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Economic Insight Fall budget update reveals a government seriously concerned with appearances

The Trudeau Liberals' fall budget update showed a government deeply committed to a strategy for rebuilding Canada's stunted economy. It also showed one much less committed to transparency in its fiscal and economic forecasting.

At issue is the now-you-see-it, now-you-don't nature of the $6-billion "forecast adjustment" the rookie government built into its inaugural budget last March. In its Fall Economic Statement issued Tuesday, the government leaned on it to plug an eroded economic outlook into its budget and end up with a smaller deficit coming out the other end.

The updated projection for the budget deficit in the 2016-2017 fiscal year (ending March 31) is $25.1-billion, down from $29.4-billion in the spring budget. This despite Finance Minister Bill Morneau's acknowledgement that the economy deteriorated in the intervening months, taking a notable bite out of economic growth forecasts and, by extension, delivering a $1.3-billion hit to the budget for the fiscal year.

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In short, the government said, everything that it warned in the spring could go wrong with the economy pretty much did. U.S. growth disappointed. Canadian exports failed to capitalize on the weakening of the Canadian dollar. Business investment has failed to launch. The global economy has struggled. (They even tossed in Brexit for good measure.)

The average forecast from private-sector economists, on which governments have for many years based their own budgeting (in order to maintain a semblance of independence in the economic assumptions baked into the budget numbers), now calls for real gross domestic product growth of 1.2 per cent in 2016, down from 1.4 per cent in the spring budget. The 2017 forecast has been cut to 2 per cent from 2.2 per cent, and 1.8 per cent in 2018, down from 2.2 per cent. The outlooks for 2019 and 2020 were also downgraded. All of that implies a smaller economy, and thus a reduced revenue stream, for the federal government for the next several years.

And yet the government turned that bad news into an improved bottom line by taking the $6-billion it had set aside in the spring in the event of bad news, and, declaring the bad news already on the books, reversed it. Voila, instead of the deficit being worse, it's better.

What's more, the government has removed the $6-billion contingency from its fiscal forecasts not just for the current year, but for each of the next four years that follow. The result is that its new deficit projections look more or less in line with its spring projections, despite, by its own reckoning, a nominal gross domestic product that will be $40-billion lower than its spring projections by 2020.

Mr. Morneau defended this treatment by explaining that the government felt in the spring that the private-sector forecasters were being overly optimistic and underplaying the downside risks, so the government felt it prudent to build in the adjustment. Now, he said, "the risks are much more balanced." So, basically, the downside contingency is no longer needed. He was non-committal about whether he will set aside contingency funds in future budgets, saying only that this will be a "consideration" come the government's spring budget.

It's been a long time since we've seen a federal government willing to fly without a safety net of a contingency built into its budget figures. If the government had said it felt it no longer needed the contingency in the current fiscal year, which is more than half over, that would be one thing; but the contingency has been removed for the next several years to come – for which, obviously, the economic outlook is increasingly uncertain, and for which budgeting prudence would generally be considered appropriate.

Few economists would quibble with the economic priorities outlined by Mr. Morneau in this fall update: Infrastructure, investment, skills development, immigration. There is reasonably widespread agreement that these are the planks needed to improve the country's long-term growth prospects.

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Mr. Morneau reminded reporters that this government's priority is "that we should be focused on investments," while adding that it is pursuing that course "in a fiscally responsible way." While he talked about the investment side of that equation as being all about the "long term," it would appear that for the short term, the government is more focused on the appearance of fiscal responsibility – to the extent that it was willing to fiddle with its own budget contingency in a way that improved its bottom line.

It's an act of a government seriously concerned with appearances – specifically, how bad it would look for the government that returned Canada to sizable deficits in its very first budget to announce an even bigger pool of red ink just seven months later.

The government may argue that this is a more transparent way of presenting the numbers; there's no fudge factor built into the figures anymore. But transparency includes presenting your numbers in a consistent way from fiscal projection to fiscal projection. Just as the unusually large $6-billion adjustment in the spring budget raised eyebrows (and more than a few objections), it's disappearance from this fiscal update is equally confusing to anyone trying to track the forecasts over time.

It raises the question of whether the government will adjust its prudence according to its own whim. This implies that the government has, effectively, found a back door to overrule the private-sector forecasts; if its internal officials feel for whatever reason that the private sector hasn't calculated the same "risks" that the government sees, it will effectively bake different economic growth assumptions into the budget's bottom line through an ever-shifting "adjustment."

One can argue about whether the government's long-term focus outlined in the fall update is the appropriate strategy. But what one can't argue with, or shouldn't, is that regardless of the plan, it should always be built on sound, objective and consistent approach to the numbers themselves. The independent forecasts of private-sector economists shouldn't be effectively adjusted depending on whether the government chooses to agree with them. And the bottom line shouldn't be a moving target.

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