National Newswatch
National Opinion Centre

The Minister of Finance presented an Economic and Fiscal Update (Update) at a press conference on Monday.  The Finance Minister had waited for Parliament to adjourn for the holidays before presenting his Update. The press conference lasted about 30 minutes; so much for accountability and transparency.

A lot has changed over the last 30 years when it comes to Updates. When Paul Martin was Minister of Finance, the Updates were presented to the Standing Committee on Finance.  These Updates identified major economic and fiscal issues and launched public consultations for the upcoming Budget.  They allowed members of the Finance Committee to question the Minister and his officials on the projections and potential policy initiatives to be considered for the upcoming budget.

This began to change with the election of the Conservative government in 2006. Under the Harper government, Updates were no longer presented to the Finance Committee. Instead they were often presented outside Parliament and they often became more like a budget. Although the Finance Committee still conducted consultations and presented its recommendations to the Government, it no longer played the role it had in the past.

In this weeks “news conference”, Parliamentarians were completely shut out of the Update. In fact the Finance Minister could simply have skipped the Update altogether. He didn’t need the Update to announce the increase to the Basic Personal Amount. The Ways and Means Motion had already been introduced in Parliament before the Update so that affected changes could be introduced effective January 1, 2020 and formalized with the passage of the 2020 Budget.

The budgetary consultation process would be improved if Parliamentarians were to insist that the Minister of Finance present the Update in October or November to the Finance Committee and answer questions. The Finance Minister shouldn’t object since fiscal credibility requires transparency and accountability.

In his Update, the Finance Minister claims that Canada will be second only to the United States in economic growth in 2019. Canada’s real GDP growth in 2019 is now estimated at 1.7% compared to 2.4% in the United States.  Given that the United States is Canada’s major trading partner, it is surprising that Canada’s growth is not stronger.

According to the Update, economic growth in Canada will decelerate in 2020 and 2021 before recovering slightly in the outer years. In other words, Canada is in a “growth recession” relative to potential economic growth of 2.0%. What this means is that there is a gap opening up between potential and actual output and this gap could widen even farther if economic growth were to decline faster than forecast.

In his Mandate letter, the Finance Minister was tasked to ensure that the government could cope fiscally in the event of a possible recession. We are already there, but Mr. Morneau doesn’t seem to understand that. Economic growth is slowing and positive growth can quickly become negative growth. The Finance Minister needs to recognize that “warning lights” are already flashing and he needs to develop a strategy for dealing with a worsening growth recession in the 2020 budget.

This will be challenging given his additional mandate to ensure an annual decline in the debt-to-GDP ratio. In this Update, this election commitment was actually broken. The ratio increases in 2019-20, remains stable in 2020-21 and then declines to 2024-25. The ratio is higher each year throughout the projection period compared to the March 2019 Budget: by 0.4 percentage point in 2019-20; 0.6 percentage point in 2020-21; 0.8 percentage point in 2021-22; 1.1 percentage points in 2022-23; and, 1.2 percentages points in 2023-24. It would appear the fiscal anchor is slipping and it would not take much to completely wipe out the forecast decline in the debt ratio.

The deficit for 2019-20 is now estimated at $26.6 billion, up $6.8 billion from the 2019 Budget. It increases to $28.1 billion in 2020-21, up $8.4 billion from the March 2019 Budget.  It then declines on a fiscal year basis to $22.1 billion in 2021-22,  $18.4 billion in 2022-23, $16.3 billion in 2023-24, and to $11.6 billion in 2024-25. The higher deficit outlook is attributable primarily to the increase in the Basic Personal Amount and to economic and fiscal developments since the March 2019 Budget.

In early November, the Parliamentary Budget Officer (PBO) released his Economic and Fiscal Update.  On a comparable basis to the Update, including the impact of the increase in the Basic Personal Amount, the PBO deficit forecast is $1.8 billion lower in 2019-20 but higher each year thereafter. In 2024-25, the PBO deficit forecast is $4.6 billion higher. This raises issues regarding the credibility of the government’s forecast.

The current Update includes the fiscal cost of the Liberals’ 2019 election promise to increase the Basic Personal Amount. No other election commitments were included. These amount to $1.1 billion in 2020-21, $4.3 billion in 2021-22, $4.2 billion in 2022-23 and $3.8 billion in 2023-24. Incorporating just the remaining election commitments would result in a deficit of $20.1 billion in 2023-24.

However, it appears that the costs of the remaining elections may have been “buried” in the adjustments resulting from economic and fiscal developments since the March 2019 Budget.  In 2019-20, the increase in the deficit result primarily from changes in the actuarial estimates for federal employees’ future benefit expenses. However, the operating costs of the government are still higher throughout the outlook period: $3.4 billion in 2019-20, rising to $5.4 billion in 2023-24.  No explanation are given for the higher operating costs. For 2019-20, it could relate to liabilities incurred during the year for which no cash payment has been made.

The fiscal forecast includes a Contingency Reserve: $1.5 billion in 2019-20 and $3.0 billion each year thereafter.  This would provide some buffer if the economic environment deteriorates. In addition, there are still large amounts of infrastructure funding in the expenditure framework to be allocated.

This Update raises serious challenges for the Minister of Finance in his 2020 budget and in subsequent budgets. First, whether he realizes it or not the economy is already in a growth recession, which could worsen. He will have to find a way to strengthen both short-term economic growth and long-term potential economic growth. Second, he will have to do this without violating his commitment to an annual declining debt-to-GDP ratio. This could be achieved through a re-profiling of the existing infrastructure program. Third, he needs to postpone election commitments that do not support economic growth; good luck to that.

C. Scott Clark held a number of senior positions in the Canadian Government, including Deputy Minister of Finance from 1998-2001.  He has a PhD in Economics from the University of California at Berkeley and is currently President of C. S. Clark Consulting.

From 1990 to 2005, Peter C. DeVries served as Director, Fiscal Policy Division, at the Department of Finance.  In that capacity he was responsible for overall preparation of the federal budget.  He is currently a consultant in fiscal policy and public management issues.

Their Blog is 3dpolicy.ca

The views, opinions and analyses expressed in the articles on National Newswatch are those of the contributor(s) and do not necessarily reflect the views or opinions of the publishers.
Click here for more political news headlines