What is a credible fiscal strategy? As we evaluate parties' platforms in the lead-up to the federal election, here are four essential criteria to bear in mind.

First, a credible strategy must be realistic. That is, it must be based on sound analysis and a careful and balanced view of economic and fiscal prospects, challenges, and risks.  


On this measure, the Tories fail. Take last April's budget, the only objective of which was to show projected surpluses sufficiently large to finance their election platform. This required using overly optimistic economic growth and oil price assumptions.


Stephen Harper has rejected a "technical recession" and has claimed, on the basis of an increase in GDP in June, that everything would now get better. That's not what most analysts say.


Despite new data, Harper still believes that there will be a surplus in 2015-16 and that his five-year surplus projections are still realistic.  This reluctance to accept new economic and oil price data undermine the fiscal credibility of the Conservative election platform.


The NDP has fallen into a similar trap. Although Thomas Mulcair acknowledges that there could be a deficit in 2015-16, he is nevertheless prepared to adopt the outdated Conservative surplus projections for his own budget plan. Without this, the NDP budget presented earlier this month would be in deficit.  His use of the Conservative surplus forecasts undermines the credibility of the NDP budget plan.


On this test, the Liberals fare better. Justin Trudeau has based his budget plan on a PBO forecast released in July that projects lower real and nominal GDP and lower budget balances. Since july, however, oil prices have fallen further. Mr. Trudeau is realistic enough to caution that his budget plan will depend on what financial "mess" he might inherit if elected. His has the most realistic approach.


The second criterion for judging credibility is sustainablity. By this, we mean the government must be committed to establishing a medium-term fiscal framework that supports economic growth, while restraining the accumulation of public debt to below the growth of the economy.


A sustainable fiscal framework would allow fiscal policy to support demand and cushion fluctuations in output, without increasing the public debt burden.


The Conservatives inherited a sustainable fiscal framework from the previous Liberal government. But with the exception of the temporary stimulus in 2008-2009, they have consistently rejected the use of fiscal policy to boost growth. And they are promising more of the same - smaller, balanced budgets.


The NDP fiscal strategy is similar to that of the Conservatives in that they are also committed to balancing the budget in each of the next four years. Higher spending will be paid for primarily by raising taxes.  Like the Conservatives, the NDP are not prepared to use fiscal policy to support economic growth. They are promising larger but balanced budgets.


The Liberals have taken an entirely different approach. They argue that with a weak economy now is not the time for balanced budgets. Instead, the government should run temporary deficits to support economic growth. The Liberals are prepared to expand the budget and run deficits, while still maintaining a declining debt burden over the medium term.


This is exactly what a sustainable fiscal structure allows a government to do. Mr. Trudeau appears to have a better understanding of fiscal sustainability than either Mr. Harper or Mr. Mulcaire.


The third criterion for judging credibility is that a fiscal strategy should be prudent, thus guarding against forecast error and the impact of unforeseen events.


In the April budget, the Conservatives cut the contingency reserve by $2 billion in 2015-16 and $1billion per year over the next two years. Without this cut, the Conservatives would have been unable to show a surplus in 2015-16.Given the highly volatile state of the global economy, this is not prudent.


The NDP budget plan does not include any contingency reserve whatsoever, thereby undermining its credibility.

The Liberals have built in some prudence by adopting more realsitic economic projectiuons, but they also have not included a contingency reserve. All three parties will have to do more to meet the prudence criterion.


Finally to be credible, a fiscal strategy must be transparent. Without transparency, there can be no accountability.


The Conservative record of budget transparency has been notoriously bad. Most obvious has been their use of voluminous omnibus budget bills designed to implement major policy changes without adequate Parliamentary scrutiny

The NDP were the first to provide a costing of their election promises. Unfortunately, the information they provided was seriously inadequate, difficult to understand, and in some cases misleading.


 the Liberals have also provided a full costing of their budget plan. The material included a detailed breakdown of the costs associated with their election promises, and their revenue-raising measures, along with summary budget planning tables. They also committed to putting an end to inapproptiate budget omnibus bills.


The Conservatives have yet to provide any detailed costing of their election promises in a single document.


So far the Liberals have demonstraed greater transparency.


As the election nears, Canadians need to decide which party if elected will pursue a realistic, sustainable, prudent, and 

Add new comment