Getting a vaccination probably remains the top priority of most Canadians especially in the middle of a very scary third wave generated by COVID variants. Notwithstanding a new stay at home order, there is some emerging hope that by the summer the situation will be much better and by September anyone who wants a vaccine will have it.
By then the economy will be growing and Canadians will want to know what the government intends to do about a deficit of around $380 billion in 2020-21 (not $39.4 billion as in 2019-20) and a debt ratio of around 50 per cent (not 31 per cent as in 2019-20).
There hasn’t been a full-blown federal budget since March 2019, although there have been three economic and fiscal updates. But Canadians want more than a financial update. The “COVID depression” has revealed a number of significant structural flaws in the economy and Canadians want to know how the government intends to deal with them in the budget: the underfunding of healthcare; child care and the labour force participation rate of women; income inequality; the GIG economy and reform of Employment Insurance; support for a green economy in driving economic growth are some examples. In other words, Canadians want to know how the government will set its priorities in a sustainable fiscal framework. Should eliminating the deficit be a top priority no matter what it takes?
The Finance Minister has announced that she will deliver the first budget on April 19th.
The government has been delaying its budget for months using the pandemic as an excuse because of the economic and fiscal uncertainties. But there has been growing criticism for the delay from members of Parliament and the media. It is argued that without a budget, Parliament does not have the opportunity to scrutinize government revenue and spending initiatives. This is not exactly correct. Parliamentary review and approval of all proposed spending and revenue initiatives is done through the various appropriation bills, not the budget. Although the vote on the budget is a confidence motion, it relates to the government’s overall management of the economy and the fiscal situation, not individual spending and revenue initiatives.
Despite the fact that no formal budget has been tabled since March 2019, there have been two fall updates, presenting detailed five-year economic and fiscal projections, as normally included in a budget. In addition, there was a one-year Snapshot tabled in July 2020. In the interim, proposed COVID spending initiatives were tabled through appropriation bills for Parliamentary review and approval. Indeed more information has been made available than in a normal budgetary cycle. In our view, many of the criticisms have been misplaced.
The events of 2020 resulted in considerable uncertainty about economic and fiscal developments. This uncertainty is clearly illustrated by the recent release of two very different economic and fiscal forecasts – one by the Parliamentary Budget Officer (PBO) in its “Pre- Budget Outlook” and the other by the C.D. Howe Institute in its “Recovery and Stability: A Shadow Federal Budget for 2021”.
The PBO forecasts a deficit, on a “status quo” basis, of $363.4 billion in 2020-21 falling rapidly to $19.2 billion in 2025-26. In contrast, the C.D. Howe Institute forecasts a deficit of $388.7 billion in 2020-21 but falling to only $51.4 billion in 2025-26. This divergence highlights the environment in which Minister Freeland is planning her upcoming budget.
Both of these forecasts received considerable media attention even though comparing these two fiscal forecasts is comparable to comparing apples and oranges.
The PBO forecast assumes no policy actions by the government; for example, no short-term stimulus and no new spending. In the short term, the PBO is forecasting a strong economic recovery. Nominal economic growth, a rough measure of the government tax base for revenues, is forecast to increase by 9.9% in 2021.
In contrast, C.D. Howe is forecasting nominal income growth of only 6.0% in 2021.The large difference in nominal growth is primarily in the outlook for GDP inflation, which is considerably higher in the PBO forecast. Thereafter, the growth rates are more consistent. The outlook for inflation right now is anyone’s “guess”. This difference in inflation “guess” in 2021 accounts for much of the difference in deficit forecasts in 2025-26
However, the C.D. Howe forecast is not a status quo forecast like the PBO. Rather it includes policy actions that the C.D. Howe believes the government will implement. It includes the three-year $100 billion stimulus amount outlined in the November 2020 Economic Statement. In addition, it also assumes ongoing spending of $20 billion per year for “new policy initiatives identified in the Speech from the Throne”. As such, the C.D. Howe forecast is not a status quo forecast. It assumes the implementation of new policy initiatives. On a status quo basis, comparable to that of the PBO, the C.D. Howe projected deficit would be about $30 billion in 2025-26, with the difference due to economic growth assumptions in 2021.
The C.D. Howe report also includes other “policy initiatives” it believes the government should implement to support the recovery and promote long-term economic growth. This includes freezing employment insurance premium rates to 2026 by crediting the EI Operating Account with $6 billion out of general revenues. Earlier in their report, they argue that the fiscal impact of the COVID-19 support measures to households and firms should not be passed to future generations. Yet, their proposed EI premium rate freeze does exactly the opposite.
The Report recommends a 2-percentage point reduction in the general corporate tax rate, arguing that this would enhance competitiveness, especially with respect to the United States even though the United States is currently proposing to increase the general corporate tax rate.
In addition, there is a proposal to give workers a temporary bonus, introduce a childcare benefit, and in improvement in nondiscretionary medical spending, among others. These costs amount to $4.6 billion by 2025-26.
Second, the C. D, Howe report then creates its “shadow budget” by setting out policy changes that would achieve a balanced budget in 2025-26.
Most importantly, the shadow budget includes an increase in the GST by 2 percentage points, raising the GST on transportation fuels, freezing the wage and salary budgets of federal departments for five years, applying the GST to the digital economy, rationalizing the age credit, eliminating the stimulus spending ($100 billion) and any new policy spending ($20 billion annually) among others.
They argue that these expenditure cuts and tax increases would result in a saving of $60.6 billion in 2025-26.
The C.D. Howe shadow budget represents an attempt to resurrect the much discredited “growth through austerity” budget-planning model. In this budget-planning model the top priority is eliminating the deficit at the expense of everything else. This is the same budget model adopted by Harper over 10 years at the expense of lower economic growth.
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