July 9, 2009

Balanced Budget or Illusion?

The Campbell government claims that it ran a surplus of $78 million in 2008-2009. The Auditor General says that if the books were kept in accordance with his interpretation of Canadian generally accepted accounting standards, the surplus would be reduced to just $8 million. Relative to $38.3 billion in revenue the surplus, whichever figure is used, is almost a lost decimal point - so small that slight errors could turn the surplus into a deficit with the consequence of pay cheque penalties for Campbell and his cabinet.

The government does its accounting on an accrual, as opposed to a cash, basis. That means, for example, that if a bill is payable on March 31st but is not paid until April 1st, the payment is recorded as an expense in the fiscal year that ends March 31st rather than in the one that starts on April 1st. For routine business government knows exactly how much it paid after March 31st that should have been recorded for the year ended March 31st because it waits to close its books until most of the transactions have been done. However, there are always outstanding liabilities that must be estimated and recorded as accruals. When the surplus is less than a few tenths of one percent, how the accruals are calculated can determine whether there is a surplus or a deficit. The penalty that cabinet ministers face, not only on their pay cheques but also politically, for running a deficit provides a powerful incentive to make assumptions that keep the books in the black. None of this is to question the professionalism of the Auditor General or of any of the staff in the Ministry of Finance, but it is to make clear what they take for granted.

Footnote 2 on page 49 of the Public Accounts discusses "measurement uncertainty" and provides a table for items with a variability of over $10 million. Accruals for personal income tax revenue are shown as being accurate within plus or minus $300 million! Perhaps it should have noted that the "surplus" is variable within that range.

Perhaps more than anything, the close call on whether the Campbell government ran a surplus in 2008-2009 or not focuses attention on the silly political games played with the Balanced Budget and Ministerial Accountability Act, but those games have served the Campbell government well in creating the illusion that it alone has the skills to run the peanut stand. It is time to shatter that illusion.