Stephen Gordon: Liberals’ deficit claim doesn’t add up

It will be easier for the Liberals to run on their plan of deficits if they can credibly claim they inherited one from the Conservatives. They can’t.


 
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Minister of Finance Bill Morneau speaks to media as he delivers a fiscal update during a news conference, in Ottawa, on Friday, Nov. 20, 2015. THE CANADIAN PRESS/Adrian Wyld

Minister of Finance Bill Morneau speaks to media as he delivers a fiscal update during a news conference, in Ottawa, on Friday, Nov. 20, 2015. THE CANADIAN PRESS/Adrian Wyld

The forms must be obeyed: after a couple of weeks in power, newly-elected governments are obliged to proclaim that they are shocked! shocked! to discover that their predecessors were even more devious and incompetent than we thought. The nation’s finances, our new masters regret to inform us, are in worse straits than had been anticipated. And such is the message in the updated Economic and Fiscal Projections (EFP) released today by the new Liberal government.

There’s not much point in discussing whether or not these new projections will be borne out by future data: they’re based on the assumption that the new Liberal government would simply continue on the path laid out by the previous Conservative budget. That’s not going to happen.

But what about the current fiscal year? The 2015-16 exercise began on April 1, and we’re now in mid-November. The Conservatives were in power for the first seven months of fiscal 2015-16, and it will still be a while before the Liberals can implement the measures required to change the course of revenues and expenditures set out by the Conservatives. I expected that there would be relatively minor changes to the outlook for the current year, along the lines of the updated projections that PBO released a couple of weeks ago. The main differences between the PBO’s outlook and the one tabled by the Conservative government last April occur farther out in the forecast horizon; the PBO’s outlook for fiscal 2015-16 is not far from what was in Joe Oliver’s budget.

So I was surprised to read this:

Economic developments have led to a downward adjustment to the fiscal outlook, leading to projected deficits of $3.0 billion in 2015–16

September’s Fiscal Monitor was also released today, and it shows a surplus of $1.6 billion through the first half of fiscal 2015-16— more than the $1.4 billion surplus that last April’s budget projected for the entire year. (The PBO’s estimate was a surplus of $1.2 billion.) How did the Liberals manage to get from an actual $1.6 billion surplus over the first six months to a projected deficit of $3.0 billion over the entire year?

You’d expect the answer to be weaker-than expected revenues, driven by a weakened economy and oil prices that have come in lower than what was projected in April. But that’s not it. Here is a comparison of April’s budget, the PBO’s update and the EFP released today:

balance_15_16

Most of the $4.4 billion swing from a $1.4 billion surplus to a $3 billion deficit is from higher projected spending, not reduced revenues. If you look at tax revenues, the EFP is only $600 million below what the budget projected for 2015-16, and has the same estimate of the PBO. So if it’s not tax revenue, what is it? Let’s unpack those revenue projections:

reven_15_16

There’s a mixed message on the tax side: lower projected personal income tax revenues are largely offset by increases elsewhere, notably the GST. The item driving the downward revision for revenues is that $1.4 billion downward revision for “Other revenues”. Here is how the EFP explains it:

For 2015–16, other revenues are projected to decline by 2.8 per cent, primarily due to lower enterprise Crown corporation revenues and lower interest rates.

I would have expected rather more detail for a revenue item that accounts for three-quarters of the downward revision in projected revenues.

On to expenditures, which account for most of the projected swing into deficit:

expend_15_16

One of the two most important items here is the $900 million increase in projected Employment Insurance benefits. This is above the PBO estimate, but given the state of the Alberta labour market, I don’t see much point in quibbling about this item.

But what is that $1.2 billion increase in operating expenses? Here’s the EFP explanation:

Direct program expenses are expected to be higher than projected in Budget 2015, largely as a result of higher projected public service pension and benefit expenses. Long-term interest rates are used in the valuations of the Government’s liabilities for employee pensions and other future benefits. While the total pension and benefit obligation of the Government has not changed, lower projected interest rates result in relatively more of these costs being recognized in the near term rather than the future.

