Five months ago, the ornery economists at the Parliamentary Budget Office were calling on the federal government to reform the country’s Old Age Security program. In its September fiscal sustainability report, the agency warned that Canada’s aging population would soon put downward pressure on government revenues and upward pressure on programs for the country’s elders. “Policy makers will need to address the aging demographic issue,” top PBO economist Kevin Page said in an e-mail to Globe and Mail reporter Bill Curry. “We feel it should be part of the discussions leading to the 2012 budget.”
But that was then. Now Mr. Page says we no longer need to address the consequences of an aging population. Now we can afford to fund OAS for the next two generations – at least. Now we can afford to cut bigger cheques for our elders. An aging nation? Bring it on.
How could Canada’s economic fortunes turn around so abruptly? In September, Mr. Page calculated that the country needed to cut government spending, or increase taxes, by something approaching $50-billion. Did our fortunes turn around before Prime Minister Stephen Harper signalled OAS reform in his speech at Davos in January? Or did they turn around after Mr. Harper’s speech? It would be wrong to conclude that Mr. Page is a partisan economist, an Opposition economist. But it gets harder to prove that he isn’t.
Mr. Page’s flip-flop on Old Age Security lends credence to Finance Minister Jim Flaherty’s assessment of Mr. Page’s work: unreliable. Recall Mr. Page’s stern warnings of 2010 that the country risked deficits forever more (or, more accurately, through 2085). Equally curious was Mr. Page’s rush to judgment on the OAS file – reporting that all is well – only a few weeks before the government tables its 2012-13 austerity budget. Might not this budget prove relevant to OAS reform?
Suppose for a moment that Mr. Page is wrong on OAS. Suppose that two working Canadians will not be able to support four or five senior citizens in 2030, or six or seven in 2040. In this case, the longer we wait to address the problem, the harder it will be to do it. Further, let’s not forget that – believe it or not – the PBO has been wrong before. As convincingly demonstrated in a Globe and Mail analysis, the Finance Canada’s economic projections have proven more accurate than PBO projections nine times out of 15. (In two times out of 15, the agencies tied.) This is statistically significant.
Theoretically, the Finance Canada and the PBO projections should be reliably comparable – because both agencies depend on independent private sector forecasts of the country’s biggest financial companies and on the independent public sector forecasts of academic economists. Based on these independent forecasts and its own internal tweaking of them, the Finance Canada thinks that the economy will grow in 2012-13 at the nominal rate of 4.3 per cent. From its own identical process, the PBO thinks that the economy will grow at the nominal rate of 4.5 per cent. Indeed, the PBO thinks that the economy will grow at the nominal rate of 4.5 per cent from now through 2017 – and beyond.
What we have here is not a significant disagreement on the need to reform OAS. The argument has little to do with the elderly, whose number in 2032 can be precisely projected. It has much to do with the country’s rate of growth in the next 20 years, a number that can’t be precisely projected.
In its latest economic and fiscal outlook (November, 2011), the PBO concedes the importance of the rate of economic growth to its conclusions: “Estimates of potential GDP are key inputs into estimates of government’s structural balance since they are used to identify cyclical revenue and expenditure components of the federal budget balance.”
In other words, the PBO’s assertion that OAS expenditures are sustainable rests on the slightly more optimistic economic growth rate that it chooses to project. Indeed, more specifically: “The PBO believes that differences in estimates of the economy’s performance … are largely responsible for the discrepancy in Finance Canada and PBO estimates of the government’s structural budget.” In the end, the OAS flap embodies a slight difference of opinion – 0.2 percentage points – in Canada’s nominal growth rate for the next generation or two. Picky, picky.