Government budgets are like volcanoes: It’s what underneath that counts

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Appeared in the Calgary Herald

Imagine you’re near what you thought was a dormant volcano but it suddenly erupts. Assuming you escape, you might later reflect that there was nothing “sudden” about it. The eruption resulted from earlier events deep within the Earth’s crust, when tectonic plates moved and later produced the eruption that almost trapped you in a hot flow of lava.

Now think about government budgets. There are plenty of “underground” numbers that are akin to subterranean tectonic plates and their after-effects.

Therefore, during this tax and budget time, let’s consider two “tectonic realities” about governments and numbers—helpful to think about, given that there is plenty of “underground” action. It explains why governments often get themselves (and taxpayers) into trouble later.

Tectonic Reality One: The facts of math have their own unstoppable logic.

In 1995, the federal Liberal finance minister tried to explain why Ottawa needed to cut expenditures—interest payments on the debt were crowding other priorities for taxpayer cash. “The debt and deficit are not inventions of ideology,” said Paul Martin. “They are facts of arithmetic. The quicksand of compound interest is real.”

As it happened, by 1994/95, interest payments on the ballooning national debt amounted to $44.2 billion, or more than 26 per cent of all the money the federal government spent that year. That was a problem—as that $44.2 billion was already more than the federal government spent on direct transfers to Canadians ($40.3 billion).

One could pretend the numbers didn’t matter—like Greece today, for example—but Martin and his federal Liberal colleagues took a different tack: they acted to arrest the growth in debt and thus escalating interest payments.

While Martin raised taxes, much of the heavy lifting in getting the budget into the black was done through spending reform and reductions. Prudent, given that taxes and other revenues to all governments were already nearing an all-time high (42.5 per cent of GDP in 1995 compared to a 1970s-era range of between 29.9 and 32.6 per cent). Over the next two years, for every one dollar raised in taxes, the Liberal government cut spending by four and a-half dollars.

Simply put, math has its own logic and flow and governments can’t wish that away. Whether the issue is escalating debt interest, government-sector pay premiums or unreformed government-sector pensions, the lesson (especially for Ontario, Alberta and other provinces running significant deficits now) is clear: deal with the facts of arithmetic sooner, not later.

That leads to Tectonic Reality Two: Pay attention to the small numbers below the surface or you’ll eventually face trouble or lost opportunities.

Here, ponder provincial education spending.

As my colleagues demonstrated in a recent paper, once you adjust education spending across the provinces for inflation and student enrolment, spending on education (in public schools) rose by 38 per cent, on average, beyond what was necessary to keep pace with enrolment and inflation between 2001/02 and 2011/12.

At the top of the not-paying-attention list was New Brunswick. That province spent 56.4 per cent more than that required by the combination of student enrolment plus inflation between 2001/02 and 2011/12. Other examples: Alberta increased spending by 55.3 per cent beyond student enrolment and inflation, followed by Ontario (46.7 per cent) and British Columbia (19 per cent).

In total, the provinces spent $14.8 billion (between 2001/02 and 2011/12) beyond what was necessary to keep pace with enrolment and inflation.

Why does that matter? Because that $14.8 billion didn’t go to other priorities—hospitals, roads, balancing the books, or in the Maritimes and Quebec, reducing some of the highest provincial taxes in the country.

That’s a big number. But it resulted from the smaller, earlier numbers most people never noticed. All of those went unnoticed below the surface. As with the movement of actual tectonic plates, it’s never a good idea to ignore such underground realities for too long.

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