The first unanswered question is why did he do it?

Typically, a Minister of Finance does not release revised economic and fiscal projections that close to the budget.  Instead, revised status quo forecasts, along with detailed explanations of the revisions, are a major component of the budget. It would appear that the Minister wanted to put a damper on public expectations on what be expected in the budget. He may also have wanted to signal to his cabinet colleagues that they should also curtail their expectations for his first budget.

The second unanswered question why did he do the presentation at a town hall meeting in a suburb of Ottawa?

After all, he was already scheduled to appear before the House of Commons Standing Committee on Finance the next day, as part of the Committee’s pre-budget consultations.  By presenting them at a town hall meeting, he followed the practice used by the previous Conservative government and, in doing so, undermined the role of Parliament in the budget process. This is a complete contradiction to the commitments made by the Liberals during the election to enhance the role Parliament.

The third unanswered question is how big a deficit revision was there?

As expected, the worsening global economic environment and the fall in oil prices since November both had a significant adverse impact on the government’s budgetary balance, a slight improvement is expected for 2015-16. However, for 2016-17, the planning deficit, before the inclusion of any election promises, is now projected at $18.4 billion, compared to a deficit of $3.9 billion forecast in November 2015.  A deficit of $15.5 billion is now forecast for 2017-18, compared to a previous forecast of $2.4 billion.  Preliminary estimates for gross domestic product in 2015 will become available on March 1^st, which may necessitate some minor revisions.

However, a significant component in the deterioration in the deficit outlook in 2016-17 and 2017-18 is the inclusion of a $6 billion Contingency Reserve, double the amount included in the November Update.  The Contingency Reserve is included to provide a cushion against forecast and technical errors.  If not needed, the deficit would be correspondingly lower.  Without the Contingency Reserve, the underlying deficit for 2016-17 could be as low $12.4 billion and $9.5 billion for 2017-18. In other words, roughly 35 per cent of the deficit in 2016-17 is the Contingency Reserve. In 2017-18 the Contingency Reserve accounts for 40 per cent of the deficit.

Not only is there no explanation given for doubling the Contingency Reserve, the Contingency Reserve was also not separately identified in the fiscal tables.  Instead, it was “allocated” somehow among the various revenue components. This is confusing and misleading. We recommend that, if the government is committed to budget transparency, then it should show the Contingency Reserve separately. Mr. Martin followed this practice. It would provide for a clearer assessment of the changes to the various revenue components.

The fourth unanswered question is how big could the deficit be?

With the exception of the middle-income tax cut and the introduction of the high-income tax bracket, the revised fiscal projections do not include the Liberal election promises.  They would add about $9 billion to the deficit in 2016-17 and about $10 billion in 2017-18. . If the Contingency Reserve were included the deficit would rise to $27 billion in 2016-17 and $25.5 billion in 2017-18. As a result, the debt-to-GDP ratio would increase from around 31% in 2015-16 to over 32% in 2016-17 before falling again in 2017-18 and in subsequent years.  In the election platform, the Liberals committed to a stable or declining debt-to-GDP ratio over their first four years. However, if the Contingency Reserve were excluded, the deficit forecasts for the next two years would fall to $21 billion and $19.5 billion. This would maintain a stable debt ratio

The fifth unanswered question is how is the Contingency Reserve to be used if not needed? 

In the budgets presented by the previous Liberal government, it was clearly stated that the Contingency Reserve was not to be used to finance new policy initiatives.  If not needed to offset the impact of changes to the economic variables and/or to offset errors in translating the economic projections into fiscal projections, it would be used to reduce the federal debt. A clear policy statement is required in the upcoming budget.

The sixth unanswered question is why did the government only update two years and not five years?

 In the past, five-year projections were provided. The shorter two-year time period was first introduced by Mr. Martin to ensure the deficit targets would be met in the short term rather than pushing required adjustments into the future. Five-year projections are notoriously unreliable, so focussing on the short term is legitimate. However, committing to only two years avoids the immediate question as to when the budget will be balanced. Given the Government’s commitment to balancing the budget, focusing on the first term would appear that the Government is not willing to address that question. A five-year forecast should have been provided in the most recent update. The budget, however, could focus on the next two years only, as was the practice in the 1990s.  We will have to wait until March 22nd to find out.