TRANSITION BRIEFING FOR MINISTER OF FINANCE KEY ISSUES FOR BUDGET PLANNING AN OVERVIEW

INTRODUCTION

 

The purpose of this note is to provide you with an overview of key budget planning issues and the decisions you will have to make in the upcoming days and weeks. Detailed briefings on each of the issues are provided in a separate binder. As you know very well, the economic outlook has deteriorated significantly since last April and this will present a major challenge in the preparation of the 2016 budget. A key objective in budget planning will be to re-establish the credibility, integrity and transparency of the budget process.

 

The election platform contained a number of high cost initiatives along with less expensive commitments. Priorities will have to be established in how and when these policies can be implemented over the mandate. Much will depend on the economic circumstances, but also on the nature of consultations that will be needed to ensure appropriate policy design and stakeholder acceptance.

URGENT: IMPLEMENTING CHANGES FOR THE 2015 TAX YEAR

 

The Prime Minister has committed the government to immediately passing legislation that would implement the income tax changes promised in the election platform. If these changes are to take effect in the 2015 taxation year, a “Ways and Means” motion must be introduced in the House as soon as possible, in order to give the Canada Revenue Agency (CRA) sufficient time to prepare new tax forms for taxation year 2015.

 

This motion would repeal income splitting as well as reduce contributions to the Tax Free Savings Account from $10,000 to $5,500, both implemented by the Conservative government. The motion would also implement the middle-income tax cut and introduce the new tax rate for those earning above $200,000.

 

These changes could be delayed to the 2016 Budget. However, this would mean taxpayers would continue to operate under Conservative tax legislation for one more year. This would be confusing and cause negative reaction from those taxpayers benefitting from those changes. We recommend against delaying the tax changes.

 

It would also be preferable to introduce the new Child Care Benefit effective January 1, 2016.  However, this would require legislation to be approved by Parliament before the new benefit can be put in place, which may be problematic. In addition, it may not be possible for CRA to put the new benefit in place in time for a January launch.

 

Failure to meet the January 1st deadline would mean that families would continue to receive benefits under the Conservative enhanced UCCB, until such time as the new legislation receives Royal Assent and CRA can identify who is eligible and the benefit they will receive. This could take to April  (amount of the benefit and who is eligible would be based on their 2014 tax returns) or even July (amount of the benefit and who is eligible would be based on their 2014 tax returns).

 

We recommend strongly that the January 1st deadline be met by CRA. However if this is not possible, we recommend that the new Child Care Benefit be introduced in July 2016, and that there be no claw back of benefits from high-income families (under the Conservative system).  The net fiscal cost of this delay should be minor.

 

RESTORING BUDGET CREDIBILITY, TRANSPARENCY AND INTEGRITY

 

The election platform proposed a number of initiatives to improve the credibility, transparency and integrity of the budget process.  These are discussed in the sections below.

 

  1. IS THERE A NEED FOR AN ECONOMIC AND FISCAL UPDATE?

 

Previously, Economic and Fiscal Updates have been provided as late as the second half of November. Under the previous Liberal government, Updates were normally presented to the Finance Committee, but the Conservative government chose to make their Update presentations outside Parliament.

 

We have updated the economic and fiscal projections. Based on updated economic growth and oil price assumptions and the restoration of a $3 billion contingency reserve has resulted in “status quo” budget deficits in 2015-16 and each of the subsequent four fiscal years. These deficits are not large (as a share of GDP) and the projected debt burden still continues to fall. Nevertheless, it raises the issue of how the government will live up to the election commitment to keep the deficit to $10 billion (or does a small increase actually matter politically).

 

We believe that a fall update would provide you with opportunity to discuss the economic risks and challenges that you will confront in planning your 2016 budget. The Update could also be used to describe in greater detail the four fiscal principles that you intend to follow in developing your budget planning over the next four years:-“realistic, sustainable, prudent and transparent”.

 

The ways and means motion to implement the tax changes could be tabled the same day.

 

 We also believe that you should commit to presenting the Update to the House of Commons Standing Committee of Finance. This would demonstrate that you intend to establish a greater role for Parliament in the budget process. The Finance Committee would be able to use this as background for its budget consultations.

 

We would also propose that you commit to a fixed date for future fall Updates.  Although not applicable for this year, we would propose that it be presented in the second week of October.  By then we would have all of the applicable data we need to do a proper Update (final financial results for the previous fiscal year, second quarter results for economic growth, etc.). In addition, it would give the Finance Committee more time to examine the economic and fiscal projections and provide credible recommendations for the upcoming budget.

 

  1. A FIXED BUDGET DATE

 

Under current supply rules, the Main Estimates, which detail the Government’s spending intentions for the upcoming fiscal year, must be referred to the appropriate Parliamentary Standing Committees for review before or on March 1st.  For the Main Estimates to be relevant to Parliament, they should be based on the economic and fiscal assumptions in the Budget for that year. This implies that the Budget should be tabled before the Main Estimates, between late January and mid-February. This would give the Treasury Board Secretariat time to make the Main Estimates consistent with the economic assumptions and spending initiatives proposed in the Budget.

