The power of the jaws

The long-awaited federal budget was delivered last week, and it was, to tell the truth, rather boring. The media was fixated on whether the federal deficit would be eliminated.

The long-awaited federal budget was delivered last week, and it was, to tell the truth, rather boring.

The media was fixated on whether the federal deficit would be eliminated, even though everyone knows that this year’s $1.4 billion surplus is essentially no different from last year’s $2 billion deficit when you are talking about a budget that is almost $300 billion in total.

Instead, there were a few deeper budgetary themes lurking under the surface that are worth talking about.

The first is the “jaws.” This is finance talk for the difference in the growth rate of your revenues compared to your costs. The “jaws” phrase comes from looking at charts where the revenue line goes up and cost line goes down, which makes the PowerPoint graph look like a great white shark eating your problem.

It is obvious that having revenue growing faster than cost is a good thing. But what savvy CFOs realize is that if you maintain the jaws wide-open for a couple of years, you can solve some daunting financial problems without having to resort to slash-and-burn cost cuts. Even just a 3 or 4 point gap between revenue and cost growth can make a big difference.

This is essentially what the federal government has done over the last five years. In 2010-11, they had revenue of $236 billion, costs of $272 billion and a $36 billion deficit.

Cutting $36 billion in public programs to kill that deficit would probably make any government unelectable.

Instead, the feds relied on the jaws operating over five years. For the 2015-16 fiscal year, they expect that $1.4 billion surplus mentioned above.

They got here by keeping cost growth to just 1.2 per cent a year over the period, while revenue grew 3 points faster at 4.2 per cent. It doesn’t sound like a huge difference, but with compounding growth rates over five years it has made that $36 billion deficit go away.

Of course, you can only do this if you have a low national debt and can afford to borrow to cover the deficits over those years (which is the case for Canada, if not some of our European friends).

Keeping cost growth to a bit under inflation requires discipline. Especially since the government promised not to cut transfers to provinces, territories or individuals. This meant that federal spending on the federal government’s own programs went down about 5 per cent from 2010-11 to this year.

This brings up a second budgetary theme: secrecy. Unlike some previous governments, which went through high-profile spending reviews, this government was very tight-lipped about where it planned to slash. I am not aware of a public document that sums up all the cuts.

Instead, bits and pieces leaked out or were announced piecemeal. A cut to Parks Canada’s Yukon operations here, a closure of the Whitehorse tax office there. It played out the same way across the country.

I don’t think this is transparent government. But tactically it seems to have worked for the Conservatives, since it made it difficult for opponents to mobilize.

We don’t know enough about the cuts to get a sense if they made fundamental changes to make government more efficient, or just cut spending temporarily. If you merge three departments’ server farms to achieve economies of scale, that can last. If you just go on a server purchase holiday, you save money in the short term but just have to spend twice as much in a later year when the servers wear out.

The third theme relates to the territories. The word “Yukon” only shows up five times in the entire 528-page budget document, and these mentions are not major new spending programs. In addition to the Community Salmon Program, we get mentioned in a table once and are also apparently participating in some initiatives around capital markets regulation, pooled pension plans and registered disability savings plans.

Remember the days when ministers seemed to always be flying into town to announce specific northern programs in areas like health, infrastructure, defence or whatnot? A lot of these programs have expired in recent years, and for now it looks like we can expect fewer new ones in the future.

When devolution was being negotiated, I remember people wondering if the feds would use it as an excuse to cut support to the Yukon. You have the power now and get a billion-dollar transfer, federal finance officials might say, so get on with running your government and don’t expect a bunch of extra programs from Ottawa to help you.

I of course have always been in favour of the Yukon having its cake and eating it too, as well as having an iron-clad formula guaranteeing that future cake deliveries from Ottawa will increase in line with nominal gross domestic product.

I sense that the bakers in Ottawa have developed a different view.

This could be tough news for the Yukon government. They may have to manage more of our surging health costs and infrastructure gaps with their core budget.

So there you have the three big lessons of the federal budget for future politicians to absorb: always manage the jaws, keep your cuts secret, and quietly let costly bonus programs for lower levels of government die off.

It’s not exactly uplifting politics, but who ever told you fiscal policy was fun?

Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. You can follow him on Channel 9’s Yukonomist show or Twitter @hallidaykeith

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