In the mid-1990s, governments across Canada found a neat budget-balancing trick. By lowballing their revenue projections, they could virtually guarantee a surplus and indulge in mid-year splurges. Paul Martin, who was then finance minister, was the champion of this technique but his provincial counterparts quickly adopted it. They knew taxpayers had little chance of discovering their sleight of hand because spending estimates and year-end financial statements were presented in different — and incompatible — accounting terms.
This deception irritated economist Bill Robson, now president of the C.D. Howe Institute. Under his leadership, the 56-year-old think-tank developed the “Pinocchio index” to expose their tactics and provide Canadians with trustworthy numbers. Each year it compares the spending targets governments announce with their actual outlays; grades Ottawa and the provinces on the performances; and exposes new forms of creative bookkeeping as they arise.
The institute just released its 2013 rankings. The good news is that Ottawa and Ontario have cleaned up their acts. Between 2003 and 2013, their cost overruns were minimal (0.6 per cent and 0.4 per cent respectively) and their financial documents were accurate and intelligible to “an intelligent and motivated — but non-expert — reader.” Both received an A.
Newfoundland undershot its spending targets by 10 per cent, but its accounts were so confusing and unreliable that it got a D+. Saskatchewan was the worst overspender. It spent 37 per cent more than it budgeted, covering its tracks with multiple, non-comparable financial documents. Because it is beginning to put in place a more intelligible reporting system, the institute also gave it a D+. The rest of the provinces got scores between B+ (British Columbia) to D- (Prince Edward Island). The three territories were in a sub-league of their own. The think-tank had so little confidence in their numbers it left them out of the index, noting that they regularly missed their targets by large margins.
Overall Canada’s senior governments spent $47 billion more than they budgeted in the last decade.
This matters for three reasons, Robson explained:
• It makes budget votes meaningless. MPs are being asked to approve targets governments have no intention of meeting.
• It allows finance ministers to keep taxes higher than they need to cover government operations.
• It makes a mockery of the principle of no taxation without representation, one of the cornerstones of democracy.
To launch its latest “Pinocchio index “and attract the attention of legislators, C.D. Howe invited two former Ontario finance ministers, Liberal Dwight Duncan and Conservative Janet Ecker, to share their experience.
Both were in a fiscally safe but politically awkward position. They had presided over Ontario’s cleanup — Duncan more than Ecker — but chiefly by padding their budgets more visibly than their predecessors (using reserves and contingency funds) had done. Both felt compelled to defend their less virtuous counterparts, pointing out that revenues can be volatile.
“Our corporate tax revenue fell by half in 2008-2009,” Duncan recounted. “When you live through that you tend to become more cautious.”
He held the finance portfolio for seven years before stepping down in 2013. He is now a senior adviser at McMillan LLP, a large Bay Street law firm. While acknowledging that underestimating revenue is “a backward way of keeping taxes high,” he pointed out that budgets are based on a consensus of private economists’ forecasts; they are drafted before the final numbers for the previous year are in; they must allow for emergencies and surprises; and they are no more opaque than corporate financial statements
“When you look at what’s going on in the political sphere, getting an ‘A’ from the C.D. Howe Institute doesn’t compare to: Here is a cheque for your local hospital,” added Ecker, who now heads the Toronto Financial Services Alliance.
She served as provincial financial minister for just 18 months, bringing finely honed political instincts to the job, having served as press secretary to former premier Bill Davis, a member of Mike Harris’s government and a long-time Tory organizer.
For policy wonks, it was a thought-provoking discussion of how economic and political priorities clash. For citizens, it was a glimpse into how easy it is to manipulate the budgetary balance. For Robson, it was a modest advance in his crusade for honest financial reporting.