The great Canadian economist John Kenneth Galbraith once said that economists didn't make forecasts because they thought they could predict the future; they made forecasts because people asked them to. That was certainly the case during my own career: predicting the inherently unknowable was a big part of the job. Still, you have to wonder who asks the economists at Canada's Department to Finance to do this: a long-term economic and fiscal projection.
The introduction notes that projections over several decades are subject to "a fair degree of uncertainty". That's putting it mildly, and it may explain why the updates to these projections are always snuck out just as Santa is loading up the old sleigh. The projections don't get a lot of media attention, although one wire service solemnly reported that the federal budget deficit was now forecast to disappear in 2040, "five years sooner than was projected last year".
There are things you can reasonably forecast for the long term. For any country, the rate of real GDP growth will oscillate around a base level dictated by the growth in the labour force and the rate of productivity gains. The first of those is certainly reasonably predictable, and it's quite reasonable to approximate productivity growth by extrapolating past trends, which is not, by the way, particularly good news for Canada. It's also not a stretch to assume that the inflation-targeting approach in place for the last two decades will be maintained, which can be layered onto the real GDP forecast to come up with a defensible projection for nominal GDP growth.
So far, so good. It's when you get into the fiscal policy forecasts that the trouble starts. Budget making is political. Canada faces a Federal election in 2019 and, assuming that the pattern of elections every four years is maintained, will see a total of six elections by 2040 when, if you recall, the deficit is now projected to fall to zero. That means there are six occasions on which a wrenching change in the direction of fiscal policy might occur, throwing even short term forecasts, let alone long term projections, into disarray.
Just look back a recent history. The Stephen Harper Tory government had been devoted to balanced budgets. Justin Trudeau decided almost on the spur of the moment during the 2015 election campaign to pledge a return to deficit financing for a limited time to boost the economy, a pledge that he believes won him the election.
In office, the Trudeaucrats have abandoned the "limited time" part of that pledge; there is now no timetable for a return to balance. The main opposition leader, a right-wing Tory lightweight named Andrew Scheer, will surely fight the 2019 election on a platform of fiscal responsibility. That got Doug Ford elected in Ontario, so you can't bet against it working at the national level, and if that happens, all current bets are off.
If there's that much uncertainty over the possible impact of an election that's ten months away, how can you even conceive of forecasting the next five elections after that? Now of course, the Department of Finance carefully spells out the assumptions it uses to generate its results, but they're basically all of a "steady as she goes" nature. Given the ever-widening gap between left and right wing policy approaches nowadays, it seems very unlikely that will be the case.
I started with a quote from an eminent three-named economist, so let's finish the same way. John Maynard Keynes once remarked, a propos of long term forecasting, "In the long run we are all dead". And on that cheerful note, let me wish everyone who has stopped by this blog during the past year a happy Christmas and a safe and prosperous new year!
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