By Tom Bradley

From a post I did in October:

Whenever I go through a government budget document, I’m always struck by how similar governments are to low (profit) margin, debt burdened companies. Small changes to the inputs into the budget calculations can have a huge impact on the surplus/deficit number. Like a highly geared, marginally profitable company, the swings can be dramatic - explosive on the upside when things work out, but serious trouble when a few factors go against them.

I was reminded of this government/company comparison yesterday as I reviewed the Federal Budget. Finance Minister Flaherty has tabled a projected deficit of $3 billion next year - total revenues of $276 billion minus expenses of $279 billion. It’s expected that we’ll be in surplus the following year ($6 billion), which is an election year.

Let’s do some math. $6 billion profit in 2015/16 on roughly $300 billion in revenue equates to a margin of 2%. Talk about operating leverage. And that’s on top of significant financial leverage.

It’s a good reminder as to how tough it is to forecast government balances and why the bureaucrats undoubtedly build in all kinds of cushions and safety valves. The numbers can change dramatically with a small change in economic growth, employment or interest rates.