I think this means that using a lower interest rate to discount future pension obligations increases their present value, and this increase is being booked as a current cost. If so, then it looks like the GM sale in reverse. But again, this one item accounts for almost half of the increase in expenditures, and the government should be clearer about what is going on here, and why it’s happening now.

It seems pretty clear that the goal of the EFP is to prepare the ground for the deficits the Liberals plans to run; it will be easier for the government to do so if it can credibly claim that it inherited a deficit situation in the current fiscal year.

Based on the information made available so far, I don’t think that claim would be credible. I don’t doubt that the government will produce a deficit for 2015-16 if it wants one, but it would be the Liberals’ deficit. They should take ownership of it.

 

 


 

Stephen Gordon: Liberals’ deficit claim doesn’t add up

  1. They ran on the promise of $10 billion annual deficits. By claiming they inherited at $3 billion deficit, they’ve gained themselves an extra $3 billion in spending. Now they can run $13 billion deficits and pretend they had no choice.

    • Not hard to see how the Libs created the deficit from the Conservative Surplus. Once the Liberals were in charge, any additional expenditures they made will show up, as the Fiscal year end for Government is 31 March, not the 31 Dec.

      When you consider all of the new expenditures the Liberals have already made, it is easy to see how they created a new deficit already.

      (bogus) Refugees from Syria – 1.2 billion (supposedly over 6 years, but wait for that number to increase to about 6 Billion.
      New advertising blitz to make it look like anyone concerned about security threats of Muslim immigrants is a racist or bigot – $500,000 (most likely to increase to $2,000,000 by year end, and much of that going to “Liberal” agencies.
      Flying everyone and their uncle to paris for a “climate change” conference……$1,000,000 (but will be reported as about $75,000.

      the list goes on.

      Of course the new Government is lying about the costs….they are liberals after all.

  2. Seems to me for a number of years, you were claiming the 2% GST cut created a structural deficit of the same amount, and were highly sceptical of the gov’ts claims to be able to balance the books by 2015.

    And when they claimed they would, a bit of a shrug (or acknowledgement that program spending was being artificially constrained in the short term).

    Looks like you are mainly taking issue with $1.2 billion increase in op expenses. If they are as sensitive to interest rates as you infer, isn’t it equally plausible that a higher rate at the upper end of the scale was purposely used in the past to make the books look better?

    In any event, a forecast that once the final costs come in, can be adjusted accordingly, at the end of the fiscal year.

    • I had hoped that the Federal Liberals would be more honest than their Ontario counterparts but, based on this slight of hand, that doesn’t look to be the case. Looks like Trudeau has learned more from Wynne than I had hoped.

      • Be realistic. The federal Libranos and the Ontario Libranos drink each other’s bath water. You’re expecting a leopard to change its spots.

        • Leopards drinking bathwater? Aren’t there animal welfare rules that prevent this?

          The horror!

  3. Yesterday, when I read the article on Bill Morneau by John Geddes, I had essentially said the same thing.It is filed under
    http://www.macleans.ca/politics/ottawa/bill-morneau-the-finance-ministers-portfolio/
    Mine was from a layman’s point of view. Today, I am only glad that someone in authority like Stephen Gordon is backing me up, with facts and figures. To me, Bill Morneau didn’t cut up the figure of an authority in finance, just a smart businessman. Clue: Look at the way he delivers like a parrot. Every second word of every sentence, he had to look up in the papers before him. He was just reading it without any conviction. The cook-up actually must have been made elsewhere without much input from him. Stephen Harper may be many things, but to accuse him of dishonesty in public life needs something much more, much worse than mere evil intentions. The devious plans of Liberals are only too apparent here.
    Some words of caution: PBO knew some of this voodoo accounting of Liberals well in advance, but hesitated to make it public and hurt their chances of election, so in future too, whatever they say, we will have to double check with the numbers from Central Bank or elsewhere integrity is still the norm.
    If you want more fun with numbers though, you will have to await the FM’s announcements on capital budgeting and other growth-spurring measures. During the elections, when I heard Justin pronounce that he will engage every municipality and village council on capital spending measures, and gave me the impression of this being an annual event,I immediately understood this as another tax and spend technique borrowed from the Martin era. It would still be helpful though if they can hire the Greek Prime Minister as a consultant.

