Economic analysis

Kevin Page on the economic update

The former parliamentary budget officer considers Jim Flaherty's fiscal statement

I think the economic and fiscal projections in the economic update will not be a surprise. The headline (or bottom-line) numbers for economic growth and fiscal balance have not changed significantly. It is a reasonable planning framework and is quite similar to the one presented to Parliament by the Parliamentary Budget Office a few weeks ago.

The underlying economic analysis provided by the Department of Finance provides strong communications support for the government. The Canadian economy did not decline as much as other G8 economies during the 2008-2009 financial crisis and our recovery, while weak, has been better than most. Much of this reflects the fact that we did not have a financial crisis in Canada (like that experienced in the United States and other countries) and our relatively large stimulus package provided much needed support for the private sector in supporting demand.

The Department of Finance continues to use the average private sector forecast to generate its baseline fiscal projections. The numeric average of different forecasts can be argued to provide a sense of confidence that the government is not providing upward bias to its projections that would facilitate hitting its 2015 budget balance targets. It would be nice to know what the view of the Department of Finance is on the economic outlook (and not just the reporting of the numeric average of other economic projections). The adjustment for risk to the nominal GDP outlook is maintained. Given the relative weak recovery in recent years, this is likely a prudent adjustment.

It would be useful if the government provided its analysis of where the economy is operating relative to its potential.

Estimates of the so-called output gap and structural budget balance would give parliamentarians a better sense of the government’s policy stance. Is the government applying an additional freeze to operating budgets to get rid of a structural deficit created in part by significant cuts to taxes before the recession? What is the impact of additional restraint on the economy given that the Canadian economy continues to operate well below its potential some five years after the financial crisis? This analysis is the bedrock to balanced-budget-type legislation in Europe. Will we have balanced budget legislation in Canada devoid of analysis of where the economy is operating relative to the cycle?

PBO analysis suggests if the Finance (private sector) projections turn out as planned, the government will be back to structural surplus by 2015 and will be in a positive long term fiscal gap position (declining net debt relative to GDP in face of aging aging demographics). The government has not been very clear on what it plans to do if it achieves this state. Budgetary revenues and expenditures will be at historic lows relative to GDP. Will it cut taxes further? Will it strive to reduce the debt further?

It is a good thing that the government introduces some analysis on the long-term fiscal sustainability of the country. It would be better if they expanded this analysis to include the provinces and territories and pensions, like the PBO. This is important because when the government makes major decisions like changing the escalator on the Canadian Health Transfer we can see what the impact is on the provincial fiscal position. Similarly, if the government reduces taxes (like the GST) and then argues (incorrectly) that the old age security program is not sustainable we can examine their analysis and policy logic.

Also, and very importantly, it is imperative that the government and public service provide departmental and agency spending plans to Parliament and Canadians. Freezing departmental operating budgets for five years will have a impact on service levels. It may also create future fiscal risk (program integrity issues). There is no accountability without transparency. The lack of medium departmental spending plans linking spending freezes to service levels is undermining Parliament. How is government going to achieve these absolutely incredible efficiency gains? What is the plan? Cabinet ministers and deputy ministers must provide these plans to Parliament.

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