Most economists who follow federal budgets probably didn’t think much of Mr. Morneau’s recent budget. In their view, there is too much new spending; spending on government operations is growing too fast; and, there is no commitment to deficit elimination.  They would probably give the budget a failing grade in judging its overall fiscal credibility. In a poll conducted the Forum Research Inc. 36% of the respondents said the budget was bad for the economy.

Our assessment of the budget’s fiscal credibility is, however, much different. We would assign an “A” grade to the budget for fiscal credibility. We would do so for four reasons. We have argued in the past that the fiscal credibility of a budget should be judged against four basic principles. Fiscal policy must be realistic; it must be responsible; it must be prudent; and, it must be transparent.

First, fiscal policy must be realistic. By that we mean fiscal policy should be based on sound analysis and a careful and balanced view of economic and fiscal prospects, challenges and risks.

We believe the budget satisfies this principle. The 2018 budget forecast is “based on an average of the December 2017 private sector economic outlook survey, and also reflects upside and downside risks, noted above, identified through ongoing engagement with survey participants.”

The budget notes “economists surveyed offered a wide range of views regarding future economic growth” and that “changes in economic growth assumptions can have large impacts on the budgetary balance and debt-to-GDP profile over an extended projection horizon”.

Using more optimistic economic assumptions, for example, would reduce the deficit by $3.5 billion per year on average; more pessimistic economic assumptions would raise the deficit by $3.0 billion per year on average. In both scenarios the debt to GDP ratio would decline to below 30 per cent.

However, that is not to say that more can be done.  We would encourage the Department of Finance to publish the forecasts of at least real and nominal GDP for each of the survey participants.  This provides the reviewer with an assessment of the variability among the private sector forecasts; thereby providing a better basis to assess the economic forecast underlying the budget.

This is the practice in many of the provinces. In addition, we would encourage the Department to publish its forecasts of the components of nominal income and expenditures. Changes in these components, which are forecast solely by the Department can have a significant impact on the outlook for revenues.  Again, several provinces publish such forecast.  These two initiatives would further increase the credibility of the economic and fiscal forecasts.

Second, fiscal policy must be responsible. This means the government must be committed to establishing and maintaining a sustainable medium or longer-term fiscal anchor, one that supports long-run stable economic growth through control of the accumulation of public debt.

Although we believe that the budget satisfies this principle, many economists would not agree with us.  It is certainly clear by now that the government no longer intends to fulfill its budget promise of eliminating the deficit by 2019-20. In fact the government has explicitly rejected deficit elimination as a fiscal anchor and instead replaced it with a fiscal plan “anchored by a low and consistently declining debt-to-GDP (gross domestic product) ratio.”

Many economists reject this debt anchor and instead believe that with a strong economy now is the time not only to eliminate the deficit, but also to run surpluses and reduce debt. This strategy is based on two assumptions. The first assumption is that sooner or later there will be some sort of economic growth slowdown or even a recession with falling GDP. The government needs to eliminate the deficit now, when times are good, in order to have the flexibility to respond economic downturns in the future. The second assumption is that increasing debt will only leave future generations with higher debt burdens without greater productive capital to pay for it.

The budget makes it very clear that the government is rejecting an “austerity” fiscal strategy and instead is prepared do run relatively small deficits (1/2 of 1% of GDP), resulting from investments in both physical and human capital. In the long run both types of investment create capital that can yield substantial positive rates of return (above the current 30 and 50 year real bond rate) and result in both higher productivity and stronger labour force growth. This means stronger economic growth. This would lead to higher wealth for future generations, not lower wealth.

In this situation could the resulting fiscal track “handle a slump”? The fiscal outlook today is a lot better than that in 2007-2008 after the Harper government cut the GST by two points at the cost of $14 billion annually.

Lets suppose, for the sake of argument that real GDP were to decline by 1 per cent as a result of a global slump beginning 2021-22. The deficit in that year is currently forecast to be $13.1 billion or 0.6% of GDP (this includes a contingency reserve of $3 billion).

Sensitivity analysis presented in the budget shows that the budget impact of a decline of 1 per cent of real GDP would be an increase in the deficit of about $5 billion per year. Most of this negative impact would be absorbed by the contingency reserve. The deficit would still be below 1 per cent of GDP and the government would have ample room to undertake “fiscal stimulus” if required. Even a decline in real GDP of 2 per cent, which would be a major economic slump, could be managed.

Under the current budget plan, both transfer expenses and non-transfer expenses are forecast to decline as a share of GDP. In terms of government operations, “Operating expenses are projected to reach $95.6 billion in 2017–18, reflecting year-to-date results and the introduction of Pension for Life for veterans, which results in a significant one- time expense in 2017–18. From 2018–19 onwards, operating expenses are projected to grow by about 1.1 per cent annually, reaching $97.3 billion in 2022–23. The growth in operating expenses is composed of growth in departmental expenses, which is partially offset by falling expenses related to pensions and employee future benefits, reflecting the projected rise in long-term interest rates.”

Finally, long-term fiscal projections conducted by the Finance Department and the Parliamentary Budget Officer show that federal finances are sustainable over time.

Third, fiscal policy must be prudent by including a reasonable amount of “insurance” to guard against forecast error and the impact of unforeseen events and necessary policy actions. The budget plan contains an annual contingency reserve of $3 billion. This may be reasonable, but given the substantial downside uncertainties with respect to NAFTA, Brexit, the U.S. tax cuts and the economic and fiscal outlook for the U.S. economy, we would have preferred an increasing contingency reserve over the medium term.

Finally, fiscal policy must be transparent. This means providing full disclosure of analysis and information since, without this, independent experts will not be able to assess how realistic the economic and fiscal forecasts are. With- out transparency there can be no accountability.

With respect to transparency the 2018 budget provides more detailed financial analysis and information than any budget that we can remember, and we go back a long way. For critics of the budget who felt such information was lacking, they should perhaps take the time to read the Annexes.

They would find the usual detailed fiscal tables; the government’s financial requirements and planned debt strategy; and detailed economic and fiscal risk analysis.  The budget also provides detailed information on the government’s revised infrastructure spending plan.

But in addition to all this detailed information, for the first time, the budget provides detailed spending estimates (modified cash basis) by government Department that includes the impact of budget initiatives. There is also a full reconciliation of budget expenses (accrual basis) for 2018-19 and Main Estimates spending (modified cash basis) for 2018-19. In the past, the Main Estimates were based on the latest Fall Economic Statement and did not include any of the budget initiatives. Now there is a full reconciliation between the two documents. 

This was made possible by the tabling the budget in February. For the first time, Parliamentary Committees will have up to date departmental spending numbers upon which to base their discussions. This represents a major step forward in facilitating the accountability of Parliament over government spending. In fact, it is surprising that the full Main Estimates were not published with the budget as is the case in many provinces.

The Annexes of the budget contain so much useful fiscal information that they should have been included as a separate budget document. This would certainly have helped in the media lock-up given that reading the first 275 pages would have left most readers mentally exhausted with little time or interest in the Annexes.

Our message to the Finance Minister is that a budget is a financial accountability document and he shouldn’t bury it in Annexes, especially when he has a very “credible” fiscal plan. The Finance minister’s job is to sell the fiscal credibility of the budget, not to mention his own fiscal credibility, not the spending programs of other Ministers.