The run-up to spring is budget season in Canada. Federal, provincial and territorial finance ministers have been presenting their plans for the upcoming fiscal year to their legislatures. Budget votes are matters of confidence, on which governments stand or fall. Budgets lay out how much governments intend to raise, how much they intend to spend, and what kind of surplus or deficit they anticipate, so financial analysts, policy wonks and the media pore over them.
Amid all the attention, it might seem odd to ask how much budgets actually mean. Not all are equally reliable, however: How meaningful a budget vote is depends on where in Canada you live.
While some legislatures vote budgets that contain straightforward information about the governments' fiscal plans, others do not. And while some governments' results are not embarrassingly different from their budget plans, the Canada-wide record over the past decade is a spending overshoot of $47-billion. If governments had more accurately hit their budget targets over that time, Canadians now would be paying lower taxes and carrying less public debt.
Forty-seven billion dollars is a lot of money – bigger than British Columbia's entire budget. And while in-year surprises – booms, slumps or disasters – are part of the explanation, in many jurisdictions, the problem starts with deficient information in budgets themselves.
Canadians who are not wonks or analysts, and do not pore over budgets themselves, might imagine that budgets present headline numbers for the upcoming year – total revenue, total spending and the bottom line – in the same format as their financial results, the public accounts, at the end of the year.
In some cases, that is true: A diligent but non-expert user – a legislator or taxpayer – can readily find and compare intentions to results for the federal government, New Brunswick, Ontario and British Columbia. But in others it is not: Some governments make the numbers hard to find; others have inconsistent presentations of multiple revenue and spending figures that would stump an accountant.
These deficient presentations might seem arcane matters for accountants and auditors to sort out – if the deviations of actual results from budgets over the past decade had not been so large.
The average spending increase voted in Ottawa and each of the provinces and territories each year over that span was 2.7 per cent. Yet the average increase reported in the end-of-year public accounts each year was 5.4 per cent. Add those overshoots across the country over the decade, and governments spent $47-billion more than anticipated in their annual budgets.
Budgets were even worse guides to results on the revenue side. The average revenue increase voted by all senior governments each year over the decade was 2.1 per cent. Yet the average increase reported at year-end was 5.4 per cent. The cumulative Canada-wide revenue overshoot over the decade was an eye-popping $72-billion.
Granted, prudence helps explain the tendency to underestimate revenue. An in-year revenue shortfall forces an unpleasant choice between in-year spending cuts or missing a bottom-line commitment. Provinces that depend heavily on natural resource revenues show larger over-shoots: They tend to build in larger prudence cushions, and natural resource prices have surprised on the up-side more often than not since 2003.
Look at the in-year revenue and spending surprises together, though, and a suspicious pattern emerges. Not just in natural-resource dependent Alberta and Saskatchewan, but also in Quebec, the Northwest Territories and to a lesser degree Ontario, misses on both sides of the budget tended to coincide. If governments have reacted to higher-than-projected revenue – whether relative to a prudent baseline or a genuine surprise – by spending it, the size of government in Canada has been ratcheting higher year by year in ways budgets did not anticipate.
The fiscal accountability news from the past decade is not all bad. Not long ago, no government presented its budget on a basis comparable to its financial reports; now, many do. As for the overshoots, the economic environment was tougher during the second half of the past decade than during its first half, yet results were generally closer to projections in the more recent years. So progress is possible. And given the startling tally of spending overshoots over the past decade, it is certainly necessary.
William Robson is President CEO and Colin Busby is Senior Policy Analyst at the C.D. Howe Institute. Their 2013 fiscal accountability report is available at cdhowe.org.