Finance

PBO says government has financial room to manoeuvre, economic update on tap this week

The parliamentary budget officer says the economy has worsened in recent months, but the government is on track to reducing its debt-to-GDP ratio ahead of schedule.

All eyes will be on Finance Minister Bill Morneau on Nov. 1 as he puts forth the government's fall economic update. The Hill Times photograph by Sam Garcia

By DEREK ABMA

PUBLISHED : Monday, Oct. 31, 2016 12:00 AM

A senior official with the Office of the Parliamentary Budget Officer says the government has room to introduce additional spending initiatives and still meet its goals for reducing the national debt-to-GDP ratio, despite a deteriorating economic picture.

That assertion came in an interview last week following a new report from the PBO that said that while the government’s deficit this year will be smaller than what the government stated in its March budget, it will be more than what the PBO forecast in April.

The federal government is scheduled to release its fall economic update on Nov.1, and it will be closely watched for possible new spending initiatives, and revised forecasts for the government’s fiscal situation and the country’s economic prospects.

The PBO’s report last week said the federal debt-to-GDP ratio is on track to be reduced quicker than the government is projecting. The government said in its March budget that this figure would fall from 32.5 per cent in the current fiscal year to 30.9 per cent in 2020-21. Last week’s PBO projection said the government is on track to reach a debt-to-GDP ratio of 30.9 per cent two years earlier—in 2018-19—and it will be down to 29.7 per cent in 2020-21.

  

“If that is the target and they achieve that target two years earlier, then obviously they have some room if the target is still to have a decline in the debt-to-GDP ratio,” Mostafa Askari, the assistant parliamentary budget officer, said in an interview with The Hill Times. “They can still take other measures and achieve that target.”

The office of Finance Minister Bill Morneau (Toronto Centre, Ont.) was saying little about what this week’s economic update might include. It simply referred to a press release issued by the Department of Finance on Oct. 20 that said the update “will set the economic stage in advance of budget 2017, and provide an update on many of the measures implemented over the last year, and how the government can build on them to keep its momentum going.”

The Globe and Mail reported last week that the update will include details about the second phase of the government’s $60-billion infrastructure plan. The Globe also said the update will respond to recent recommendations from Mr. Morneau’s Economic Advisory Council, which has called for a new infrastructure bank, more immigration, and the creation of a federal agency dedicated to attracting foreign investment.

Kevin Page, the former parliamentary budget officer, said in an email that the PBO’s latest report “shows that the government has some fiscal room to manoeuvre relative to its medium-term debt-to-GDP objective.”

  

Mr. Page added: “It will be important for the government to strengthen its fiscal planning framework and make the case for new policies and proposals expected in budget 2017 (innovation agenda, health care, infrastructure, etc.).”

An April report from the PBO said the government was on track to be debt-free within 50 years, based on its current pattern of spending and taxation. Last week’s report did not mention this, though Mr. Askari said this theory remains true.

“If the current fiscal measures do not change from what we have right now, over a longer period of time, we see that the debt-to-GDP ratio actually will decline gradually and eventually will disappear,” he said.

Mike Moffatt, an economics professor with the Ivey Business School at Western University in London, Ont., said he expects the government to “stay the course” with no major changes in its economic update this week.

  

“I think, overall, things have been worse than expected, but I don’t think the difference has been large enough to warrant the government changing course and doing something significant on the stimulus side,” said Mr. Moffatt, who was part of an economic advisory panel for Justin Trudeau (Papineau, Que.) before he was elected prime minister last year.

If anything, Mr. Moffatt said the government might try to accelerate some of the infrastructure projects it has already promised to fund.

The PBO said in its fall fiscal and economic outlook last week that it is now anticipating the government to run a deficit of $22.4-billion in 2016-17. While still short of the $29.4-billion projected in the government’s budget in March, it’s greater than the $20.5-billion deficit the PBO forecast in its spring outlook in April.

The PBO has attributed the difference between its numbers on the deficit and the government’s forecast largely to the annual $40-billion downward annual adjustment “for planning purposes” the government made to private-sector economists’ forecasts for total economic output in the coming years.

With an updated set of predictions from private-sector economists expected to be taken into account for this week’s economic update, Mr. Askari said it will be interesting to see whether the government continues to factor in a $40-billion cushion.

