For many of us, the immediate response to receiving an unexpected windfall of cash is to spend it -- which, as a new study suggests, is an impulse that is also shared by government.
The fiscal accountability rankings released Thursday by the C.D. Howe Institute show that in the past decade, federal and provincial governments have overshot their projected spending by a total of $82 billion. The substantial overrun -- equivalent to roughly 14 per cent of total current expenditures and the sum of current projected deficits -- is due, at least in part, to the tendency of governments to pour found money into new expenditures.
The worst offenders: resource-rich Saskatchewan and Alberta.
To be sure, accurately predicting government spending over the course of a fiscal year can be tough; faced with emergencies, governments are often forced to open the taps. But according to Colin Busby, senior policy analyst at the C.D. Howe Institute, unexpected expenditures don’t account for the bulk of the discrepancy.
"Obviously, a small portion of [the overrun] will be due to emergency situations, and we’re not really concerned with that. But another portion of it will be a one-time expense on a government service, and another portion of it is going to be a recurring expense," he told The Huffington Post. "It’s hard to say how much of that $82 billion is falling into each category, but I think it’s the two latter examples that are probably the most concerning."
As Busby explains, the rankings, which are based on the difference between the fiscal plans outlined in government budgets and the audited statements of financial results published in public accounts, reveal "a very strong correlation" between jurisdictions that enjoyed better-than-expected revenues and those that spent more than they said they would.
With the exception of Newfoundland and Labrador, which was only jurisdiction to undershoot spending, Busby says those that scored lowest on the accountability scale -- aptly dubbed The Pinocchio Index -- were resource-rich jurisdictions, where unanticipated revenues quickly turned into added expenses.
Source: C.D. Howe Institute
"There is a very close -- knee-jerk, almost -- reaction in most resource-based jurisdictions of getting extra revenues over the course of the fiscal year, and then finding ways to spend them as opposed to what would be a more preferred course of action -- either paying off debts or saving more," he says. "Certainly, resource-based jurisdictions performed by far the worst in our analysis."
As a percentage of 2010-2011 budgeted spending, Saskatchewan had the most egregious record. Over the past 10 years, the potash-rich province overshot spending by a total of $3 billion -- roughly 30 per cent of the total spending planned for this fiscal year. Meanwhile, oil-endowed Alberta had a total of $10.4 billion in additional spending, which is equivalent to more than 25 per cent of total budgeted spending for 2010-2011.
It's no coincidence that the jurisdictions with the worst accountability records also have some of the best balance sheets in the country: resource-dependent provinces have enjoyed many surprise injections of revenue in recent years. But as Busby points out, the report shows that they could be in even better fiscal shape.
"Were they able to put these higher-than-expected revenues toward their debt levels -- or in Alberta's case, increasing their savings -- they could have accomplished an even stronger balance sheet," he says. "There’s so much extra potential there."
After Newfoundland and Labrador, which underestimated spending by $300 million, Nova Scotia and Ontario performed best, with overruns equivalent to less than 10 per cent of 2010-2011 budgeted spending. The Federal government landed in the middle of the pack, overshooting spending by a total of $35 billion -- about 12 per cent of this year’s budgeted expenditures.
Though Newfoundland and Labrador scored best on The Pinocchio Index, the study identifies a a significant caveat: the province received a grade of "F" for its reporting practices of public accounts.
"They are still pursuing these very old reporting procedures ... that make the process a lot less transparent to legislators and to the general public," says Busby. "So it takes what is a good result on one hand and shoves it into a very grey space where we’re not sure how much we can applaud those results."
While reporting procedures across the country have gotten better in recent years, Busby says there is still room for improvement -- particularly in the context of renewed demand for fiscal responsibility in the aftermath of the financial crisis.
"The public should demand more from governments in terms of following through on their budget promises,” he says. “We need to pay more attention to it, both as a society and as policy makers and as legislators."