Canada's PBO Kevin Page - Canada's Stubborn Deficit and Growing Fiscal Gap

On February 15^th, 2011, Kevin Page, Canada’s Parliamentary Budget Officer appeared before the House of Commons Standing Committee on Finance to discuss the Parliamentary Budget Office’s (PBO) updated fiscal projections and issues associated with the upcoming 2011 Budget.  I’ll focus on the highlights from his speech.

The PBO’s fiscal projections are based on Finance Canada’s December 2010 survey of private sector forecasters.  While the PBO bases its projections on these forecasts, the Office produces their own projections and uses the private sector forecasts as guidance only.

From these forecasts, the PBO projects the following:

1.)   The federal deficit will fall from $56 billion or 3.6 percent of GDP in 2009 – 2010 to $10 billion or 0.5 percent of GDP in 2015 – 2016.

2.)   The federal debt is projected to rise from $519 billion or 34 percent of GDP in 2009 – 2010 to $652 billion or 31.9 percent of GDP in 2015 – 2016.

Note that although the total dollar amount of the debt is higher by $133 billion in 2015 – 2016, it drops as a percentage of GDP because of growth in the economy.  Risks to the growth in GDP include weaker than anticipated growth in both the United States and the remainder of the world’s economy, changes in the value of currencies, the high level of household debt which could suppress consumer spending (and put negative pressure on GDP growth) and a rise in global interest rates which would impact the interest payments on the debt.  These factors could have a dramatic affect on the debt-to-GDP ratio.

Here is a summary of the fiscal projections used by the PBO:

The PBO also assesses the probability of returning to balanced budgets over the period from 2010 to 2016.  As shown in this chart, the chance of achieving budgetary balance by 2013 – 2014 is zero and the chance of achieving balance by 2015 – 2016 is only 16 percent, in other words, slim to nil.  As an aside, it is in the 2015- 2016 fiscal year that Mr. Flaherty’s 2010 budget projected a return to balance:

Here are Mr. Flaherty’s budget deficit projections for the next 5 fiscal years from his 2010 Budget document:

Here are the PBO’s projected deficits for each fiscal year for comparison:

For fiscal 2015 - 2016, there's a gap of $7.9 billion between the Harper government's projections and those of the PBO.  Now, who are we going to believe – a politician standing for re-election or an independent Budget Officer?  As well, with global economic slowdowns occurring every 5 to 7 years, it is most likely that during the 2011 to 2016 time frame, another global recession will take place.  This will make it even more unlikely that the Canadian government will be able to balance its budget.

On top of the normal economic issues of debt and deficit, the PBO asserts that Canada is facing a long term fiscal challenge.  Here’s a quote from Mr. Page’s speech:

“Canada’s serious fiscal challenge is underscored by ageing demographics and weak productivity growth.

Our population is getting older. In 1971 there were 7.8 people at working age for every person over 65; which fell to 5.1 in 2008 and is projected to be 3.8 in 2019 and 2.5 in 2033. Growth in labour supply will fall dramatically due to slower population growth and the retirement of the baby boom generation.

Productivity growth is trending down: 2.6% average growth from 1962 to 1976; 1.2% since 1976; about 0.8% since 2000.

The bottom line is that Canada does not have a fiscally sustainable structure. There is a fiscal gap. This means that sustained fiscal actions are required to avoid excessive debt-to-GDP accumulation. Based on PBO’s 2010 report, assuming that the Canada Health Transfer grows in line with projected provincial-territorial health spending beyond 2013-14 – which is projected to be approximately 4.2% per year on average – the fiscal gap is about 1% of GDP, or $20 billion in 2016. Alternatively, if the Canada Health Transfer continues to grow at 6% per year as currently assumed by Finance Canada, the fiscal gap increases to 1.9% of GDP, or about $40 billion in 2016. Moreover, a significant delay in taking fiscal action substantially increases the required amount of corrective measures.”

Here’s the PBO chart used to show the growth in the dependency ratio (the number of Canadians 65 years of age and older divided by the number of Canadians aged 15 to 64 as a percentage) and the shrinking rate of population growth.  Note that in the next 50 years, nearly 1 in 2 Canadians will be over 65, up from 1 in 5 at the turn of the millennium:

Thank you Mr. Page.  At least someone in Ottawa is thinking well beyond the 4 year election cycle. As the baby boomer cohort ages, they will be using more government services (health care etcetera) and contributing less in revenue to the federal government in the form of both consumption and income taxes.  This makes the current scenario unsustainable.

In closing, Mr. Page chastises the Harper government for its unwillingness to supply the PBO (whose mandate from the Parliament is to provide independent analysis of Canada's finances to both the House of Commons and the Senate as stated in the Harper Government's Federal Accountability Act of 2006) with the necessary information which would allow for an open and  transparent assessment of expenditures.  I’ll quote from Mr. Page’s speech once again:

“There is genuine concern that Parliament is losing control of its fiduciary responsibilities of approving financial authorities of public monies as afforded in the Constitution. In the recent past, Parliament was asked to approve changes to crime legislation without financial information or knowledge of monies set aside in the fiscal framework. Parliament was asked to approve authorities related to operational restraint without access to a government plan.

New policy measures (e.g., Afghan mission extension) and existing measures (e.g., corporate income tax reductions) must be debated in an open and transparent manner with the information required for parliamentarians to assess their financial costs and risks.

Budget 2011 should provide a frank picture of the short- and medium-term planning environment and budgetary constraints. Parliamentarians could benefit from having access to the Government’s estimates of the output gap, structural budget balances, and the quantification of risk and uncertainty.

PBO believes that the Government should provide the strategy to achieve estimated operating savings in the 2011 budget and departments and agencies should outline their plans to achieve their respective three-year savings contributions in their 2011-12 Reports on Plans and Priorities.

It is our view that this would be similar to the approach the Government took in its Economic Action Plan where the two-year stimulus strategy was outlined in the 2009 budget including additional planned resources for government programs before Parliament was asked to provide financial authorities. The degree of transparency demanded by parliamentarians for stimulus spending should parallel those required for spending restraint measures.

The PBO also wishes to note this Government provided Parliament details on spending restraint by

department and agency in 2006 prior to parliamentary approval of financial authorities as did the previous government in 2005 on its expenditure review exercise. This raises the question as to why the application of Cabinet confidence with respect to restraint measures appears to have changed in such a short period of time.

Further, the application of Cabinet confidence has been used to withhold information regarding the assumptions used to translate the private sector economic forecasts into Finance Canada’s fiscal projections.

New policy measures (e.g., Afghan mission extension) and existing measures (e.g., corporate income tax reductions) must be debated in an open and transparent manner with the information required for parliamentarians to assess their financial costs and risks.” (my bold)

Apparently, the Harper government seems to have lost touch with the fact that the money that they spend belongs to Canadian taxpayers and that as suppliers of that money we deserve to know how it is being spent and how they plan to dig us out of the fiscal mess they have created over the past 3 years. 

But then again, we’ve learned that Mr. Harper loves to operate in secret.