Blown Budgets: Canada's Senior Government Need Better Fiscal Controls.

Author:Robson, William B.P.
 
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Canada's federal, provincial and territorialgovernments routinely miss their budget targets By economically meaningful amounts. Over the past 15 years, senior governments' Cumulative spending overshoot adds up to $69 billion. Even larger is the cumulative revenue Overshoot: $104 billion. Governments in Canada are spending and taxing far more this year than they would have if they had delivered on their past budget commitments.

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THE STUDY IN BRIEF

In 2017, Canada's senior governments spent some S782 billion on program expenditures and interest payments, amounting to 36 percent of gross domestic product. Control of public money is fundamental to democratic government, so it is natural to wonder how much of this activity--and the taxes, fees and borrowing that support it--reflects deliberate choices by voters and legislators.

Formal accountability exists. Governments typically present budgets before or shortly after the start of the fiscal year, and budget votes are votes of confidence on which governments stand or fall. Legislatures and their committees play a key role in authorizing many specific expenditures. Governments table their public accounts, which present the audited results for actual revenues and expenses, after the end of the fiscal year.

But comparing the expenses and revenues projected in the budgets of Canada's federal, provincial and territorial governments at the beginning of the year with the results reported in their public accounts after the end of the year reveals that governments routinely miss their budget targets by economically meaningful amounts. More significant, they miss their targets in predictable ways: expenses and revenue typically come in above what the budgets promised. Over the past 15 years, senior governments'cumulative spending overshoot adds up to $69 billion, with the Prairie Provinces and the Territories showing the biggest overruns. Even larger is the cumulative revenue overshoot: $104 billion. Governments in Canada are spending and taxing far more this year than they would have if they had delivered on their budget commitments.

Comparing the annual patterns of overshoots and undershoots over time raises a further concern. Rather than overshoots of expenses coinciding with undershoots of revenue, or vice versa, as would happen if government finances were responding to economic cycles, overshoots on either side of the ledger tend to coincide--which suggests that governments are spending "windfalls" and/or managing the bottom line.

Encouragingly, however, the tendency to overshoot and miss budget targets more generally, and the troubling annual patterns, seem to have become less pronounced over the past 15 years. Several steps, including estimates that are more timely and presented in the context of the government's fiscal plan, a stronger role for legislative committees that authorize spending, and faster and more frequent publication of actual results, could further improve the record. Canada's senior governments should improve the quality of their budget forecasts and their adherence to those forecasts, and legislators and voters should hold them accountable for doing so.

Control over public money is central to democratic government. Canada's senior governments provide a wide range of services, from national defence and policing through social services such as health and education to income supports.

In 2017, their program expenditures and interest payments amounted to some S782 billion, or 36 percent of gross domestic product. On its face, the assumption that this activity, and the configuration of taxes, fees and borrowing that supports it, reflects the will of Canadians seems reasonable. Budget votes near the beginning of each fiscal year are votes of confidence on which governments stand or fall. Legislatures also vote on estimates to authorize spending--which people might assume would give effect to the plans articulated in the budget. Yet an investigation of results as published in their audited financial statements after year-end reveals not just that governments often miss their budget targets, but that they do so in predictable ways, with spending and revenue routinely coming in above what budgets promised. Over the past 15 years, the cumulative spending overshoot adds up to some $69 billion, with the Prairie provinces and the Territories showing the biggest overruns. Over the same period, revenue overshot budget projections by an even larger amount: a cumulative $104 billion.

Despite these sizeable overshoots, there is some optimism to be derived from longer-term trends. Fiscal accountability has improved over the past 15 years. Most Canadian jurisdictions have been overshooting or undershooting their budgeted spending and revenue figures by smaller amounts over time. Although the pattern of annual under- and overshoots suggests a tendency to spend "windfalls" and/or manage the bottom line, that tendency has become less pronounced over this period. Canadians should insist on more progress where it is occurring and turnarounds in the jurisdictions with bad misses and suspicious patterns. The spending and revenue overshoots remain significant, and the tendency for positive revenue "surprises" to generate positive spending "surprises" suggests that Canada's senior governments are not exercising care over public funds consistent with their huge influence over Canada's economy and Canadians' lives.

MEASURING FISCAL ACCOUNTABILITY

Formal control over public money is not the same as effective control. Legislatures and their committees do play an important formal role in approving fiscal plans and authorizing many specific expenses. They are critical in authorizing changes in the bases, rates, and other provisions of various taxes. While the bottom line--the difference between revenues and expenses in the government's statement of operations--reflects many factors that affect both sides of the ledger, and is not something a legislature can control directly, it is also typically a major focus of the fiscal plan. But Norm Betts, a former Minister of Finance in New Brunswick, spoke for many counterparts across the country when he said: "Anyone can balance a budget; balancing the actuals is what is hard!" (Ferguson 2017). What ultimately matters--a critical test of whether control over public money is effective--is the outcome. So meaningful measures of fiscal accountability require comparing intentions to results.

Our investigation comparing intentions to results focuses on the two primary documents at either end of the annual fiscal cycle. Canada's senior governments have fiscal years that run from April 1 to March 31. Budgets come at the beginning of that cycle: legislatures should vote on them before the beginning of the fiscal year. The public accounts, which present the audited results for actual revenues and spending, appear after its end--typically in the summer or fall.

Budgets are the core statement of a government's fiscal priorities. Budget votes are votes of confidence. They typically get extensive legislative debate, wide media coverage and attention from the interested public.

The audited financial statements in the public accounts are the definitive report of the government's annual finances. They are the official record of what a government raised and spent. They should, and typically do, present a consolidated annual statement of all expenses and revenue, with the difference between revenue and expenses representing the change in the government's net worth over the year.

Comparing the spending and revenue projections in the budget at the beginning of the year with the actual amounts reported after year-end should be a straightforward and illuminating way to measure how reliable budgets are, and draw some lessons about narrowing any predictable gaps between projections and results.

BUDGET PROJECTIONS VERSUS ACTUAL RESULTS

We say "should" in these descriptions, and will use the word several more times. If governments consistently presented expenses and revenue figures that captured the full extent of a government's activities using public sector accounting standards (PSAS), comparing plans and results over time would be simple. We would look at the dollar amounts for spending and revenue in each document and consider the differences between them. The only arithmetic required would be expressing changes in percentages to allow comparisons among jurisdictions of different sizes.

However, all governments did not present comprehensive...

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