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Feds still creating confusion in way it forecasts deficits: experts

By Derek Abma      

The fall update predicted a smaller deficit for the current fiscal year, but did not factor in a $6-billion contingency like the budget did.

Don Drummond, former senior bureaucrat at the Department of Finance, at a House Finance Committee meeting in 2009. The Hill Times photograph by Jake Wright

Experts say the way the government has forecast deficits this year in its fall economic update and March budget has created confusion, and there is a need for clearer standards for how contingencies are factored into projected deficits.

On Nov. 1, the government presented an update in which deficits projected for the current fiscal year and the years ahead were adjusted. For the current 2016-17 fiscal year, the projection is now for a deficit of $25.1-billion instead of the $29.4-billion indicated in the March budget. Yet, the newer forecast does not include the $6-billion contingency that was factored into the budget’s figures for planning purposes.

The inconsistent manner in which the contingency was applied is troublesome, said Don Drummond, an adjunct professor of policy studies at Queen’s University and former senior bureaucrat at the Department of Finance.

“It absolutely creates a lot of confusion, and how can you compare them?” he said.

Although he took responsibility for the practice of having contingencies built into fiscal forecasts, Mr. Drummond admitted that the public and Parliamentarians would have a clearer sense of the government’s finances without them.

“I think it weakens the accountability of Parliament, it weakens the accountability of spending, and it leads to confusion,” said in an interview with The Hill Times.

Kevin Page, former parliamentary budget officer and now president of the University of Ottawa’s Institute of Fiscal Studies and Democracy, said in a email: “I think the use of the planned $6-billion forecast adjustment to budget balances by the federal government has been very confusing for budget watchers and Members of Parliament and has essentially made it impossible for citizens to understand without help.”

Mr. Page’s former colleague Mostafa Askari, who remains the assistant parliamentary budget officer, said in an email that “for reasons unknown to us, the government decided not to have any risk adjustment in this forecast.” He added that the Office of the Parliamentary Budget Officer will release a report on Monday, Nov. 14, about the fall economic update and address this issue.

Joe Oliver, the last finance minister of the former Conservative government, told The Hill Times that to use a $6-billion contingency in March and drop it altogether just a few months later “looks like political manipulation because they didn’t want to have as big a number. They didn’t want the number to be triple what they originally said, which was $10-billion” in last year’s election campaign.

“It’s a credibility issue,” he said. “The average person is not going to delve into those specific numbers. … It’s hard not to come to a cynical conclusion.”

Mr. Oliver said using contingencies in budgetary-balance forecasts is not a problem in itself. However, he said he disagrees with the inconsistency in which the Liberal government has applied them and also with the size of the contingency used in the March budget.

He said “$6-billion is very high,” noting that the Conservative government used a contingency of $3-billion, though was reduced to $1-billion in its final 2015 budget because it came on the heels a collapse in oil prices, which lessened some of risk that contingencies are meant to guard against.

The $6-billion contingency that the 2016 budget the government had built into deficits projected for the next five years was based on a downward adjustment of $40-billion the government made to the average forecast of private-sector economists for overall economic output for those five years.

The government’s fall update said external economists, in a poll taken in September, had downgraded their projections for nominal gross domestic product, which includes inflation, by $10-billion in 2016, $16-billion in 2017, $30-billion in 2018, $35-billion in 2019, and $40-billion in 2020.

“In that context, the government’s decision to include a $40 billion forecast adjustment in Budget 2016 was prudent and appropriate,” the government’s November update said.

Paul Duchesne, a spokesman for the Department of Finance, said in an email that the adjustment to private-sector forecasts in the budget “reflected the particularly weak and uncertain economic conditions prevailing at the beginning of this year,” adding that for the fall update, “some of these have risks have subsided, while others have materialized.”

Asked about the potential for confusion from the inconsistent use of contingencies, he said the fall economic statement “provides clear tables showing how the unwinding of the adjustment for risk and economic and fiscal developments since the budget have affected the fiscal outlook.”

But Mr. Page said “there was very little information” from the government in how it came up with the $40-billion adjustment to the economic outlook in the budget in the first place. He said “some clear rules” on how contingency figures are used and derived at should be implemented.

Conservative MP Gérard Deltell (Louis-Saint-Laurent, Que.), the party’s finance critic, described the situation as “another Liberal trick to introduce something that is not good … but they think that the people will not see their misjudgment and bad administrative skills.”

Mr. Drummond said the degree of adjustment the government makes to private-sector forecasts tends to coincide with how comfortable it is with what external economists are saying. With the government not making any adjustments to the average forecast of economists in its fall update, it shows that they were more believable to the government than the forecasts used for the March budget, he said.

“Even though Finance, and virtually all provincial governments as well, use private-sector forecasts for their budgets, believe me, they continue to do their own forecasts,” he said. “If you didn’t do that, how would you ever be able to judge the private-sector forecasts? So clearly, [the government’s] internal forecast is fairly close to the average of the private-sector forecast, and so they felt a degree of confidence in it.

“But essentially, Finance is still using their own forecast, because when they don’t believe the private sector, they adjust it.”

Mr. Drummond recalled how Paul Martin, the finance minister he once worked for, decided in 1994 that federal fiscal projections would start being based on an average of economic forecasts from private-sector economists. Mr. Drummond said he disagreed with this, noting that a study indicated that for a 15-year period up until that point, Department of Finance forecasts for economic growth were more accurate than the private sector.

However, Mr. Drummond said he understood why the change was made.

“I get it,” Mr. Drummond said. “As a political vehicle, that made a lot of sense because [Mr. Martin] put himself in a position where if there were errors, it was, ‘Don’t look at me. It’s not my fault. I just use the private-sector forecasts.’ ”

However, Mr. Drummond, who was chief economist for the Toronto-Dominion Bank between 2000 and 2010, said private-sector economists tend to overestimate economic growth. The reason, he said, is they give too much weight to historical performance and not enough to the fact that the potential for economic growth in Canada has slowed down in recent years, largely because of the country’s aging population and how this affects labour-market participation.

Mr. Oliver said that, as finance minister, he relied on private-sector forecasts to guide projections, with contingencies factored in.

“The reason I was very comfortable with our approach is it depoliticized our forecasts,” he said. “It took away some freedom, but on the other hand, you want to maintain credibility. When I got up there, no one could say, ‘Hey, where did you get these numbers? What kind of games are you playing?’ ”

Mr. Deltell agreed that the use of contingencies is a good practice, but that the $6-billion cushion used in the Liberal budget was excessive.

Mr. Drummond admitted that he’s “got some dirt and my fingerprints on this, because I’m the creator of the contingency reserve.”

He explained how in the mid-1990s, after decades of the government constantly predicting smaller deficits than what ended up materializing, Mr. Martin began demanding that, no matter what, the final results for fiscal balances could not be worse than the projections. As a result, contingencies were factored in, and deficits and surpluses were always better than forecast.

“It was in the context of for almost every single year for 20 years the budget forecast had made an error on the same side [worse that expected]. You get pretty sick of that,” Mr. Drummond said. “But then we went too far in the other direction.”

He added: “Martin never cared about a forecast error, per se. He only cared about errors in a certain direction.”


The Hill Times

Federal deficit projections:

Fiscal year       March budget  November update

2017-16           $29.4-billion    $25.1-billion

2017-18           $29.0-billion    $27.8-billion

2018-19           $22.8-billion    $25.9-billion

2019-20           $17.7-billion    $19.3-billion

2020-21           $14.3-billion    $16.8-billion

2021-22           NA      $14.6-billion

Source: Fall Economic Statement 2016

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