
Best Business Blog, EPPY awards, 2011 and 2012

Entry archive:

Economy Lab has moved

Only Globe Unlimited members will now have access to a wide range of insightful commentary
and analysis on the economy and markets previously offered on this page.


Globe Unlimited subscribers will be able to read these columns,
written by some of Canada’s most deeply respected economists,
such as Christopher Ragan, Sheryl King, Andrew Jackson, and Clement Gignac,
as part of our ROB INSIGHT section.


All of our readers will still be able to browse the Economy Lab archives and read our
broader coverage of economic data and news by accessing their 10 free articles a month.


Learn more about Globe Unlimited and how to subscribe.

Economy Lab

Beware unrealistic budget spending forecasts Add to ...

British Columbia is leading Canada in two ways, one habitual and one unique.

As always, Victoria is the first provincial capital to see the arrival of spring. This year, it will also be first with 2013's provincial budget, set for Tuesday.

As the budgetary bouquet is delivered, I will keep my eyes open for three perennial fiscal feints that can taint budget credibility.

More Related to this Story

First, it pays to beware unrealistic projections of spending in the future.

Often, this can be detected through ‘inverted hockey stick’ spending projections that show a spending category that has grown strongly over the last few years (the upward sloping shaft of the stick) suddenly revert to a flat line (the blade).

Making such projections of spending restraint is easy; bringing spending restraint to fruition is difficult. Any inverted hockey stick spending projections need to be accompanied by a serious and credible spending restraint plan.

Second, revenue estimates are another source of budgetary danger.

Across Canada, standard budgetary practice has evolved over the past 20 years to generate a norm of benchmarking economic projections in the budget against private sector forecasts.

This year, the B.C. government has taken the extra step of hiring Tim O’Neill, an accomplished business economist best known for his stint with Bank of Montreal, to vet the budgetary economic assumptions.

While some economists question the value of private sector forecasts, I think this Canadian budgetary norm is a good one, although perhaps not completely sufficient.

For example, some difficulties arise from volatile revenue sources - like resource royalties. Andrew Leach of the University of Alberta argues forcefully that using prices implied by forward markets provides a sounder basis for revenue projections than price forecasts, and this becomes more important for B.C. the more the province relies on future resource revenues in its budget.

Finally, I am wary of leaning too hard on aspirational plans for future revenue before that revenue is actually realized.

The recent Speech from the Throne in the B.C. Legislature featured speculation of how the province might spend future budgetary bounty arising from as-yet unbuilt liquefied natural gas projects.

Having a plan for economic growth is the right way to go, but dwelling too much on revenues before they are booked lacks prudence.

I will pay close attention to the opinions of resource industry analysts in assessing the viability of B.C.’s plans for an expansion of resource revenues.

With B.C. being the first in Canada to release a budget and with an upcoming provincial election in May, more eyes than usual may be on Victoria Tuesday.

While our eyes are often drawn first to the headline deficit numbers in the budget documents, it is worthwhile to spare a few moments to assess the credibility of the assumptions on spending, revenue, and sources of economic growth that underlie the headline numbers.

Kevin Milligan is Associate Professor of Economics at the University of British Columbia's Vancouver School of Economics

Follow on Twitter: @kevinmilligan

 

In the know

Most popular video »

Highlights

More from The Globe and Mail

Most Popular Stories