    • This is great. Accusing Stephen Harper of dishonesty requires, to your mind, a high standard of evidence. But you’re already convinced that the Liberals have “devious” plans, no evidence required.

      You do see the differing standards, right?

      Oh, and you seem to have forgotten that those “tax and spend” Martin Liberals handed Harper a $12B surplus, having balanced the federal budget for the first time in 40 years. Funny how that happens…

      • TJCook,

        We know how the Liberals balanced the budget in the 1990’s. they lifted the economic policy of the Reform Party.

        by the way..the policy Martin stole from the REFORM party was written by a young economics student named Stephen Harper. If you want to be picky, you can also credit the CLARITY ACT to harper as well. Of course, when harper wrote it, he called it the “Quebec Contingency Act” and it was tabled as bill C-341. the Liberals just stole it and re-wrote it in Liberal-speak and called it the clarity act.

  4. Excellent article! This is beginning to sound like gamesmanship by a government that vowed true transparency. Kudos to Stephen Gordon for challenging them early in their mandate. If Bill Morneau wishes to stick with these numbers, he needs to elaborate.

    • He can’t is the real problem. I’ve have subscribed to this Government Report for more than 5 years now and in the past if Jim Flaherty or Joe Oliver ever had a comment or explanation to make it was severely highlighted and noted that it was their addition to the report and separate from it. Some one made an opening statement to this report that contradicts what is in the report without clearly stating how or why or who! Sad state of affairs! :http://www.fin.gc.ca/fiscmon-revfin/2015-09-eng.asp

  5. From CBC this spring ..”Clement, speaking on CBC’s Ottawa Morning on Tuesday, said the government will realize $900 million in savings this fiscal year from changes to the sick leave”…recall these were savings booked without the reforms. I think that has been undone.

  6. Meeting of the Con loser convention, I see.

    • Emily,
      Did you even take time to read the article? If so, you’ve added another arrow to your sorry quiver-you support dishonesty.

    • Calling people you don’t agree with losers is a bit too Trumpian, even for you, non?

      • Cons have spent 10 years lying, and calling people names.

        So go play with the cows and let the adults run the country.

        • I must admit I read many articles and the comments just to see if Emilyone has a comment . I keep thinking she cannot write any thing more stupid but she always seems to be able to.

          • Oooooo bitter bitter losers. LOL

          • She hates farmers and western Canadians so if she can make a nasty comment about one, she will even though she likely survives on the food they provide. As for calling people bitter, pot meet kettle.

          • There is no limit to Emily’s ignorance.

            but at least she’s happy to share the extent of her vacuous mind.

    • Stephen Gordon is a con…who knew.

      • She accused Paul Wells of being a con too I think. She also claims the official Liberal party website is wrong and that Sophie Gregoire-Trudeau doesn’t call herself Gregoire-Trudeau. A strange bird she is.

  7. I think the main thesis of your article errs because of a misunderstanding of how pensions work. It would be great to have a pension professional respond, but here is my understanding based on a fairly close following of my own pension:

    -Pensions benefits are not supposed to be future expenditures – if I earn a year of pension service this year as an employee, the organization, if they are following the principles of good governance, should be investing an amount of money that will pay for the cost of that year of service. The cost that they should be paying is based on an actuarial calculation of what that benefit should be.

    -So, while the money is paid in the future, it is invested in the present. The investment revenue from the employer/employee contributions is what pays for the bulk of the benefits in a well run pension.

    -Every few years, actuaries come in and make sure that the contributions to the pension are adequate to meet the benefit in the future. As market conditions deteriorate and medium to long term trends made in the last prediction show that the prediction needs to be revised to account for the ‘best guess’ the actuaries can make with present data. In this case, the government is saying that lower bond yields, for example, and a downward revision in the trend expected for interest rates moving forward means that they have to increase the amount the put aside as an investment in the present to fund the pensions of THIS YEAR’S employees even though the employees will withdraw that in the future.

