TIGHT CONTROL OVER SPENDING: MYTH OR REALITY
In the media briefing following his meeting with private sector economists on October 28th, the Minister of Finance stated that the lower than expected deficit outcome for 2012-13, of $6.9 billion, was due to the Government’s ``tight control over spending``. The focus of Minister Flaherty’s comments was on the differences between the final deficit outcome and the March 2013 Budget forecast. However, in the March 2012 Budget, the Minister of Finance forecast a deficit of $21.1 billion for 2012-13, only $2.2 billion higher than the final outcome of $18.9 billion. What caused the Minister of Finance to revise upward his deficit forecast from $21.1 billion to $25.9 billion during the course of the fiscal year, which clearly was not warranted?
Comparing the final outcome of $18.9 billion to the March 2012 Budget deficit forecast of $21.1 billion, budgetary revenues were $5.1 billion lower (excluding the “risk adjustment reserve” of $3 billion). This was more than offset by lower program expenses, down $2.6 billion, lower public debt charges, down $1.7 billion, and the use of the $3 billion “risk adjustment factor”.
Virtually all of the upward revision to the budget deficit forecast was made in the November 2012 Update of Economic and Fiscal Projections. Weakness in the global economy resulted in much lower than expected commodity prices. Private sector economists revised down their outlook for nominal GDP growth from 4.6% in their March 2012 survey to 3.4% in their October 2012 survey. As a result, budgetary revenues in the November 2012 Update were revised down significantly by $6.3 billion. They were revised down further by an additional $1.3 billion in the March 2013 Budget. The final outcome, however, was $2.4 billion higher than forecast in the March 2013 Budget.
The key factor offsetting the decline in revenues was the inclusion of the” risk adjustment factor” of $3 billion. This provided the Minister of Finance with a “cushion/buffer” to help offset a significant portion of the impact of the decline in commodity prices on revenues.
An examination of program spending shows that tight control over spending had little to do with the better deficit outcome.
Within program expenses, most of the lower than expected spending was attributable to lower major transfers to persons, which were $1.9 billion lower, primarily due to employment insurance (EI) benefits, down $1.6 billion. Over the last three fiscal years, EI benefits have been over estimated ($2.8 billion in 2010-11, $2.0 billion in 2011-12 and $1.6 billion in 2012-13). Over this period, the ratio of those receiving benefits to those claiming to be unemployed and seeking work (B/U ratio) has fallen steadily, despite an improvement in labour market conditions. This could be attributable to the tightening of eligibility criteria for benefits. Major transfers to other levels government were bang on the March 2012 Budget forecast. This shouldn`t be surprising as the changes in most components are set in legislation.
In contrast, direct program expenses, which includes other transfer payments, Crown corporation expenses and departmental and agency operating costs were only $0.6 billion lower. This is the component over which the government has the most direct control and the component primarily subject to the government`s restraint measures, beginning with the 2010 Budget. Within direct program expenses, other transfer payments were $2.9 billion lower. This component was also significantly over estimated in the previous two years – by $5.0 billion in 2011-12, and $2.6 billion in 2010-11. It is suspected that this over estimation was primarily due to delays in spending the stimulus funding under the Economic Action Plan. For example, in 2012-13, the Office of Infrastructure Canada ``lapsed``$1.6 billion of the funds they were appropriated, with even larger amounts in each of the previous two years. This has little to do with the Minister of Finance`s claim of ``tight control over spending``. Too much money was allocated to these programs relative to the demand, especially over the short term.
In contrast, departmental and agency operating expenses were $2.3 billion higher ,higher, reflecting the impact of increased liabilities pertaining to environment cleanup costs and court decisions and the introduction of new policy initiatives. These initiatives were estimated at $3.7 billion.
It is evident that there was enough of a cushion in the March 2012 Budget forecast for direct program expenses to absorb the increase of these liabilities/iinitiativesinitiatives without adversely affecting the deficit target for that year. This further contradicts the Minister`s claim that the better than expected outcome was due to ``tight control over spending``.
The better than expected outcome for 2012-13 was due to the inclusion of the risk adjustment factor, forecast errors and increased flexibility built into the March 2012 Budget forecast, not because of ``tight control over spending``. As we have argued in the past, neither the Minister of Finance nor the President of the Treasury Board knows how much the government will spend in any one year. This is because there has been no detailed reconciliation between the Estimates tabled by the President of the Treasury Board and the expense forecasts in the budget tabled by the Minister of Finance since 2007. Clearly, there was enough flexibility built into the March 2012 Budget forecast to absorb any unexpected developments during the course of the year. What Minister Flaherty criticized the previous government for doing when he was in opposition, he has now adopted as part of his budget planning.