To assist parliamentarians in their pre-budget deliberations, this report identifies key issues arising from the Government’s Fall Economic Statement published on 21 November 2018.
PBO judges that there is downside risk to the private sector outlook for nominal GDP over 2021 to 2023. PBO’s outlook for nominal GDP is $16 billion lower, on average, over 2021 to 2023 compared to the private sector outlook in the Fall Economic Statement.
When put on a comparable basis, projected budgetary deficits in PBO’s October Economic and Fiscal Outlook are $8.0 billion (0.4 per cent of GDP) larger, on average, over 2018-19 to 2023-24 compared to the Fall Economic Statement. Incorporating the Government’s annual $3 billion risk adjustment narrows this difference to $5 billion. Key discrepancies are attributable to lower income tax revenues ($3.0 billion per year) and GST revenues ($1.0 billion per year), as well as higher operating expenses ($2.4 billion per year).
Unfortunately, Finance Canada does not quantify the underlying components of its operating expense forecast, making it difficult to reconcile between the two outlooks for this category. Parliamentarians may wish to seek a more detailed and quantifiable breakdown of the major cost components within operating expenses in the Fall Economic Statement.
Risks from lower oil prices
Given their recent sharp decline, lower oil prices, in our view, pose a downside risk to the economic and fiscal outlook. Based on recent oil price futures, the price of West Texas Intermediate (WTI) is approximately US$15 per barrel lower, on average, over 2019 to 2023 compared to the forecast in the Fall Economic Statement. We estimate that a reduction in oil prices of this magnitude would lower nominal GDP by $37 billion annually, on average, over 2019 to 2023 and reduce the budgetary balance by $3.5 billion per year, on average, over 2019-20 to 2023-24.
Fall Economic Statement 2018 includes a total of $9.5 billion in non-announced measures over 2018-19 to 2023-24. There are legitimate and varied rationales for not announcing specific measures.
That said, given their unprecedented magnitude and fiscal materiality, parliamentarians may wish to seek quantifiable details regarding the spending envelopes underlying the $9.5 billion in non-announced measures in the Fall Economic Statement, particularly total amounts allocated to future Cabinet funding decisions.
The Government’s fiscal anchors
PBO has been monitoring the Government’s progress toward meeting the two fiscal anchors it identified in 2015: balancing the budget in 2019-20 and continuing to reduce the federal debt-to-GDP ratio throughout its mandate.
In October 2018, we estimated that, without further policy actions, there was a near-zero likelihood that the Government would balance the budget in 2019 20 and an 80 per cent likelihood that the federal debt ratio would be below the Government’s anchor of 31.8 per cent of GDP in 2020-21. That said, the Government continues to report on balancing the budget in 2019 20, indicating that “progress was made” and that the Government is “facing challenges”.
Parliamentarians may wish to request regular and realistic reporting on the Government’s progress against consistent and measurable fiscal anchors in its budgets and Fall Economic Statements.
With the creation of the Treasury Board Central Vote 40, Parliament was asked to provide authority to spend on many measures that were announced in Budget 2018 which had not yet gone through the scrutiny of the Treasury Board submission process. In doing so, Parliamentarians’ ability to scrutinize and oversee government spending has been reduced. Evidence suggests that these procedural changes have not accelerated the Government’s implementation of budget measures.
Timeliness of financial reporting
Canada lags both its provincial and international peers in terms of the timeliness of publishing its annual financial statements. To ensure more timely reporting, one of the International Monetary Fund’s recommendations is that governments publish financial statements both as audited and unaudited documents.
To help inform Parliament and Canadians earlier on the Government’s year end financial position, parliamentarians may wish to request that the Government publish the Annual Financial Report unaudited within three months of the close of the fiscal year.