People are beginning to wonder where exactly Minister of Finance Joe Oliver is these days.

 He certainly hasn’t been in Parliament answering questions about the economy and how the government intends to act to strengthen economic growth and job creation. The reason given is that he is working on the budget. Parliament will adjourn this week for another “holiday” and will not return until April 20th. He plans to meet with private sector economists on April 9. Maybe he will come out of hiding after that.

Finance Minister Joe Oliver delayed the tabling of the 2015 Budget, his first budget, until after April 1st., citing the economic and fiscal uncertainties caused by the dramatic fall in oil prices and their impact on the economy and the federal budgetary balance.

Everyone knows of course that the real reason for postponing the budget was that the election strategy for the Conservatives had evaporated with the fall in oil prices.

The Governor of the Bank of Canada and a number of private sector economists have made public their updated forecasts for the economy and they have all been “unambiguously negative” although not by a large amount.

Fortunately, even though Mr. Oliver is nowhere to be seen, we can always depend on the Parliamentary Budget Office (PB0) to fill in for him. The PBO is required to provide the House of Commons Standing Committee on Finance with economic and fiscal updates in the fourth week of October and April. So we can expect to see a report by the PBO at the end of the month.

Even though Mr. Oliver seems confused on how to plan a budget when confronted with  “uncertainty”, his provincial colleagues seem to be able to handle it. They understood  that you couldn’t delay budgets just because of uncertainty. Dealing with uncertainty is part of the job description for a Minister of Finance and a government.

The province of Alberta, which has been impacted more severely by the decline in oil prices than any other jurisdiction, along with British Columbia, Saskatchewan and Quebec did not delay their budgets just because of the decline in oil prices.

The postponement of the 2015 budget is the first time that we can recall that the federal budget has been delayed because of “uncertainty”.  In the past, budgets, or economic and fiscal updates, have in fact been advanced, not delayed, due to unexpected economic developments and increased uncertainty.

During the 1980s, the Mulroney Government released economic and fiscal updates, with policy actions, in reaction to dramatic falls in grain and oil prices.  In 1990, the budget was moved up to deal with rising interest rates and inflation. In 2001, a budget was quickly introduced in response to the aftermath of September 11th

In late 2008 when Prime Minister Harper and Finance Minister Jim Flaherty finally realized that the economy was in a recession, they quickly tabled a new budget in January 2009, well in advance of traditional budget dates. 

In all these situations, the government did not wait, but instead acted quickly and decisively, informing Parliament and Canadians on what was happening and how the government intended to respond.  

Everyone knows that the Prime Minister and the Finance Minister were caught off guard by the fall in oil prices. Everything seemed to be going so well last October with the government’s major tax announcements. Three months later, their entire political strategy for the 2015 election ended up in the tank. Of course, we now know full well what has replaced that political strategy – playing on Canadian fears about terrorism.

In 2006, someone should have told the Prime Minister that is never good idea to build your entire economic and fiscal strategy, or for that matter a political strategy, on a highly volatile commodity price, such as oil. This is not the first time that fluctuations in oil prices have impacted on the best-developed budget plans.

There have been nine instances since 1985 when oil prices have fallen, albeit not from the high levels witnessed in the past few years. These declines in oil prices impacted directly on the budgetary balance through lower energy royalties and corporate income tax receipts, and indirectly through their impact on lower nominal income growth, other revenue sources and on employment insurance benefits.

Although the federal government levies royalties on offshore energy production, these royalties are transferred back to the provinces of Newfoundland and Labrador and Nova Scotia, thereby having no impact on the federal government’s budgetary balance.  Therefore, the direct impact of falling oil prices is restricted to lower corporate income tax revenues from energy-producing companies.

In the November 2014 Update of Economic and Fiscal Projections, the Department of Finance assumed that the price of oil would remain at US $81 per barrel (WTI) throughout the five-year planning period. However, until recently crude oil prices have fluctuated around US $50 per barrel. They have risen recently because of events in Yemen.

This raises an interesting question for the Finance Department. What assumption should be made for oil prices over the forecast planning period?  After all, no one can forecast oil prices with any precision.

For years, the forecasting practice for the Department of Finance has been to assume that the current price of crude oil remains unchanged over the planning period.

 If this “normal” practice were maintained for the 2015 Budget, the fiscal impact of the decline in oil prices since the November 2014 Update would be at least $5 billion in lost revenues per year and growing. Forget budget surpluses, especially in the short term.

If, on the other hand, the Department of Finance changes its forecasting methodology and assumed that oil prices will bounce back during 2015, then the adverse fiscal impact would be considerably less and a surplus could possibly be recorded in 2015-16 – this would depend upon how high prices were assumed to go

In their budgets released last week, both Alberta and Saskatchewan assumed that oil prices would start rising. Alberta assumed that oil prices would average US$54.84 per barrel (WTI) in 2015-16 rising to US$83.83 per barrel in 2019-20.   Saskatchewan’s oil price assumptions were not much different, assuming an average oil price of US$53 per barrel for 2015, rising to US$88 per barrel in 2019.

So what will Mr. Oliver do if he has a budget?

Mr. Oliver will almost certainly adopt the forecasting methodology of Alberta and Saskatchewan. He has already stated that he knows oil prices will rise; he just doesn’t know when by how much. He is hoping, perhaps praying, that the economists he will consult with on April 9  will forecast rising oil prices, high enough for him to show a balanced budget for 2015-16.

He will justify this change in forecasting methodology by arguing that Alberta, Saskatchewan and the private sector economists “know best”.

But of course they don’t.

In fact “oil experts” can’t agree on where the oil price is going. In a recent Bloomberg article entitled “The Only Thing Oil Analysts Can Agree On Is Disagreement”, the authors noted that the median view of 39 analysts is for the price of oil (Brent crude) to average $69 a barrel in the fourth quarter of this year. The highest was $90 a barrel, the lowest $50 a barrel, which clearly shows the extent of uncertainty.  According the Bloomberg article, this is the biggest difference of views since the first quarter of 2007.

Nevertheless, it would be very difficult to choose a forecast for oil prices higher than that forecast by Alberta, the centre of oil production and oil experts.

To be credible, if Mr. Oliver changes his forecast methodology then he  should provide information on the oil price forecasts that the private sector economists are making. He should also provide sensitivity analysis or “rules of thumb” on how different forecasts of oil prices impact the budget balance.

None of this is going to restore the kinds of budget surpluses that Mr. Oliver was forecasting last November. The government may be able to show a balanced budget in 2015-16, through using the contingency reserve and other “accounting manoeuvres” but there will be nothing left for new initiatives.

On Monday Mr. Oliver has told Canadians to stay tuned about an announcement on the budget date.

Who knows what this mean?  Mr. Oliver is creating a lot of hype and expectations that he may not be able to live up to. This budget could turn out to be a political disaster.

There is a possibility that the Government may simply release another economic and fiscal update rather than tabling a budget.

 Last week, the government tabled legislation with respect to the Family Tax Cut and the increase in the Universal Child Care Benefit (UCCB).  The Family Tax Cut measures are already in place through the tabling of the Motion of Ways and Means Notion, which gave the Canada Revenue Agency the authority to make changes to the 2014 tax forms. However, unlike revenue measures, new spending initiatives need Parliamentary approval before any payment can be made.

The Government is determined that this legislation receive Royal Assent before the summer recess so that the incremental UCCB payments, for the period January to June, can be made in July or August.

Tabling legislation now, rather than as part of the budget and the budget omnibus bill, allows the Government to delay the budget even longer or simply replace it with an economic and fiscal statement, released in a government friendly environment.




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