Whose Credibility is at Risk?

Recently, the Minister of Finance, once again, questioned the quality and credibility of the research undertaken by the Office of the Parliamentary Budget Officer (PBO).  This related both to the PBO’s survey of the Infrastructure Stimulus Fund and the projections of the fiscal balance.  On December 22, 2010, the International Monetary Fund (IMF) released its 2010 Article IV Consultation with Canada. The Minister claimed that the “International Monetary Fund’s annual review of Canada’s economic developments and policies, which strongly supports the Government’s plan to return to balanced budgets over the medium term”.[1]

The Minister, however, chose  not mention that the IMF still expects the federal government to be in deficit in 2015-16, whereas the Finance Department is forecasting a surplus.  In fact, the deficit track forecast by the IMF is closer to the deficit track forecast by the PBO – a forecast that the Minister of Finance stated is not credible.

Projections of Fiscal Balance: Millions of Dollars















October 2010 Update







November 2010 PBO







December 2010 IMF (1)







1. Based on deficit-to-GDP and nominal GDP growth

The Minister of Finance, in his current round of pre-budget consultations, claims that some additional cuts (over and above those announced in the 2010 budget) will be needed in the upcoming budget, although the Prime Minister in his year end review stated that no new major cuts will be necessary. It would help the government’s claim to credibility if the Minister of Finance and the Prime Minister could agree on what is required to eliminate the deficit.

The government has staked credibility on achieving a surplus in 2015-16. You can be sure that the government will do whatever is needed to achieve that goal. In our view this goal will not be achieved without additional credible spending cuts. However, given that the PM and the Minister don’t agree on what is needed, and the difficulty the government is already having in finding the expenditure cuts required by the 2010 budget, it is highly unlikely that the government will look for the additional $6 billion that would be required to eliminate the deficit that the IMF (a credible institution) has forecast for 2015-16.

This leaves the government looking for some “easy way out” solutions. Perhaps there are some accounting changes that might help, or some vague operational efficiencies that will save lots of money. Better still why not simply change the economic assumptions and claim that since the Minister consulted with private sector forecasters, this makes both his assumptions and fiscal forecast credible.

[1] Department of Finance News Release December 22, 2010 (2010-130)

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