Paul Martin presented the first fall Economic and Fiscal Update in 1995. The purpose of that Update was to present a review of current and future economic circumstances and what these meant for the fiscal situation of the federal government. It contained no new policy initiatives. These were left for the subsequent spring budget. The Minister of Finance and departmental officials appeared before the Commons Standing Committee on Finance to present the Update and to answer questions.

The Finance Committee was asked to advise on whether the economic assumptions were prudent; what should be the ratio between expenditure reductions and revenue increases to meet the deficit target of 2 per cent of GDP; should programs be reduced or eliminated; and, how should the government change spending and taxation to increase jobs and economic growth?

Over the period 1995-96 to 2015-16, the majority of the Economic and Fiscal Updates did not contain new policy initiatives.  The October 2000 Economic Statement and Budget Update provided significant tax relief and increased transfers to the provinces and territories. The November 2005 Update was the last Liberal’s government update prior to the 2006 election and contained a number of new initiatives. During the Harper era, three Fall Updates contained new spending and tax initiatives.

However, since 2016, Finance Minister Morneau’s Updates have become increasingly more like budgets than an update of the economic and fiscal projections. The 2016 Update contained $9.6 billion of new initiatives; the 2017 Update $14.9 billion; and, the recent 2018 Update $32.9 billion over 6 years. This latter amount is signicantly larger than the measures  included in the 2018 budget. ($20.3 billion over six years). Included in the $32.9 billion  is $17.6 billion related to “investments in the 2018 Fall Economic Statement”, and an additional $15.3 billion related to “policy actions and investments since Budget 2018”.  Of the latter amount, $9.5 billion relates to non-announced measures. No details are provided.  But buried in a footnote to Table A1.7 is the admission that these funds are for “anticipated Cabinet decisions not yet made and funding decisions related to national security, commercial sensitivity, trade agreements and litigation issues”

The revised economic assumptions and the better-than-expected deficit outcome for 2017-18 provided the government with an unplanned  “fiscal dividend” of $22.3 billion over the period 2018-19 to 2022-23 (the fiscal years presented in Budget 2018). Regrettably Mr. Morneau decided to spend, not just the entire fiscal dividend, but also an additional $5.4 billion. As a result, the deficit actually increases over this five-year period. This doesn’t seem to bother the Finance Minister since the government’s fiscal anchor – the debt-to-GDP – is still forecast to decline annually, from 31.4% in 2017-18 to 28.5% in 2023-24. In the 2018 Budget, the deficit-to-GDP ratio was about one percentage point lower in each year.

What does the Fall Update/Budget imply for the 2019 Budget?  The fiscal dividend has been more than spent.  It is highly unlikely that another large dividend will miraculously appear over the next few months leading to the 2019 Budget?  The government could debt finance any new initiatives, thereby further increasing the deficit. Their focus has been on reducing the debt-to-GDP ratio and this could still be accomplished with new debt financed measures.

Perhaps there is no need for a 2019 Budget, given all the initiatives proposals in the Fall Update. There is no legislative requirement to have a budget. The Liberals could instead put out its election platform when the writ is dropped and not present a budget or revised economic and fiscal projections.

Mr. Morneau presented his Update in the House of Commons and not to the Finance Committee, suggesting that he actually knew his Update was more of a budget than a typical fall update.  However, a budget, upon tabling, requires four days of Commons debate, followed by a vote of confidence. He was able to circumvent that by “presenting an Update rather than a budget” to the House, thereby avoiding detailed and aggressive debate and examination of his new fiscal plan. Given the number and fiscal cost of the proposed policy initiatives, he should have tabled the Update as a Budget and provided Parliamentarians with a full review. Instead, he chose to by pass Parliament.  

But the real problem with the 2018 Update is not whether it is called a budget or the process followed in presenting it. The real problem is that it runs completely counter to the kind of prudent fiscal planning currently needed. Obviously the Finance Minister decided to reject the advice of outside experts. The OECD, for example, recently recommended to the Finance Minister “at this advanced stage of the business cycle, greater budget consolidation would be more appropriate – it would ease the pressure on monetary policy and create more fiscal space to support the economy in the event of a downturn”.

The need for a policy of fiscal consolidation is made more urgent by the considerable domestic and international risks on the horizon. The current domestic expansion is largely driven by household consumption, but with rising interest rates and record household debt, this is not likely to continue.  The oil price differential between Canada and the United States will put increasing hardship on the western oil-producing provinces and could impact other regions as well. It will certainly impact the government’s bottom line. Access to the U.S. market has become less accessible, even if the USMCA is signed. Trade frictions between the U.S. and China, if not resolved, could have adverse impact on global trade and economic growth. Perhaps most worrisome is the emerging debt crisis in the U.S. and the unwillingness of Congress to deal with it. This could easily along with other factors trigger a major downturn in U.S.

To put it mildly Finance Minister made a bad policy decision in the Fall Update. He should not have spent the full fiscal dividend, plus more, on unneeded spending measures. The only policy action that perhaps could be justified was the accelerated investment tax credit. Every thing else should have been “permanently” delayed. This would have resulted in a declining deficit and a faster declining debt ratio, giving the Minister fiscal planning room for the 2019 budget. Unfortunately all that is gone.