    -Again, pensions themselves aren’t paid out of general revenue as you seem to suggest in your article. Pensions are paid out of a pension fund and the government pays into that fund the amount of money needed to fund that year’s worth of benefit of the employees currently in the public service.

    -Treating pensions as “Future expenses” that should be on a future budget would actually be highly irresponsible – this is what is saddling a lot of corporations and governments who have underfunded pension contributions. NOT putting the money in this year would be slight of hand. Putting the money in this year and being conservative in how much you actually need to put in (ie: erring on the side of caution) is actually good governance.

    So, in short, I’d love to see a researched article in response to your apparently uninformed opinion – maybe one where you actually ask an actuary if they assumptions made here are reasonable, or ask someone in government if there has been an actuarial report on the pension received since April, which would trigger this change. You are accusing the government of slight of hand, and whipping up cynicism among those who want to see the Liberals fail, but do you actually understand what you are talking about? Are you actually telling the truth? I know this is opinion, but isn’t it an important responsibility of yours to ensure you are giving an opinion on something you understand?

    Sorry if I am being unfair and you have done all this and have found the responses lacking – but that is not at all clear from this article.

    • If you’ll look back on what I wrote, all I said was that this item needed clarification. I don’t think it’s up to me to try and reverse-engineer an explanation.

      • I am probably out of date but when I was involved federal pensions did not proceed from an actual fund backed by investments but were drawn on the Treasury to pay the current years payout requirements – a contingent liability. Has it changed to a funded plan as is BC’s?

      • Thanks Dr. Gordon for taking the time to reply.

        My issue is with the overall thesis/headline of your article vs. the content of the article. You boldly state in the headline and conclude that the government lacks credibility and that their numbers don’t add up – which in my world, and I believe the comments show that many others agree – means that the government is being untruthful or not fully truthful and that we ought to suspect them of dubious intentions. While you may not agree with how I’m interpreting your words, I believe that this is a rational, predictable interpretation based on what’s written.

        I agree with your points that the government has not provided enough detail. As someone publishing in a national news magazine, though, I think it is incumbent on you to ensure that you have sought that detail before impugning the government as being “not credible”. There is a vast chasm of difference between someone being insufficiently detailed and them being “not credible”.

        And so, my view is that your article’s thesis and conclusion is a vast overreach of the evidence you’ve presented. My view is further that, rather than trying to fill in the detail gap by seeking further information, you have chosen to impugn the credibility of the authors of the update. I don’t expect you to reverse-engineer an explanation. I do expect you to ask for one. And I certainly expect that step if your conclusion is that the government should not credible in what is says (therefore is not telling the truth and therefore is lying to Canadians – all less polite ways of saying they “lack credibility”). If that’s not in your job description as an opinion columnist, that’s fine, but an unwillingness to seek further information doesn’t absolve you from using available facts on which to ground your opinions, rather than unsubstantiated speculation based on little (if any) evidence.

        Thanks again for your reply.

        Stephen Price

    • This kind of argument again looks like a sleight of hands to me. Ever since we started running deficits, it was a known factor that the Canada Pension Plan is underfunded. The whole idea of eradicating deficit was (I) making Canada Pension Plan payments sustainable and (ii) eliminating interest payments on bonds and debentures, there by reducing the taxation while maintaining program expenditure. A climate of reduced taxation would spur investments and growth resulting in an upward spiralling of quality of living and government support. This is not Einsteinian mathematics. It was known during Martin era that the government was overcharging workers and inflating Employment Insurance Fund beyond all reasonable expectations. Again it was thought that transferring the surplus to Consolidated Fund was more expedient in the short term as it would reduce the underfunded pension liability. It has continued thus till now until Harper gained some confidence that he has both the underfunded pension liability and the ballooning deficit under control. The first one he tried to tackle by increasing the age of pension eligibility. This was reasonable since positive changes in all the relevant social parameters such as living age, and healthy life; and ironically this only made the pension underfunding worse. He also tried to eliminate the wasted program expenditure and this one had particularly infuriated interest groups that had led a parasitic life. Harper even promised to reduce the EI contributions so that the savings and self-investment climate may improve so that many will liberate themselves from government-dependence This election was lost not on any failed promises but on earning the wrath of parasitic groups.