 

We would recommend that you make a commitment to deliver the 2016 budget by mid-February.

 

c.     ECONOMIC AND FISCAL FORECASTS

 

Currently the fall Update and the Budget economic forecasts are based on the average growth, inflation, interest rates and unemployment rate forecasts of a select group of private sector economic forecasters. This process was put in place by the previous Liberal government. This was done primarily to avoid criticism if the forecasts turned out wrong. It was not done because private sector forecasts are more accurate. Indeed the exact opposite is true. Two earlier independent studies both concluded that the forecasts of the Department of Finance were more accurate. This should not be surprising given the resources and expertise available to the Finance Department.

 

A key issue is whether to give responsibility for the economic forecast back to the Department of Finance. This would not preclude advice from the private sector forecasters, but the budget and fall update economic forecasts would no longer be based on private sector averages. The private sector economic forecasters would still be surveyed and you would still meet with them to discuss the results. A reconciliation of the differences would be presented in the fall Update and Budget.

 

Another issue is whether to replace five-year fiscal projections in the budget with two-year rolling budget forecasts.  In other words, a budget would only provide detailed economic and fiscal forecasts for two years. A new year would be added and an old year dropped in the following year. Five-year forecasts are notoriously unreliable. Nevertheless, in the budget we could provide a general discussion of longer-term growth scenarios under different economic assumptions. Such a discussion would highlight the risks and uncertainties in budget planning.

 

Two-year budget forecasts were first used by Paul Martin and proved very successful. It meant the government would be accountable for two years at a time.  This makes sense if we are to continue to use the private sector economic forecasts for the fall Update and the Budget. Only two of the fourteen private sector forecasters currently surveyed do five-year forecasts. Most provide only two-year forecasts. The IMF, the OECD and the Bank of Canada only do two-year forecasts.

 

The fall Update would continue to present five-year economic and fiscal forecasts in order to provide a longer-term perspective of the challenges facing the government.

 

Impacts of policy actions would continue to be provided for five years.

 

d.     RESTORING THE CONTINGENCY RESERVE IN THE BUDGET FRAMEWORK

 

In the budget costing of your policies, you excluded a contingency reserve for each year except for 2019-20. You argued that you had included implicit prudence by not including the second round effects of the impact of the policy initiatives on the economy. You were criticized in the media for excluding a contingency reserve.

 

 In order to establish fiscal credibility, we strongly recommend the inclusion of a $3 billion contingency reserve in the fiscal framework. This is especially true in the current economic circumstances of high uncertainty both globally and domestically. Failure to include a contingency would be heavily criticized by financial markets and other stakeholders.

 

The conditions for using the Contingency Reserve would be similar to those made by the previous Liberal government.  It could only be used to offset the impact of lower-than-expected economic developments on the fiscal projections and to offset the impact of errors in translating the economic assumptions into fiscal projections. It could not be used to fund new policy initiatives.  If not needed, it would be used to reduce the federal debt.

 

e.     PARLIAMENTARY APPROVAL OF BORROWING AUTHORITY

 

In the 2007 Budget Omnibus Bill, the previous government amended the Financial Administration Act to eliminate the need to introduce a Borrowing Authority Act for any new borrowing requirements. Liberal members of the Senate raised this issue as undermining the authority of Parliament.  In your election platform, you promised to restore this provision.

 

In the 2016 Budget, we recommend that you include an amendment to the Financial Administration Act to restore the requirement for the Borrowing Authority Act. The provisions would be identical to those that were previously required (any new borrowings above a $4 billion carry forward provision). The Borrowing Authority Bill would need to be tabled shortly after or with the tabling of the Budget to ensure that the borrowing can begin early in the new year in an orderly fashion.

 

f.      INDEPENDENCE OF PARLIAMENTARY BUDGET OFFICER

 

In your election platform, you promised to make the Parliamentary Budget Officer an independent officer, answerable only to Parliament.  This would require an amendment to the Parliament Act.  We recommend that this be done in the 2016 Budget.

 

g.     REPEAL OF BALANCED BUDGET LEGISLATION

 

The previous government implemented the Balanced Budget Act, which precluded the running of deficits, except in extraordinary circumstances. Penalties would be imposed on the Executive, deputy ministers and departments. The evidence in other countries (U.K. and the EURO) is that balanced budget legislation has not worked. The legislation is changed, manipulated or repealed. In the end, the fiscal credibility of the government is eroded. Balanced Budget Legislation is neither necessary nor sufficient for ensuring fiscal credibility.

 

We would recommend that legislation be included in the 2016 Budget, repealing the Balanced Budget Act.

