PBO'S ECONOMIC AND FISCAL OUTLOOK - THE MINISTER OF FINANCE SHOULD BE HAPPY
The Parliamentary Budget Officer’s (PBO) latest economic and fiscal outlook is more optimistic than the forecast in Mr. Flaherty’s 2013 Budget. PBO is forecasting lower deficits and higher surpluses throughout the 2012-13 to 2017-18 period. In 2015-16, the year in which the Conservatives promised a balanced budget or better, PBO is forecasting a surplus of $3.7 billion, compared to the Budget 2013 forecast of only $0.8 billion. However, PBO’s forecast is based on a number of assumptions, which if not realized, would put their forecast at risk.
Based on a 2011 Standing Committee on Finance decision, PBO is to provide an economic and fiscal forecast to the Committee in the fourth week of October and April. This is the first report under the interim PBO, but it has former PBO’s finger prints all over it. The report received little media attention, in part because of other news developments.
PBO views its economic forecast as a “balanced” projection, with higher or lower outcomes equally likely. But PBO’s nominal gross domestic product is equal to or higher in each year compared to the Budget 2013 “risk adjusted” forecast. Accordingly, this assumes that the financial crisis in Europe doesn’t get any worse, that the U.S. muddles through its fiscal issues and that growth in the emerging economics remains strong. Over time, these may turn out to be somewhat heroic assumptions.
PBO assumes a deficit of $25.0 billion for 2012-13, compared to Budget 2013’s estimate of $25.9 billion. Adjusting for the one-time AECL environmental liability, PBO’s underlying deficit is about$22.5 billion; an improvement of $3.7 billion from 2011-12. Such an improvement appears more than reasonable, given that incremental restraint measures of about $5.5 billion were to come into effect in 2012-13. This would account for more than all of the improvement. However, financial results to the end of February 2013 indicate only a small reduction of $0.8 billion in the deficit. There are still two accounting periods left in fiscal year 2012-13 – March 2013 and the end-of-year accounting period. In order to meet the PBO deficit forecast, there would need to be a significant improvement in the deficit outcomes in these two periods. This may be wishful thinking.
PBO’s fiscal forecast incorporates the 2013 Budget forecast of direct program expenses and assumes it will be achieved– they do not provide their own forecast of direct program spending. In our assessment of Budget 2013, we raised concerns about the Government’s ability to keep within their forecast of direct program expenses . These included the adjustment to the “lapse”, the booking of savings from capital reprofiling, and the sustainability of some of the restraint measures. In our view, there are significant downside risks to the forecast of direct program expenses, which could push the Government and PBO off their current fiscal tracks.
Given the rosy economic forecast and the risks associated with direct program expenses, we feel that there are downside risks to PBO’s fiscal forecast.
PBO again provided estimates of the structural and cyclical balances. The division of the budgetary balance (deficit/surplus) into it structural and cyclical components is important as to whether incremental discretionary measures are required in order to eliminate the structural deficit. The cyclical component would be expected to disappear as the economy returns to its potential GDP. The Government does not release its forecasts of the structural and cyclical balances underlying its forecast of the budgetary balance. Such information would be useful in assessing the Government’s budgetary balance forecast and the possible need for further restraint measures.
PBO also published its estimates of the impact of the restraint measures since Budget 2012 on real GDP and employment. Based on their analysis, they concluded that in the absence of these measures, employment would be 67,000 higher by 2017, all other things remaining equal. It is interesting to note that the Minister of Finance provided a detailed assessment about how many jobs the stimulus measures introduced in the 2009 and 2010 budgets created. He has been silent about the impact of the restraint measures on job creation.