ADVICE FOR THE MINISTER OF FINANCE
Last Friday, you presented your first Update of Economic and Fiscal Projections. Not surprisingly, the outlook has worsened since the April 2015 Budget. During the election, you based your platform on the 2015 Budget projections, adjusted using a July PBO report. That adjusted forecast projected a surplus of $7.2 billion in 2019-20, allowing you to claim a balanced budget in 2019-20, after incorporating the net impact of your election promises.
In your Update, you are now forecasting a “budget planning deficit” of $3.0 billion for 2015-16, followed by deficits of $3.9 billion, $2.4 billion and $1.4 billion in the following three years. In 2019-20 and 2020-21, you are projecting surpluses of $1.7 billion and $6.6 billion, respectively. These forecasts include a contingency reserve of $1.5 billion in 2015-16, rising to $3 billion annually thereafter.
Your deficit projections are quite different from the latest Economic and Fiscal Update of the Parliamentary Budget Officer (PBO). The PBO is forecasting deficits of about $4 billion a year to 2020-21, without including a contingency reserve.
Both deficit forecasts are not large, amounting to less than 0.2% of GDP per year. More importantly, in both forecasts, the debt to GDP ratio is forecast to decline to between 25 and 26 percent by 2019-20.
However, the situation becomes politically problematic for you, when you incorporate the net impact of your election promises. The PBO forecast, including a contingency reserve, shows a balanced budget in 2015-16, followed by deficits of $16.5 billion, $19.4 billion, $17.1 billion, and $14.2 billion in each of the following years.
Incorporating the net impact of your election promises in your forecast results in a deficit of $2.6 billion in 2015-16, followed by deficits of $14.4 billion, $14.1 billion, $10.5 billion, and $4.9 billion in 2019-20. A balanced budget is forecast for 2020-21.
Your day of “fiscal reckoning” was bound to come, and better sooner than later.
The reality is that you will not balance the budget in 2019-20 without cutting spending and/or raising taxes.
Your election platform already includes $3 billion in savings from a review of programs and tax expenditures. Additional spending reductions would be extremely difficult, given the restraint measures imposed by the previous government. This only leaves raising taxes and right now that would not be advisable.
Now is not the time for more austerity. The economy is underperforming relative to its potential and future growth prospects are not good. Austerity was the wrong policy after 2010 and it is the wrong policy now.
Your mandate letter directs you to implement a fiscal strategy that is realistic, sustainable, prudent, and transparent. Your mandate letter also requires you to balance the budget in 2019-20.
These two requirements are incompatible.
To be “realistic”, you need to acknowledge that you will not balance the budget by 2019-20. You will be criticized, (not by debt rating agencies), but even if the deficit were to rise to one per cent of GDP (about $20 billion) the debt burden would still continue to decline.
Second, a “sustainable” fiscal policy is one that supports economic growth, while ensuring that the debt burden declines over the medium term. You recognized this in your election platform and in your Update. A declining debt ratio should be your “fiscal anchor”, not the elimination of the deficit by some arbitrary date.
Third, because of the uncertain economic outlook, you are right to include a contingency reserve in your budget-planning forecast. However, in your Update, you state “The Government will continue to evaluate economic developments and risks to determine whether or not it would be appropriate to maintain this forecast adjustment in the future.” This sounds as if you might eliminate the contingency reserve in the future. This would be a serious mistake. Don’t even think about it.
Finally, to be “transparent” you must commit to providing full information in your future budgets and not rely on unrelated omnibus bills. Being open and honest is the only politically defensible policy.
If you fail any of these four principles, you will lose credibility, and it will be difficult to regain it.