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Ottawa’s budget shift on economic forecasts is a welcome one

Canada's Finance Minister Bill Morneau delivers the federal budget in the House of Commons on Parliament Hill in Ottawa, Ontario, Canada, March 22, 2017.

Chris Wattie/REUTERS

One hard lesson learned from the annals of government-budget history is that it's a bad idea for the politicians to make their own economic forecasts. The federal Liberals, thankfully, seem to have come to their senses on that front in their second budget, reversing a confusing and potentially dangerous precedent they set in their first.

In one small but important line item in last week's budget, the government built a $3-billion "risk adjustment" into its forecast of $28.5-billion deficit for the 2017-18 fiscal year. Nothing particularly unusual about that; these sorts of contingencies in government budgets have become commonplace and are generally considered prudent, protecting the government's planning against downside economic surprises. Federal budgets have included built-in contingencies dating back to the Chrétien government in the mid-1990s.

But the nature of this budget's fiscal cushion is a welcome departure from the curious approach the current government took at its first kick at the budgetary can, last spring. First, the 2017 provision is only half as big as last year's. More importantly, the government de-linked the contingency from its own assessment of the accuracy of private-sector forecasts.

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By another long-standing budget convention, also instituted by the Chrétien Liberals in the mid-1990s, governments rely on a survey of the country's top private-sector economists (usually about 15 of them) to set the economic forecasts that are baked into the budget's calculations. That took the economic projections out of the hands of the politicians, who in the past had often been tempted to stray significantly from the consensus of the country's less politically motivated economists in rather self-serving ways.

But last year's provision was quite different. The government looked at the private-sector survey and decided that those economists' average projection for nominal gross domestic product – the critical figure for estimating government revenues – looked too optimistic. So they declared that they were subtracting $40-billion from nominal GDP for the year, just to be safe, and going with that number instead for their revenue calculations. They called it a "forecast adjustment," and it worked out to $6-billion. Unlike previous contingencies, it didn't appear as a line item in the budget tables, but rather was built directly into the top-line revenue number.

In last week's budget, the government said it reinstated the line item "to improve transparency." But at least as significant is the name change, from "forecast adjustment" to "risk adjustment." It amounts to the government getting its fat fingers out of the forecasts.

As it turned out, last year's nominal GDP was a lot closer to the private-sector survey's projection than the government's. As a result, the deficit for the fiscal year ending March 31, 2017, now looks to be almost exactly $6-billion smaller than the forecast-adjusted 2016 budget had projected.

It's notable that this government didn't insert itself into the forecasts to prop up numbers that would improve its bottom line, which was the penchant of many governments in the days before the adoption of the private-sector economists' survey. It actually went the other way, building an even worse economic outlook – and thus a deeper deficit – into its budgeting. A cynic might say it was all designed to all but assure that the deficit would come in significantly lower than budgeted (something that the Chrétien government that invented contingency provisions was often accused of doing). A more generous explanation was that the government opted to be overly conservative in what it perceived as a risky time.

But that's beside the point. Having a government start to cherry-pick the economic forecasts that it likes, and "adjust" the ones it doesn't, takes us down a dangerous path – one overexposed to political gamesmanship over sound economic analysis. It looks like the government has wisely reversed its course, and gone back to a contingency based on a sense of prudence, rather than an urge to micromanage.

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That said, the Liberals may have stumbled into a particularly opportune time to find religion on this matter.

The private-sector survey used in this budget actually took place in December; in the intervening three months, economic figures have come in generally stronger than expected, and most economists have subsequently raised their growth outlooks. The current consensus forecast for 2017 real GDP growth, according to Bloomberg's survey of economists, is 2.2 per cent, considerably stronger than the 1.9-per-cent forecast used in the budget.

The government's comfort with adjusting its approach to the risk provision, and its willingness to go with a smaller cushion, comes with a certain confidence that the economy is already running ahead of the game.

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