Dissecting the Canadian Federal Budget

Canada's independent Parliamentary Budget Officer (PBO) has just released its customary commentary on the recent Federal budget. The stated aim of the report is "to assist Parliamentarians in their budgetary deliberations", although it probably goes without saying that very few Opposition MPs have waited for this informed critique before unloading on the budget. 

In terms of the economic outlook for the budget's time horizon (out to fiscal 2025), there are no significant differences between the PBO's projections and those in the budget. (As usual, the budget projections for growth and inflation reflect the views of private sector economists). The PBO's forecasts for real growth are slightly slower than those in the budget, likely because the private sector economists made assumptions about additional fiscal stimulus in drawing up their projections. On the other hand the PBO's inflation forecast is slightly higher than that in the budget. As a result the nominal GDP forecasts,  arguably the key figure in projecting government revenues, wind up being very close. 

As for the fiscal outlook, the PBO projects that deficits will average about C$ 5.6 billion higher than the budget forecasts over the period to 2025. In the context of the forecast deficit for FY 2020/21 (already ended) of C$ 354 billion, or for 2021/22 of over C$ 150 billion, the discrepancies are not much more than rounding errors. They are, however, more significant in the "out years": for FY 2025/26, the PBO foresees a deficit of C$ 35.9 billion, against a budget projection of C$ 30.7 billion. The discrepancy is largely attributable to lower revenues in the PBO projections, reflecting shortfalls in both income tax revenues and income from Crown Corporations. 

The PBO report goes on to break down the additional stimulus spending in the budget. It notes that a significant portion of the "Recovery Plan" in the budget in fact represents the continuation of previously-existing COVID-related measures. It estimates actual new stimulus spending at about C$ 70 billion spread over three fiscal years, a much lower number than the budget claimed. That said, the PBO reiterates a concern it expressed pre-budget, that the stimulus may be misdirected. The stated goal in the budget is to restore labour market conditions to pre-pandemic levels, but in the PBO's judgment, the ongoing improvement in labour markets does not suggest this is the appropriate yardstick for determining the need for stimulus.  

Lastly, the PBO looks at the government's chosen "fiscal anchor", the debt-to-GDP ratio. While noting that the budget projects a slight fall in that ratio starting in FY 2025/26, the PBO notes that in the absence of the new measures in the budget, the ratio would have been 5 percentage points lower in that year, at 44.2 percent, than the government now projects.  Taking this together with the ultra long-term projections in the budget, which showed the debt-to-GDP ratio staying above its pre-pandemic level all the way to 2055,  the report concludes "the Government has decided to effectively stabilize the federal debt ratio at a higher level, potentially exhausting its fiscal room over the medium- and long-term."

This is, of course, the very point that the opposition Tories have been hammering away at since the budget was tabled. It may well turn out to be true, but we have still not heard very much from those same Tories about how they would have steered the economy through the pandemic without getting into exactly the same fiscal position.