Economy Lab

Why there's never any bad news in a budget

Special to The Globe and Mail

(BRIAN GABLE/THE GLOBE AND MAIL/BRIAN GABLE/THE GLOBE AND MAIL)

Frances Woolley is a professor of economics at Carleton University

Every budget has its share of “announcables”: programs that sound good when the Minister announces them. A children’s tax credit, for example, is eminently announcable, providing ample opportunities for fine words about Canadian families, and photo opportunities with adorable children.

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The actual tax savings, however, are decidedly less impressive. The federal Children’s Fitness Amount reduces taxes owing by up to $75, the Ontario Children’s Activity Credit provides tax savings of up to $50 for a typical child. I don’t mind politicians trying to buy votes. That’s what politicians do. But why would anyone let their vote be bought for as little as $75 or $50?

One explanation is that people just do not understand how the tax system works. As an economist, however, I find “people are stupid” type explanations profoundly unsatisfying. A more interesting story is that, as behavioural economists argue, decision-making is subject to certain types of systematic bias.

Suppose, for example, that one of this week’s budgets contains a brand new $3,000 Nice Person tax credit, available to all nice people. At the same time, the budget also announces partial de-indexation of the income tax system. The behavioural economist realizes that people are smart, but they’re lazy, too, and don’t want to spend a lot of time and effort working things out.

One way to avoid thinking too hard is to grab the first number that comes up and use it as a reference point. What’s a $3,000 dollar tax credit for nice people worth? Less than $3,000, maybe $2,000? The actual number for a federal credit would be $450, but that $3,000 figure acts as an anchor, pulling people’s estimates of the potential benefits of the credit upwards.

Another way of avoiding thinking is to focus on the information that is readily available, and immediately relevant or salient to you. Nice person tax credit? Yes, that’s for me. De-indexation of the income tax system? That’s hard to analyze, so people avoid thinking about it.

Budgets are carefully crafted to maximize the salience of any good news they contain. The benefits of new initiatives are illustrated with examples of the concrete benefits they will provide for loving, caring, hard-working individuals and families – people that voters can connect with.

Budgets never explain, however, how the typical person will be affected by the cost-cutting or tax increasing initiatives. Just imagine a budget that contains language like this “Manon is a public servant with a young family. Manon’s mother, Claudine, is a low-income senior who lives with Manon’s family. Claudine is infirm and is dependent on Manon’s assistance for her personal needs. Manon will lose her job this year, after her department completes its strategic review…” Bad news is invariably presented in a way that minimizes its salience to the average person.

The challenge for journalists and policy analysts is to put numbers into perspective, to explain what they mean to Canadians. For example, if the government announces a $13-million new initiative to benefit children then the average benefits per child – dividing by 6.9 million, the number of children in the country – is less than $2 per child.

All politicians like playing Santa – the major difference between them is whether they are tax-cutting Santas or spending Santas. The challenge is to know whether Santa is really delivering the goods, or if that present is just a lot of fancy paper and ribbons, with not much of substance inside.