PBO LEAVES FLAHERTY WITH LESS ROOM TO MANOEUVRE
In its latest “Economic and Fiscal Outlook the Parliamentary Budget Office (PBO) still expects the Government to meet its balanced budget commitment in 2015-16, but with a much smaller surplus than forecast in its April 2003 update. A surplus of only $200 million is now forecast for 2015-16, down $3.5 billion from the surplus of $3.7 billion forecast in its April 2013 Update, leaving the Government little flexibility to introduce new policy initiatives, or honour its 2011 election promises of introducing new tax expenditures, in advance of the 2015 election. The PBO estimates the probability of achieving a balanced budget or better in 2015-16 to be approximately 50-50.
Based on a 2011 decision by Standing Committee on Finance, PBO is required to provide economic and fiscal forecasts to the Committee in the fourth week of October and April. This timing is unfortunate since the Minister of Finance likes to release his economic and fiscal update in the latter half of November, if not later.
It would of course be preferable to have the PBO release its economic and fiscal updates after the tabling of the Government’s economic and fiscal update and the budget. This would allow the PBO to incorporate new policy decisions proposed in the Government’s updates and budgets and allow PBO to provide Parliamentarians and Canadians with a more complete assessment of the Government’s economic and fiscal outlooks. Parliamentarians and Canadians will have to wait until the Minister of Finance releases his fall update to compare his economic and fiscal projections to those of the PBO, but those will not be comparable
The Minister of Finance has already discounted the PBO report by saying the budget would definitely be in surplus in 2015-16 and the surplus would not be “tiny”. Certainly, the Minister of Finance will forecast a surplus large enough for him to introduce the tax cuts promised in the 2011 election. Fortunately for him, the final budget outcome for 2015-16 will not be known until the fall of 2016 - one year after the election. A key issue in the 2015 budget will be whether the budget forecast is credible!
The PBO is now forecasting a deficit of $14.7 billion in 2013-14 (down $6.1 billion from its April 2013 Update), a deficit of $5.6 billion in 2014-15 (down $2.7 billion), a surplus of $0.2 billion in 2015-16 (down $3.5 billion), a surplus of $1.7 billion in 2016-17 (down $6.9 billion), and finally a surplus of $2.4 billion in 2017-17 (down $5.1 billion).
What has led the PBO to make these significant downward adjustments in their forecast budget surpluses in only six months?
First, the PBO revised down its forecast of nominal gross domestic product (GDP) – a measure of the applicable tax base for budgetary revenues – by $20 billion in 2015, rising to about $40 billion in 2017, reflecting both downward revisions to real GDP and inflation. PBO has also revised upwards its forecast of long-term interest rates on the assumption the Federal Reserve Board will begin ‘tapering” its asset purchases in late 2012 or early 2014.. The somewhat more pessimistic outlook primarily reflects international developments.
Second, the lower-than-expected deficit in 2013-14 compared to the April 2013 Update primarily results from lower employment insurance (EI) benefits. The higher-than-expected deficit forecast in 2014-15 and lower-than-forecast surpluses thereafter primarily result from lower personal income taxes and EI premium revenues and higher public debt charges, offset somewhat by higher-than-forecast corporate income tax revenues and lower EI benefits.
The reduction in EI premiums results from the Government’s September 2013 announcement to cap EI premiums rates at $1.88 (employee rate) of maximum insurable earnings. The downward revision to personal income taxes result from PBO’s lowering of it economic forecast of nominal income. Corporate income tax revenues were higher than expectedin 2012-13 and are expected to continue to be higher than originally projected in their April 2013 Economic and Fiscal Outlook The lower EI benefits “are driven by a lower expected number of regular beneficiaries to unemployed persons”, or in layman’s terms, fewer people are claiming benefits than those claiming to be unemployed. The higher than expected public debt charges is attributable to the increase in interest-bearing debt resulting from the changes in the budgetary balance forecast.
Third, PBO’s fiscal forecast maintains 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. This is a critical assumption since direct program expenses in 2012-13 were nearly $5 billion lower than forecast in the March 2013 Budget. Finally, the PBO fiscal forecast does not incorporate the Speech from the Throne announcement that the Government will extend the current freeze on departmental and agency operating budgets.
The outlook for direct program spending will be critical to assessing the credibility of the 2014 and 2015 budget forecasts. The previous PBO (Kevin Page) had tried, without much success, to get detailed information on spending cuts. The current PBO has now requested more information from the Department of Finance as to why direct program expenses in 2012-13 were nearly $5 billion lower than forecast in the March 2013 Budget.
In our assessment of Budget 2013, we raised concerns about the Government’s ability to keep within their forecast of direct program expenses. However, the much better than expected outcome for 2012-13, coupled with the Government’s announcement to freeze operating budgets, may alleviate some or all of these concerns. The Minister of Finance has indicated that he would release details on why direct program expenses for 2012-13 came in so much lower than forecast to the PBO (hopefully, he will release these to Canadians as well). In order for his explanations to be credible, he will need to provide his forecast of the lapse for that year as well. We can only wait and see and hope the Government will have a change of heart and provide a more detailed explanation.
Budget forecasting is going to become a key part of the 2015 election. There will be a lot of pressure on the forecasters in the Department of Finance. Everyone knows the Government is betting everything on a forecast showing not just the elimination of the deficit in 2015-16, but also the creation of substantial surpluses in over the medium term. Indeed, all political parties would benefit from such a forecast. Given the prospects of continued slow growth in the EURO area, the U.S. the UK, Japan and other G-20 countries, this may not be good bet. A toss of a coin does not represent good odds.