Finance Committee Pre-Budget Consultations – A Waste of Time and Resources
On March 11th, less than two weeks before the tabling of the Liberals” first Budget, the Standing Committee on Finance released its budget recommendations based on consultations with 92 Committee witnesses and another 175 witnesses who provided written submissions. Unfortunately, by then, most budget decisions had already been made and the chances that the Committee’s recommendations (other than Liberal election promises) would have any impact on the Budget were virtually non-existent. But no one really expected they would, given the length of time the Committee had for its consultations.
The “majority” Liberal report, contained 56 recommendations, most of which related to promises contained in their election platform. Many of these recommendations will likely be included in the Budget.
The Opposition Parties also released their own “minority” reports. The Conservative report focussed primarily on the establishment of a “responsible fiscal framework for the 2016 federal budget”, while the NDP report repeated a number of election commitments. Witnesses who appeared before the Committee or those made written submission must have been sorely disappointed in the Committee’s final recommendations. .
The Conservatives report focussed in on the fiscal anchors that the Liberal’s committed to in their election platform: run temporary federal deficits of no more than $10 billion; reduce Canada’s debt-to-GDP ratio annually to 27% by 2019-20; and to balance the budget in 2019-20. They claimed that all three of these anchors had been broken. However, in their commentary, they made no mention of the fact that the Liberal’s fiscal commitments were based on the Conservative Government’s April 2015 Budget fiscal projections.
These projections turned out to be overly optimistic. The deficit for 2016-17 is now projected at $18.4 billion, rather than a surplus of $1.7 billion forecast in the April 2015 Budget. A deficit of $15.5 billion is now forecast for 2017-18. In the April 2015 Budget, a surplus of $2.6 billion was forecast. These revised deficit forecasts are on a “status quo” basis; that is they do not include the impact of most of the election promises. It is, therefore, not surprising that the fiscal anchors set out during the election are now in jeopardy.
The Conservatives also are concerned “that there will not be sufficient fiscal prudence built into the upcoming budget” despite the fact that they had reduced the prudence in the 2015 budget. However, the updated fiscal projections include a Contingency Reserve of $6 billion per year, six times the amount set aside in the April 2015 Budget for 2016-17 and 2917-18.
True to their believe that the only thing that matters is a balanced budget, the Conservatives recommend that the Liberal Government commit to balancing the budget in 2019-20, while reducing the debt-to-GDP ratio. In the current economic environment, severe austerity would be required to achieve a balanced budget in 2019-20 and would have serious negative consequences for the economy.
They also recommend that the Government not repeal the Balanced Budget Act. This Act was enacted for political reasons only. It would require restraint measures to offset the impact of automatic fiscal stabilizers, thereby further worsening the economic environment. This Act was ill advised and hopefully will be repealed in the 2016 Budget.
The Conservatives also recommend that the Government focus on the annual deficit as its fiscal anchor rather than the debt-to-GDP ratio. They argue that the debt-to-GDP anchor is imprecise, as it does not include the liabilities of the Canada Pension Plan or the debt of the provinces. However, the deficit also excludes these liabilities. The federal government is not responsible for the liabilities of the Canada Pension Plan or that of the provinces, nor should it be.
The deficit is the difference between two large numbers: budgetary revenues of $282.3 billion and total expenses of $280.4 billion (figures for 2014-15). As a result, slight changes in either of these components will have a significant impact on the difference. A one per cent negative change in both components would result in a deterioration in the fiscal balance of nearly $6 billion. Focusing on a single year point anchor is extremely disruptive to effective program and economic management. The previous Conservative government consistently missed its deficit targets, given changes to the economic outlook
Most financial commentators focus on the debt-to-GDP measure. It relates to the Government’s management of its debt in relation to the size of the economy. It is the measure of a government’s fiscal sustainability.
The Finance Committee’s pre-budget consultation report and recommendations were a waste of time and money. The recommendations primarily reflect those contained in the three parties’ election platforms. The Conservative Party’s recommendations with respect to fiscal management were always ill-conceived and still are.. They might want to remember what happened to Mr. Hudac in the last Ontario election, as they try to re-invent themselves for the next federal election.