Budget officer and Flaherty differ by $10B
There's a $10-billion difference between the government's estimates and those of Parliament's budget watchdog when it comes to Canada's structural budget balance, the budget officer, Kevin Page, reported Monday.
Since 2006, Finance Canada's estimates have been, on average, $10 billion higher than the Parliamentary Budget Officer's estimates. Structural budgets are defined as the budgetary balance that would be observed if the economy were operating at its full potential. Structural budgets can be important for policy planning.
Page's report says that between 1975 and 2005, estimates are closely aligned and within about $1 billion of each other. They begin diverging in 2006 and he says the discrepancy largely comes from differences in estimates of how well the economy is performing relative to its potential.
Finance Canada's estimate of the structural budget balance last year is $17 billion higher than the PBO's estimate, Page reported.
What is the structural budget balance?
A structural budget balance is the accounting of the government's revenues and expenditures adjusted to ignore the effects of the economic cycle, such as an economic downturn or recession. The structural budget refers to what would be expected if the economy were operating at its normal potential.
Because it does not include the temporary expenses and revenue shortfalls due to a downturn in the economy, such as a recession, the structural budget balance is important for long-term policy planning to ensure a government is operating within its means. Running a structural deficit, for example, suggests that even aside from measures to deal with a recession or downturn you are spending more than you take in.
The PBO says that based on its assumptions, Finance Canada's numbers suggest that the economy did not recover in 2010 and was operating at a historic low of 5.5 per cent below its potential income.
He also estimates in his report that despite the government's promise to erase the deficit by 2015-2016, there will still be a structural deficit of $1.6 billion on the books in 2016-2017.
The opposition seized on this prediction in question period, accusing the government of taking an overly optimistic view of the economy and digging the country into a structural deficit.
The NDP's interim leader Nycole Turmel said that with corporate tax cuts, the Conservatives are "gutting the fiscal capacity of the government to provide people the services they need."
Foreign Affairs Minister John Baird and Finance Minister Jim Flaherty both defended the government's fiscal management, saying they are taking reasonable measures to ensure Canada returns to a balanced budget and they are focused on economic growth and job creation.
"We are not going to make the mistakes the European countries did with big deficits and big public debt," Flaherty said.
Prime Minister Stephen Harper's government has taken structural budget estimates into account in budget planning, for example, in 2009 when it launched the Economic Action Plan. The program was temporary and meant to be phased out as the economy recovered in order to avoid long-term structural deficits, as opposed to cyclical deficits.
In 2010, Canada's deficit was $42.6 billion, and Finance Canada estimated it was entirely cyclical in nature, reflecting the global recession and government spending on the economic stimulus plan. Page's analysis doesn't line up with that estimation, as he says it is a mixture of cyclical and structural deficits.
Page's report says his office and Finance Minister Jim Flaherty's department both estimate the structural budget balance based on National Accounts and expenditure data, and that they "appear to be based on a similar methodology" that attempts to adjust for fluctuations in commodity prices and stimulus measures.
He says that it's not possible to determine exactly how his estimates and economic assumptions differ from the government's because Finance Canada doesn't publish all the data it uses to calculate its estimates.
He called on the department to be more transparent, a call he has made before, and this is also not the first time Page and the government have clashed when it comes to economic projections and estimates.
Monday's report also shows differences between the PBO and Finance Canada on the cyclical nature of the economy between 2006 and 2010.
In late 2008 and early 2009, when the recession was settling in, Page's office estimated that the economy was operating well above its potential income (between 2.2 and 3.2 per cent) while Finance Canada estimates appeared to suggest that the economy was much closer to its potential, between 0.5 per cent below and one per cent above its potential.
"Consequently, Finance Canada estimates would suggest that the budget surpluses recorded in 2006 and 2007 were largely structural whereas PBO estimates would indicate that they were largely cyclical in nature," the report said.
The numbers are again off when it comes to the economic recovery. The PBO says that the economy began to recover in 2010 as the level of actual income moved closer to its potential, 2.7 per cent below, but Finance Canada estimates would appear to suggest that the economy continued to deteriorate, falling 5.5 per cent below its potential.
"As a result, Finance Canada estimates would suggest that the $42.6 billion budget deficit recorded in 2010 was entirely cyclical in nature whereas PBO estimates that the deficit contained significant structural and cyclical components (approximately 40 per cent structural and 60 per cent cyclical)," the report said.
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