It’s budget season, when federal and provincial governments set out their priorities for the upcoming year. Smiling pictures of happy families and lots of charts and tables illustrate the government’s take on the economy, what they’ve accomplished so far, and what they hope to get done in the future.
Budgets set the financial plan for a government’s work, but they are also political documents that reflect political choices. It isn’t always straightforward to figure out how the headlines match up with the actual plans. To make sense of it all, we’ve put together some important questions to ask and key issues to watch for.
Budgets are normally separated into themes. Each section explains new spending or changes to revenue, followed by a table showing numbers broken out by year.
Is this new funding?
Sometimes a budget will include funding that has already been announced in a previous budget or fiscal update or carry forward money that the government promised to spend last year. You may be able to uncover this by comparing the amount to previous budgets and announcements.
Does it rely on matching funding?
Budget headlines may announce a total funding bundle for projects that depend on intergovernmental co-operation. Governments eager for good news may take credit for the full amount instead of being transparent about cost breakdowns and matching funding from other levels of government.
When do funds start to flow? For how long?
Budgets sometimes make a big fuss about a multi-billion-dollar investment. But a closer look reveals a five, 10, or even 20-year time horizon for the spending, with the annual amount starting small and increasing over time. Sometimes this is called back-end loading. This can be a realistic approach for large infrastructure investments. But it can also be a way to dull the criticism of advocates calling for immediate investment in social infrastructure like a national child care program.
Who really benefits?
Budget documents sometimes feature examples of how changes to taxation or program spending will affect ordinary Canadians. The benefits described in these scenarios aren’t always the average or most common outcomes, and it’s useful to ask who’s left out.
How important is a deficit or surplus?
Media attention often focuses on whether the government is expecting a deficit or a surplus. Generally, this is the least relevant information. In economic terms, the impact of a small budget surplus is the same as the impact of a small deficit. Both revenue and spending sides of a government budget are estimates and will change throughout the year. This makes any bottom line a somewhat arbitrary prediction that falls within a range of likely outcomes.
The government’s actual bottom line will usually be a bit different, and that’s OK. The difference is usually so small it has no broad economic impact. What’s more, a focus on year-to-year deficits ignores the long-term cost of underfunding public services, and whether the returns on current government spending will be greater than its cost of borrowing.
For transparency, budgets will sometimes include a contingency fund, setting aside an amount of expected revenue to give the government wiggle room in case things don’t go as planned. Most budgets also publish their fiscal assumptions along with what they call a sensitivity analysis – how much the bottom line would be affected by changes to their assumptions about real Gross Domestic Product growth or inflation.
Budgets don’t always identify the future savings from investing in public services or environmental stewardship, but it’s a useful perspective to bring to interpreting the choices that budgets make. We do have a way to compare the economic returns on various forms of government spending (which includes tax cuts) and investing in public services always out-performs tax cuts.
For an example of a budget that puts people and public services first, check out the Canadian Centre for Policy Alternatives’ Alternative Federal Budget.