Budget Watchdog Questions Canadian Deficit Figures

by Mike Godfrey, Tax-News.com, Washington

15 December 2011

The Canadian government's budget estimates have differed from those of its fiscal watchdog by CAD10bn (USD9.6bn) over four years, according to a new report which calls for greater transparency in these projections.

In its latest report, entitled "A Comparison of Finance Canada and PBO Estimates of the Government of Canada’s Structural Budget Balance", the Parliamentary Budget Office (PBO) states that differences in estimates of the economy’s performance relative to its potential income are largely responsible for this discrepancy.

The PBO is charged with providing independent analysis to parliament on the state of the nation’s finances, the government’s estimates and trends in the Canadian economy. Its new paper provides a comparison of Finance Department and PBO estimates of the structural (or cyclically-adjusted) budget balance. This it defines as the budgetary balance that would be observed if the economy were operating at its potential gross domestic product (GDP) or income.

The paper shows that the two sets of estimates track each other quite closely over 1976-2005. On average, Finance Canada’s estimates are only about CAD1bn higher than PBO’s figures over the same period. However, Finance Canada’s statistics have been about CAD10bn higher, on average, than PBO’s estimates over the period 2006-2010. Furthermore, for 2010, Finance Canada’s estimate is CAD17bn higher than the PBO's calculations.

This means that, based on the PBO's assumptions, Finance Canada’s estimates would suggest that – relative to potential income – the economy did not recover in 2010, and was operating at a historic low of 5.5% below its potential income. As a result, Finance Canada estimates would mean that the CAD42.6bn budget deficit recorded in 2010 was entirely cyclical in nature whereas the PBO believes that the deficit contained significant structural and cyclical components (approximately 40% structural and 60% cyclical).

Prior to the recession in late 2008 and early 2009, the PBO estimates calculate that the economy was operating well above its potential income (between 2.2% and 3.2%) while Finance Canada estimates would appear to suggest that the economy was much closer to its potential (-0.5% to 1.0%). Consequently, the paper states, Finance Canada estimates would mean that the budget surpluses recorded in 2006 and 2007 were largely structural, whereas the PBO's figures would indicate that they were largely cyclical in nature.

Based on its recent Economic and Fiscal Outlook, the PBO projects that the structural deficit – on a Public Accounts basis – will decline from CAD25.0bn in 2011-12 to CAD1.6bn in 2016-17. The decline stems largely from the PBO’s assumed modest growth in direct programme expenditure over the medium-term. Although the PBO projects that the deficit will essentially be eliminated by the end of the projection horizon, it stresses that assessing whether a government’s fiscal structure is sustainable requires looking beyond the medium-term to take into account the economic and fiscal implications of population ageing.

The PBO believes that estimates and forecasts of structural budget balances provide useful information about a government’s underlying financial position and can be used to help guide policy actions. The PBO has therefore recommended that Finance Canada improve fiscal transparency by publishing its estimates and medium-term forecasts of the economy’s potential GDP/income and of the structural budget balance, as well as details of the methodology and assumptions used.

Recommended