      Now, if one sincerely thinks that the Liberals will present a budget that will adequately cater to the accumulated underfunding, he surely is smoking the funniest kind of cigar. If Justin Trudeau had the slightest notion of what all these discussions mean, he would never have promised to reinstate the pensionable age. Now, after the election, every day we are witnessing the permanent scars being created on the social fabric consequent to the irresponsible and ill thought-out election promises of one party. Let us not pretend that Trudeau was thinking like a statesman in the one are where he possesses absolutely no skills. That would be intellectual dishonesty.

      • In my note above, I referred to as sleight of hand arguments only those arguments put forth by Stephen Price ;and, not those by Stephen Gordon. The way it is presented by Macleans might make it confusing even though the reader who completes reading will realize what has happened here.

        • Nope, no intention for sleight of hand here.

          Just relating facts about how pensions are run. See for example this link explaining the pension plan valuations at McGill and how the employer needs to contribute to the plan in the present to fund future obligations:
          https://www.mcgill.ca/hr/bp/pensions/plan-changes/calculating-pension-plan-deficits

          I am unfamiliar with the Civil Servant pension at the federal level, so am happy to be corrected if they operate differently (federal law regarding pensions is different).

          Unfortunately, you have confused in your explanation an irrelevant item – namely CPP. This is not the pension under discussion here. The pension under discussion here is the federal civil servants’ pension. Perhaps it is this confusion on your part that makes my answer seem to be a sleight of hand in your view.

          • Thanks for your response and your valuable time invested in the response is very much appreciated. I am a layman lacking the tools of trade to analyze and arrive at the same conclusions as you, but the following facts must be brought to your notice:

            The current discussion is about deficits and their impact on deliverable services and therefore CPP, OAS, and Public Pensions are all in the same footing. All are guaranteed by the GOC, all cause charge to the Consolidated Fund and therefore all have an impact on the deficit. None should be excluded.

            However, since year 2000, a partial change has occurred in the administration of Public Service Pensions of GOC. There has been an attempt to follow the standard practice and invest outside the Government. And the results are partially what you describe. All of the PSP obligations since 2000 continue in an ongoing basis to be transferred a Public Service Pension Fund (PSPF) which manages it at arm’s length from the Government. Of the approximately 670 billion of government pension liabilities, only about 112 billion seem to be managed this way by PSPF. All pre-2000 obligations are still an account item within the Consolidated Fund, called Superannuation Account. This item constitutes the largest single item next to the market debts in the Balance Sheet of the Government. (But I am still not sure you can call this statement a. balance sheet). The Government annually pays interest charge on the Superannuation Account balance and transfers same to PSPF. An additional charge is made to the Consolidated Fund align the fund value with the actuarially determined obligations. I would think that objective of such a charge is to stabilize underfunded obligation while letting it continue as underfunded.

            Since all of these are structural budget items causing annual charges to the Consolidated Fund, nothing short of a series of surplus budgets will allow the Government to get a handle on these items by formulating a plan to deal with them outside the budget.

    • You would like to have a pension expert respond. Like Bill Morneau?

      • One of the major issues I have with the thesis of the article is that Bill Morneau has had something like 2 weeks to get up to speed on the entirety of the federal financial situation. He is not an expert on this (yet). So no, a real expert, not Mr. Morneau (at least at this point).

    • Well, I have to admit that when I posted my original comment, I originally was going to state that future pension liability would be a balance sheet item, offset by investment assets. So, in reading your comment, it makes a bit more sense.

      The unfunded liability on the balance sheet would need to be made up with additional cash from ops.

      Seems reasonable, if that’s how it happens. So, largely out of the control of political minions.

  8. I found the articles as confusing as the statement from Finance. But I take it that changing interest rates change pension obligations and those changes flow through the current accounts. So the increase is reflecting shifting liabilities. Not much devious here. No one seems to say if this results in the expenditure of actual cash, which really counts.

