Winnipeg Free Press - PRINT EDITION

Avoiding great expectations proving a good strategy so far

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Every government that has ever tabled a budget prefers to under-promise and over-deliver. Governments like to create modest expectations in budgets for how well they can do in areas like spending restraint and revenue growth. And if they spend less, or generate more revenue, they tend to look good. Or lucky. Or both.

Jean Chrétien's federal Liberal government was a master of this strategy. Starting shortly after coming to power in 1993, Chrétien and his finance minister, Paul Martin, brought in budgets that always seemed to have underestimated revenues. That meant they also annually underestimated the budget surplus.

Billions and billions of dollars in unexpected surpluses rolled into the federal treasury. That made Chrétien and Martin seem like fiscal magicians, and it helped build support for a succession of majority Liberal governments.

But were the Liberals deliberately underestimating so they could over-deliver? Or was this a more cynical political strategy, where a government deliberately lowballed its forecasts so it seemed to be perpetually doing better than even its best guesses?

It was never proven one way or the other that Chrétien and Martin deliberately lowballed their forecasts. Martin claimed, with some plausibility, he would take a range of forecasts and then come down on numbers that were somewhere between the most optimistic and the most cautious. And the simple fact was Canada's economy, from the mid-1990s until the mid-2000s when the Liberals ruled this country, ran hotter for longer than it ever had before. So hot, it would have been difficult to overestimate revenues.

Did Manitoba do the same? For the most part, this province did do better than it projected on revenues. At the same time, it also managed to spend close to what it budgeted. A C.D. Howe Institute report last year found Manitoba had one of the best records of spending to budget. From 2000 to 2011, Manitoba overspent its budget by 2.4 per cent. Only Quebec and New Brunswick had better records.

Some may argue that accomplishment is like being the tallest midget at the circus, but it still acknowledges Manitoba spends close to what it budgets.

There have been exceptions, of course. Last year, Manitoba's forecasts were upended by record floods, which cost Manitoba nearly $900 million. Adding nearly $200 million in other, unanticipated expenditures, Manitoba racked up a $1.1-billion deficit. Talk about underperforming.

Fast-forward to fiscal year 2012-13, which began this week with the tabling of the provincial budget. With no immediate threat from Mother Nature, the province once again forecasts modest increases in economic growth and revenues. These forecasts are based on models developed by the province, with data from third parties, including the Conference Board of Canada and most of the large and medium-sized chartered banks.

Is this going to be a return to the "under-promise and over-deliver" years? With no threat of another catastrophic weather event, the province might find savings in excess of its $128-million target, and a lower deficit than the $460 million it has forecast. Neither of those numbers is particularly daunting. But there are threats to that scenario.

In Manitoba, when it's not too wet, it's too dry. This summer, drought conditions have been forecast to prevail in some parts of the province. That usually means increased costs to government, whether to support farmers or combat drought's best friend -- the forest fire.

But there are additional threats beyond weather events. Continuing uncertainty about the strength of the global economy will be an issue.

And this week, Bank of Canada governor Mark Carney once again warned Canadians about the prospect of higher interest rates.

Although Carney was talking directly to consumers, government is also vulnerable to rate hikes. Manitoba is already paying more than $800 million in debt-servicing costs annually. Even a small boost in interest rates would drive that number up and put deficit projections in doubt.

Manitoba's debt is not wildly out of control; the debt-to-GDP ratio is still among the best in the country. However, every million dollars in increased debt-servicing is another million dollars that must be trimmed from program costs or added to the deficit.

This year, the province has a fighting chance to improve on its budget targets. However, it must have near-perfect conditions for that to happen. With a bit of luck, this government will find nirvana: a world of lower expectations and higher results.

Republished from the Winnipeg Free Press print edition April 19, 2012 A4

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