Skip to main content

The Globe and Mail

Beware unrealistic budget spending forecasts

British Columbia is leading Canada in two ways, one habitual and one unique.

As always, Victoria is the first provincial capital to see the arrival of spring. This year, it will also be first with 2013's provincial budget, set for Tuesday.

As the budgetary bouquet is delivered, I will keep my eyes open for three perennial fiscal feints that can taint budget credibility.

Story continues below advertisement

First, it pays to beware unrealistic projections of spending in the future.

Often, this can be detected through 'inverted hockey stick' spending projections that show a spending category that has grown strongly over the last few years (the upward sloping shaft of the stick) suddenly revert to a flat line (the blade).

Making such projections of spending restraint is easy; bringing spending restraint to fruition is difficult. Any inverted hockey stick spending projections need to be accompanied by a serious and credible spending restraint plan.

Second, revenue estimates are another source of budgetary danger.

Across Canada, standard budgetary practice has evolved over the past 20 years to generate a norm of benchmarking economic projections in the budget against private sector forecasts.

This year, the B.C. government has taken the extra step of hiring Tim O'Neill, an accomplished business economist best known for his stint with Bank of Montreal, to vet the budgetary economic assumptions.

While some economists question the value of private sector forecasts, I think this Canadian budgetary norm is a good one, although perhaps not completely sufficient.

Story continues below advertisement

For example, some difficulties arise from volatile revenue sources - like resource royalties. Andrew Leach of the University of Alberta argues forcefully that using prices implied by forward markets provides a sounder basis for revenue projections than price forecasts, and this becomes more important for B.C. the more the province relies on future resource revenues in its budget.

Finally, I am wary of leaning too hard on aspirational plans for future revenue before that revenue is actually realized.

The recent Speech from the Throne in the B.C. Legislature featured speculation of how the province might spend future budgetary bounty arising from as-yet unbuilt liquefied natural gas projects.

Having a plan for economic growth is the right way to go, but dwelling too much on revenues before they are booked lacks prudence.

I will pay close attention to the opinions of resource industry analysts in assessing the viability of B.C.'s plans for an expansion of resource revenues.

With B.C. being the first in Canada to release a budget and with an upcoming provincial election in May, more eyes than usual may be on Victoria Tuesday.

Story continues below advertisement

While our eyes are often drawn first to the headline deficit numbers in the budget documents, it is worthwhile to spare a few moments to assess the credibility of the assumptions on spending, revenue, and sources of economic growth that underlie the headline numbers.

Kevin Milligan is Associate Professor of Economics at the University of British Columbia's Vancouver School of Economics

Report an error
About the Author

Kevin Milligan is Associate Professor of Economics at the University of British Columbia. He is also a Research Fellow with the C.D. Howe Institute and a Research Associate of the National Bureau of Economic Research. More

Comments

The Globe invites you to share your views. Please stay on topic and be respectful to everyone. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.

We’ve made some technical updates to our commenting software. If you are experiencing any issues posting comments, simply log out and log back in.

Discussion loading… ✨