 

h.    USE OF BUDGET OMNIBUS BILLS

 

Since 2007, Budget Omnibus Bills have been used to include many legislative changes vaguely mentioned in the Budget, or for that matter, even mentioned in the Budget.  Recent Bills have been close to 1,000 pages making it impossible for adequate Parliamentary scrutiny.  In addition, they have largely precluded committees other than the Finance Committee from examining aspects of the Bill under their areas of responsibility.

 

In your election platform, you committed to ending the practice of using omnibus bill to reduce scrutiny of legislative measures.

 

We would recommend that you set out the guidelines that the government will follow in drafting Budget Bills. Most important, we would recommend that budget bills would be restricted to measures applicable to the House of Commons Standing Committee of Finance.  This would include all tax measures, borrowing requirements, and initiatives affecting the budgetary process.

 

All spending initiatives would be contained in their own legislation and submitted to the appropriate standing committee for review. In addition, requirements for incremental spending for existing programs could be included in the Main Estimates, provided the Main Estimates are tabled after the Budget.  

 

 

i.      ACCOUNTING CONSISTENCY AMONG THE ESTIMATES AND THE PUBLIC ACCOUNTS

 

In your platform you committed to taking action to ensure greater accounting consistency between the Main Estimates and the Public Accounts. However, there is already significant accounting consistency between the two.

 

At the present time, however, there are significant accounting differences between the Budget and the Estimates.  The Budget is on an accrual basis of accounting while the Estimates are primarily on a cash basis.  The universe of the Budget spending projections is more comprehensive than that of the Estimates.  The Estimates exclude the activities of the Employment Insurance Program, refundable tax credits (such as the Universal Child Care Benefit) and the activities of enterprise Crown corporations.  This difference in universe amounts to the Estimates being about $50 billion lower than those in the Budget.  By making the Estimates consistent with the Budget, the Public Accounts would be adjusted accordingly.

 

This issue has been studied for a number of years, with no resolution to date.  The Auditor General has raised this issue on numerous occasions.

 

The key issue relates to accrual accounting.  Even though departments and agencies are required to present their numbers on both a cash and accrual basis, the Treasury Board Secretariat has argued that putting the Estimates on an accrual basis would be too confusing for Parliamentarians.

 

However, we believe that there is no reason why the universe of the two sets of spending estimates cannot be consistent. We would strongly recommend that the Estimates cover the same universe as the Budget.  The accounting policies underlying the Budget primarily follow those recommended by the Public Sector Accounting Board and we would recommend that the Estimates follow these accounting standards as well.

 

This issue will not be resolved before the tabling of the 2016-17 Main Estimates.  We would recommend that this issue be re-examined by TBS, Finance and the Office of the Auditor General and that a decision be made in time for the tabling of the 2017-18 Main Estimates.

 

BUDGET 2016: SOME GENERAL STRATEGIC CONSIDERATIONS

 

Expectations for the 2016 budget are already very high. They will only get higher in the coming weeks.  A key objective for you in the coming weeks will be to contain these expectations and set out in broad terms the policy commitments that you expect to deliver in the budget. With the deterioration in the economic outlook since the April 2016 with deficits now projected over the forecast period, the deficit will be well above the $10 billion of promised policy initiatives in 2016-17. The Government will be under criticism for running deficits considerably higher than those set out in the election platform.

 

We feel that this could be a major issue and undermine the credibility of the 2016 Budget. We would recommend that the basic communication message be that the government’s entire policy platform will not all be introduced in the 2016 budget. The government has four budgets to implement its policy commitments and implementation will be conditioned by economic and fiscal circumstances. The main focus of budget 2016 should be on tax cuts (already announced), the CCB, EI reform, growth and jobs. Budget 2017 might focus on CPP reform and aboriginals; budget 2018 on environment; budget 2019 on science, research and innovation..

 

The criticism of possible increases in CPP rates as a tax (which they are not) could be offset by the announced reduction in EI rates, which take affect in 2017. We also need to consider only applying the increase in CPP rates to employees but not employers. 

 

In addition, the reduction in the Canada Health Transfer escalator takes affect in 2017-18. It will be important to implement the proposed home care services initiative in the 2016 or 2017 budget to avoid a significant decline in the rate of growth in transfers in 2017-18.

  

The 2016 budget should primarily focus on the proposed income tax changes and the introduction of the new CCB. Promised increases in the GIS should also be considered. In addition given the prospects of continuing slow growth the focus should be on initiatives to strengthen economic growth. This would mean quickly developing a program with the provinces and municipalities for new infrastructure. It is highly unlikely that $5 billion could be spent in the first year. Communities and provinces don’t have the absorption capacity.

 

There are other actions aimed at jobs that were promised during the election that could be implemented. These include: youth job strategy; new training investment; aboriginal skills and employment; and jobs and innovation.

 

We need to have substantial briefing time with you in the coming days and weeks.

 

 

 

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