AUDITOR GENERAL'S FALL 2012 REPORT CHAPTER 7: LONG-TERM FISCAL SUSTAINABILITY (1)
In his 2012 fall report, the Auditor General raises the issue of “long-term fiscal sustainability” – the government’s capacity to finance its activities and debt obligations in the future without imposing an unfair tax burden on future generations. Such analysis is especially important, given the impact of an ageing population on economic growth, and government revenues and spending, especially for public pensions and health care.
The projections developed in assessing long-term fiscal sustainability are not exact fiscal forecasts, but are rather “best” estimates at a particular point in time. They are meant to facilitate policy discussions and to assist policymakers in their decisions.
Although the Auditor General concludes that the federal government’s finances are sustainable over the long term, he raises a number of important issues in his report.
First, he questions why the Minister of Finance has not honoured his 2007 Budget commitment to publish comprehensive fiscal sustainability and intergenerational reports. According to Minister Flaherty, at that time, these reports were to “provide a broad analysis of current and future demographic changes and the implication of these changes for Canada’s long-run economic and fiscal outlook”.
Since that commitment, the Department of Finance has been preparing such reports on a regular basis but for internal use only. They have never been made public. Notwithstanding this failure to release the analysis, Minister Flaherty has, nevertheless, been very critical of the Parliamentary Budget Officer’s (PBO) fiscal sustainability reports, instead calling them “unbelievable, unreliable, and incredible”. Both the OECD and the IMF strongly recommend that countries publish long-term sustainability reports on a regular basis. Among the OECD countries, Canada is one of the few countries that do not.
The Auditor General recommends that the Government honour its 2007 Budget commitment and publish fiscal sustainability reports for both the federal government and provincial governments, on a regular basis. Based on its own analysis, the Auditor General’s long-term fiscal sustainability projections for the federal government mirror those of the PBO, as well as those of the Department of Finance.
In its response, the Department of Finance has agreed to publish fiscal sustainability reports for the federal government on an annual basis, by 2013 at the latest. It will not, however, publish its long-term fiscal projections for the provincial governments, arguing that it is not accountable for their fiscal situations. In its latest report, the PBO concluded that, although the federal government’s finances are sustainable over the long term, the provincial governments collectively face a huge fiscal challenge. For some reason, the Minister Flaherty does not seem to be interested in the long-term fiscal sustainability of the total public sector in Canada.
To us, this is “unbelievable, unreliable and incredible”. Federal actions can have profound impacts on provincial finances (e.g., restraining the growth in the Canada Health Transfer from 6 per cent per year to between 3.5-4%). The Department of Finance should publish its sustainability reports for the provincial government sector. Who else is in a position to do so or has the responsibility to do so. There is only one taxpayer and it is extremely important that Parliamentarians and Canadians fully comprehend the implications of federal actions, not only on federal finances, but on the provincial finances as well.
Second, although the Auditor General concludes that the Department of Finance’s fiscal sustainability analyses are based on sound practices, he questions why they are not done for all major initiatives or on a timely basis. The Department of Finance only undertakes such analysis when it considers the impact of the proposed initiative(s) to be significant.
In addition, the Auditor General questions why the analysis is only presented to the Minister after the budget, rather than as part of the budget decision-making process. As a result, decisions on major structural policy initiatives are being made without knowing their impact over the long term or for that matter on provincial governments. Again to us, this is “unbelievable, unreliable and incredible”. In its response, The Department of Finance indicates that such analysis will now be provided as part of the decision-making process.
Finally, the Auditor General’s report observes that background material produced internally for the Department of Finance in 2009 concluded that the elderly benefit system was sustainable in the long term. Despite this analysis, the Prime Minister in Davos stated that it was not sustainable and changes to the program were required. Doesn’t anyone in Finance or Pricy Council Office or the Prime Minister’s Office look at research and analysis? Perhaps they did but decided it was “unbelievable, unreliable, and incredible”. After all the Prime Minister, the Minister of Finance and other Ministers all claimed the OAS was not sustainable.
Budget 2012 raised the age eligibility for elderly benefits, without providing any credible analysis as to why these changes had to be made. Now we know why; the analysis apparently didn’t exist. ong-term sustainability projections on the impact of the demographic changes on the federal government’s finances would have provided valuable background to Parliamentarians and Canadians in the debate on the changes to elderly benefits.
This is not the first time the Auditor General has called for the Government to provide Parliamentarians and Canadians with long-term fiscal sustainability reports. Several reports were published during the 1990s. In her final report to Parliament, Shelia Fraser strongly encouraged the Government to publish long-term financial projections and engage Canadians in the decisions required to meet the upcoming challenges.
At roughly 3:00 pm on the same day the Auditor General tabled his report, the Department of Finance finally released a paper entitled “Economic and Fiscal and Fiscal Implications of Canada’s Aging Population”.
Talk about a surprise. Its enough to make one a cynic with this government if you aren’t one already.
It only took five years since the original commitment by Minister. Flaherty. During these five years, Minister Flaherty and the Department ignored recommendation after recommendation that long-term fiscal analysis be released.
It would have been better if the paper had been released after the Prime Minister’s statement in Davos and before budget 2012 to allow for a public discussion on the elderly benefit system, but that was not possible because the paper did not address the issue of the long-term fiscal sustainability of elderly benefits. This was probably not done because it would have been difficult, if not impossible, to show that the system was not sustainable.
The paper concludes that with the policy changes to date, including budget cuts and the changes to the Canada Health Act and to the elderly benefit system, the federal government will have a long-term sustainable fiscal structure characterized by a declining debt to GDP ratio. Isn’t this exactly what PBO said in its last fiscal sustainability report?
The PBO also said the federal government was able to achieve this fiscal sustainability by restraining the growth in the Canada Health Transfer escalator, thereby putting additional pressure on to the provinces. Not surprisingly, the Finance document did what it said it would do in its response to the Auditor General’s recommendation and provided no analysis of the long-term fiscal sustainability of provincial governments. It is up to the provinces to “take actions to put their respective health care systems on sustainable spending paths”.
We should look at the bright side. We now have small beginning in greater transparency.
Hopefully it will get bigger and better. Transparency and accountability would be significantly improved if the Government adopted fully the Auditor General’s recommendations.
1. Updated to include reference to the release of the Department of Finance's paper on the "Economic and Fiscal Implications of Canada's Aging Population".