He said the government could conceivably say the worsening economic picture that has developed since the March budget justifies the adjustment it already made. Or, if it continues to chop $40-billion from the average forecast of private-sector experts, the government’s official deficit projection will grow, Mr. Askari said.

Mr. Moffatt said the government is likely to present updated economic forecasts in its update this week. He said it could also revise its projected deficits upward, or keep them the same while acknowledging some of the cushion that was initially factored in.

“In a very odd way, the government could go, ‘Well, we thought that this kind of thing might happen; that’s why we built in this contingency. And, sure enough, aren’t we right and aren’t we prudent,’ ” Mr. Moffatt said.

“I wouldn’t be surprised to see the government highlighting their prudence, because they took some criticism in Budget 2016 about why they downgraded the forecasts so much.”

Hendrik Brakel, director of fiscal and tax policy for the Canadian Chamber of Commerce, said his group is hoping to hear whether the government is still anticipating the stimulus measures announced in the March budget to add 0.5 per cent to gross domestic product in the current fiscal year and one per cent in 2017-18.

Mr. Brakel said with much of the government’s infrastructure support going to environmental, social, and transit projects, his group would like to see more funding for infrastructure that would help improve the efficiency of the economy, such as roads, bridges, ports, and digital networks.

“We’ve got people sitting in trucks around Toronto, just idling in traffic all day,” he said. “So we don’t get products to market on time. It costs us a lot in wages because these guys are sitting there all day. So absolutely, infrastructure is a big priority for business.”

The PBO said real economic growth—which doesn’t include inflation—is anticipated to be 1.2 per cent this year, compared to the prediction of 1.8 per cent it made last spring. The PBO said the wildfire in Fort McMurray, Alta., in May had “a significant impact on the economy,” reducing economic growth by 1.4 percentage points in this year’s second quarter.

Mr. Askari added that U.S. economic growth has been slower than anticipated, and Canada’s non-oil exports have been week despite expectations that the depreciation of the Canadian dollar in recent years would help boost this part of the economy.

The PBO said next year’s economic expansion is anticipated to come in at 2.3 per cent, while last April it was forecasting 2.5 per cent.

Beyond next year, the office said economic growth will to come in at 2.2 per cent in 2018, which is better than the forecast of 1.7 per cent the PBO had in April. Then growth is expected to fall to an average of 1.7 per cent in the years 2019 to 2021, which is better than the rate of 1.5 per cent it had predicted in April.

The PBO said its upward revisions for GDP from 2018 through to 2021 are a result of higher-than-previously-expected spending by provinces and municipalities and lower-than-anticipated interest rates.

Anticipated economic growth in the coming years is sluggish compared to previous times, with no banner years on the horizon. The Canadian economy has grown three per cent or more in years such as 2011, 2010, 2005, and 2004, according to Statistics Canada, and grew more than five per cent in 2000 and 1999.

Pollster Lorne Bozinoff, president of Forum Research, said the Trudeau government might be on the defensive during the 2019 election campaign if Canadians don’t feel like its stimulus spending is working.

“The economy, it’s an issue, it has the potential for giving the government a lot of trouble, especially during the re-election,” he said in an interview. “A lot of it depends on how the slow growth manifests itself.”

For example, he said the job market will be a key factor in how favourably Canadians see the Trudeau government’s economic management record in a few years.

“I think the public reacts more to how the economy affects them personally,” Mr. Bozinoff said. “So No. 1 is: Do you have a job, and do your kids and everyone you know have a job? … If this forecast includes increasing unemployment, then I can see that there would be an issue.”

Other factors will be whether is it seems like the country’s economic benefits are being shared equally and whether any other party has “credible alternative plan” for the economy, he said. Still, Mr. Bozinoff noted that most governments are given at least two terms to make their mark before being voted out.

dabma@hilltimes.com

The Hill Times

 

Federal deficit

Government projections

2016-17: $29.4-billion

2017-18: $29.0-billion

2018-19: $22.8-billion

2019-20: $17.7-billion

2020-21: $14.3-billion

2021-22: NA

Source: Budget 2016

 

PBO projections:

2016-17: $22.4-billion

2017-18: $24.9-billion

2018-19: $18.2-billion

2019-20: $13.0-billion

2020-21: $10.6-billion

2021-22: $9.4-billion

Source: PBO’s economic and fiscal outlook, October 2016

  
  



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