  9. I have subscribed to this Government Report for more than 5 years now and in the past if Jim Flaherty or Joe Oliver ever had a comment or explanation to make, it was severely highlighted and noted that it was their addition to the report and separate from it. Some one made an opening statement to this report that contradicts what is in the report without clearly stating how or why or who! Sad state of affairs! :http://www.fin.gc.ca/fiscmon-revfin/2015-09-eng.asp

  10. Reading past columns of this author tells me that he isn’t in agreement with any of the political parties. Perhaps it is time for him to walk the talk and volunteer himself for showing us all how to make Canada work.

    • your comment is silly. We need honest objective critiques from people who aren’t running for office and have no vested interest in any particular party. Just because he disagreed with the last government on many things doesn’t mean he has to agree with this one.

  11. Yo didn’t the “Maclean’s on the Hill” episode of April 21, 2015 claim that the budget was a few billion dollars in deficit but for some sketchy accounting? So why the article six months later acting surprised that there is a deficit?

  12. One deficit incurred by the past government, which does not translate on the books, is the one of transparency and trust. No budget is sound which is built on a foundation of literally eliminating information, silencing public servants, favouring particular industry sectors over another… Like economics which treat the earth, air and water we depend on as “externalities”, any government budget which depends on willful ignorance cannot really add up, even if the numbers look like it. Lets see if this government can balance the books, while keeping democracy intact. As a Canadian tax payer, for me that is the bottom line.

    • You’ve swallowed David Suzuki’s definition of ‘externalities’. He’s wrong and so are you. In fact, someone recently wrote an article here in Macleans explaining how Suzuki completely abuses that word and twists it for his own purposes. Nobody ever called water and air “externalities”. An externality refers to the damage we do to the air and water and the costs involved in ameliorating that damage It does not refer to the air and water themselves. We call this damage an externality because it is external to whatever economic model or accounting system is used to measure economic factors. The reason we study externalities is because they are important – citing something as important is the opposite of dismissing it. Suzuki has always misunderstood (or deliberately misconstrued) that.

    • Trust and transparency for the CONS former government are words that they used to be elected and re-elected but hardly ever practiced. Finally majority of Canadians realised that and fired them on October 19th.
      In this article and in majority of the readers comments I see sour grapes because the majority of Canadians support Liberal Government direction and Policies and Trudeau approval rating as PM is in mid 60!!

  13. Unfortunately, transparency and trust are not quantifiable items and therefore will never figure into any serious discussion about the merits of financial statements. But even if they were to be, they have already been sacrificed when this Government produced a statement deliberately flouting all the reasonable premises and norms of such a statement and going out of its way, to facilitate its claim that the previous government ate the cake wholly and entirely. Public servants do have rights as citizens. They also have obligations as servants of the State. While every public service union seem to remember the former very well, they can’t seem to recollect the latter.The current problem with the unions is that they want to be the masters of all policy formulation and communication as such. No, ladies and gentlemen, there is an elected government to do that kind of stuff. They will be turned out of office on the last day, if they don’t. As for not knowing the stuff, one should honestly ask the question each for himself or herself – Did unions play a part in our media, especially CBC and CTV, in not having enough of a debate on issues of scientific, social, and economic consequences while at the same time wasting a lot of time amassing juicy, gossipy reels on one political party alone. No one can claim to speak the truth when hoping against hope, overriding the Government’s own categorically enunciated statements that it has no intention of balancing the books, not this year, not this term not in any future term if it is offered one.

  14. The Liberals needs to claim a 3 bn deficit because they expect a 3 bn shortfall in tax collection.
    They want to cut the taxes for Canadians with annual income under $89,401 and increase the taxes for the wealthy ones – with annual income over 200k.
    Everybody will try to avoid higher taxation and will contribute more to RRSP. That creates a shortfall.
    Latterly, the Liberals will force the employees to contribute to an enhanced CPP, a fund where they can get their hands on – but for now they don’t have too many choices. Claiming a deficit is the smart thing to do.

  15. I wish our country could work together instead of following hate-filled rhetoric learned from American Republicans. The weak minded follow bad examples.

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