Now that the Minister of Finance Bill Morneau has tabled his Fall Economic Statement, what does he do as an encore in the upcoming budget?  Everything in the Fall Update could have waited until the 2017 Budget. Apart from a sprinkling of new initiatives, under the guise of investing in the future, the Fall Update largely attempted to demonstrate that the government’s policy actions are working.  It was purely a political document, with little else of substance. Mr. Morneau could have waited until the current round of pre-budget consultations ended to present the Government’s long-term growth strategy. Once again, these pre-budget consultations will be a waste of time.

Not surprisingly, there has been a lot of comment in the media on the Minister’s fiscal projections, most of it confusing and misleading. First, contrary to media reports the fiscal cost of the new initiatives included in the Update is not $31.7 billion over five years. That number incorrectly includes the impact of the downward revisions to nominal gross domestic product (GDP) on the budget balance. The fiscal impact of the new initiatives introduced since the 2016 Budget amounted to only $6.7 billion over the next five years. The remaining $24.9 billion is attributable to the downward revisions to nominal GDP.

Second, the Fall Update announced an additional infrastructure investment of $81 billion over 11 years, beginning in 2017-18.  However, most of the funds were already “buried” in the 2016 Budget framework.  Over the 2017-18 to 2020-21 period, new infrastructure funding amounted to only $1.5 billion, with most occurring in 2018-19.

Finally, to fund the new initiatives as well as the impact of the adverse economic developments, the Finance Minister completely eliminated the $6 billion annual prudence factor, or risk adjustment.  Over the 2016-17 to 2020-21 period, the increase in the federal debt was only $1.7 billion, hardly a big spending budget.

The second area of confusion that has arisen out of the Update relates to the Minister’s treatment of the $6 billion prudence reserve. Much of this confusion is the Minister’s own fault because he himself seems confused as to what the $6 billion is for. Most financial commentators, including us, felt that the $6 billion of annual prudence included in the budget plan was excessive. In hindsight, however, it turned out to be a very smart move by the Finance Minister. We recommended in an earlier Globe article (October 28) that he should restore the $6 billion reserve. So why not take credit for a smart decision. Instead he did the exact opposite and presented his deficit update without any prudence at all. And that has raised all sorts of questions. If the $6 billion prudence reserve were included, the deficit would be higher than in the budget.

The Minister justified getting rid of prudence by claiming that the risks are balanced and therefore a prudence reserve is not required. This statement makes no sense at all especially coming from a Finance Minister who attends G7 and G20 meetings. Since the 2009 financial crisis, economists consistently forecast rebounds in economic activity that never materialized.  It is difficult to now justify why the risks to the economic forecast are balanced. The uncertainties associated with the U.S. election, BreXit, slowing growth in China and in the emerging economies, uncertainty and volatility in international financial markets, all suggest that the downside risks to the global economy are still high. The IMF, the World Bank, and the OECD have been reducing their forecasts for the global economy for years and they are still doing it.

The credibility of a Finance Minister is critical for any government. And prudence in budget planning is a key component of credibility and all Finance Ministers since Paul Martin have recognized this. They understood that excluding a prudence reserve would not only undermine the credibility of their budgets but also seriously their own fiscal credibility.  

We hope the Finance Minister understands this. In his Update, the Finance Minister states “based on upcoming economic data releases (including GDP data for the third quarter of 2016), the government will continue to evaluate risks between now and the time of Budget 2017 to determine the appropriate level of the adjustment for risk to be used in the Budget 2017 planning assumptions”. In other words, he hasn’t ruled out including some prudence in his budget plan. The Finance Minister should include a prudence reserve of between $3 and $6 billion in his 2017 budget. We would also recommend the Minister show this prudence separately and not through a downward adjustment to nominal GDP.

Mr. Morneau was silent on a timetable for the elimination of the deficit.  Given the economic outlook, and the sound fiscal situation of the federal government, eliminating the deficit would be counterproductive. There is absolutely no reason in the current economic circumstances to pursue deficit elimination over some arbitrary period.  As a share of GDP, the deficit is barely above 1 per cent of GDP and falls to just above 0.5 per cent in the outer years. This is small and inconsequential. The government should start thinking about additional “critical public sector investments” that will maintain a deficit target of 1 per cent of GDP and a stable debt ratio of around 30 per cent of GDP