These are the main findings of the report titled “Trouble on the Bottom Line: Canada’s Governments Must Produce More Reliable Budgets,” which was released by the C.D. Howe Institute last month.
On Dec. 21, authors William B.P. Robson and Miles Wu wrote an open letter to Canada’s ministers of finance, outlining key findings from their report while calling for better budget targets and more disciplined adherence to them.
“In theory, management of public funds by Canada’s federal, provincial and territorial governments reflects the preferences Canadians express through their elected representatives,” the letter said.
“In reality, the chain of accountability has some weak links. Among them are the large discrepancies between budget projections and results.”
Over the last 20 fiscal years for which there are results from all governments (up to 2019/2020), the federal, provincial, and territorial governments spent a total of $119 billion more than they had projected, which equates to $3,100 per Canadian, the report says.
The authors say the revenue side is “even more startling,” as these governments raised $143 billion more than what was indicated in their budgets, which amounts to $3,800 per Canadian.
“This pattern of revenue overshoots larger than spending overshoots is interesting because it runs against conventional wisdom about the over-optimism of budget forecasts,” says the report.
The authors say that if governments responded adequately to economic cycles, in times of slumps or downturns expenses would be higher than predicted (overshooting the budget) and revenues would be lower than predicted (undershooting). In times of booms or high growth, the opposite would be true, with expenses being lower than predicted (undershooting) and revenues higher than predicted (overshooting).
But this rarely happens says the report, with that pattern being an “exception” among Canada’s senior governments.
“Overshoots on either side of the ledger tend to coincide, suggesting that governments under-projected revenue and then spent most of the resulting in-year “surprise” or otherwise managed the numbers to achieve a predetermined bottom line.”
The authors also note a recent tendency for governments to be unable to deliver services that weren’t anticipated in their budgets, resulting in negative adjustments “below the line” in their financial reports. While this practice is not inconsistent with public sector accounting standards, the authors note it is an “obstacle to accountability.”
The report also takes stock of the impact of COVID-19 on finances, which they say is “currently driving an unprecedented wedge between spending commitments and results” and the increases in debt will “persist for decades.” This could lead to two potential threats, the authors note, such as increased attempts to “manage the bottom line” and pressure to increase taxes and cut services.
The report says that “control of public funds is fundamental to representative government,” and highlights that about two out of every five dollars of Canadians’ incomes were raised and spent by the federal, provincial, and territorial governments in 2020—amounting to $830 billion or over $21,000 per Canadian.