Governments (slowly) getting discipline in 4th-quarter spending

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So much for made-in-Canada austerity.

Statistics Canada on Tuesday released 2013 first-quarter finance statistics for all levels of government in the country, and the results show that despite all the talk of fiscal fitness regimens among Canada's politicians, they clearly hadn't started their diets in the first three months of the year.

Governments' combined net operating balance – the gap between revenue and expenses – showed a deficit of $20.13-billion, the second-biggest quarterly shortfall since 1993. While revenues were at their highest level in the 22-year history of this Statscan data set, expenses climbed rapidly – up 8 per cent over the past two quarters, compared with revenue growth of just 1 per cent. The binge sent quarterly government spending to its highest level in the 22 years of data; governments across the land came out of this bender with new budgets pledging to exercise more restraint.

It should be noted that the first quarter of each year is typically a big-spending quarter for governments. Remember that this period is actually the final fiscal quarter for governments, whose budget year ends March 31. For whatever reason, governments routinely step up their spending to finish off the fiscal year's budget. Over more than two decades, the fiscal fourth quarter (calendar first quarter) of each year has been the highest-spending quarter every single year; on average, spending in this quarter is 5.4 per cent higher than in the preceding quarter.

There may be other explanations for this phenomenon (if you've got some, send them along, I'm happy to hear them), but it's hard to avoid the conclusion that government departments habitually use the final quarter of the budget year to be sure to use up their allotted annual funds, lest they underspend and get hit with a budget cut the next year as their reward. After all, if they didn't spend all the money we gave them this year, they must not need it all, right? It happens in both the public and the private sector – a use-it-or-lose-it approach to budgeting creates a climate in which there's little incentive for managers and departments to underspend their targets.

However, there is a hint that this climate has changed, if only slightly, since the recession and financial crisis – a time when provincial and federal governments swung from small budget surpluses to large deficits that they are now trying to bring back down to size. In the past five fiscal years, the final quarter's spending has topped the quarter before it by a comparatively modest average of 4.3 per cent (which, incidentally, is also the median over that period). And the latest quarter exceeded the quarter before it by just 3 per cent – the smallest final-fiscal-quarter spending increase in the 22 years of data. Perhaps deficit-conscious governments are finding ways to provide managers with incentives to save, and the last-minute spending rush is being toned down as a result.

Looking at the latest quarter, the slowdown in Canada's economy in the second half of 2012 certainly had a significant impact on government finances – but, apparently, more so at the federal level than the provincial level. The data show that federal government revenues sunk nearly 4 per cent in the quarter; provincial revenues, by contrast, were flat versus the previous quarter, while local government revenues rose almost 1 per cent. Federal expenses also jumped more than 12 per cent in the quarter, compared with 2.8 per cent for the provinces; local government spending actually fell by 1 per cent.