Improving Transparency and Credibility


In the last two weeks, Finance Minister, Bill Morneau, has come under a lot of criticism over the economic and fiscal projections in his November Update and the costing of the middle-income tax cut and the new high-income tax rate.  We offer a few suggestions, which would address these criticisms while improving the transparency and credibility, not just of the budget process but the election process as well.

First, prior to the start of an election, the Parliamentary Budget Officer (PBO) should prepare a five-year economic and fiscal forecast. All political parties would use this forecast in formulating their election platforms. The election platforms for the major political parties should be submitted to the PBO for costing, about one month prior to the election. This process is used in other countries, most notably the Netherlands, where the Central Planning Bureau plays an active role in the costing of the election platforms and the forecasting of the financial resources available.

Such a process would avoid the criticism levied at a new government, when its presents its first budget update, that the “cupboard is bare”. It would also provide each political party with a non-partisan outlook of the economic and fiscal prospects.  During the election, the Liberals and NDP attempted to update the April 2015 Budget fiscal projections.  However, subsequent updates by the PBO and the Department of Finance showed that these significantly understated the budget resources available. An independent costing of the election commitments would result in a more thorough and an unbiased estimate of the costs.   

Second, the budget economic forecasts are currently based on the average of about 15 private sector economists.  They are surveyed quarterly for their forecasts of a number of major economic aggregates, such as the change in real and nominal GDP, and short- and long-term interest rates, among others. Finance Minister Paul Martin adopted this practice in his first budget, following a report on the accuracy of Finance’s economic forecasts by Ernst and Young. The Ernst and Young report found that the Department of Finance’s economic forecasts were as good if not better than those of the private sector economists. It did not recommend that the Department use the average of the private sector economists’ forecasts.

However, it did recommend that the Department consult more actively with private sector economists in formulating its economic forecasts. Although 15 private sector economists are surveyed, few employ detailed econometric models and only 5 present medium-term forecasts. The Department of Finance determines the allocation of the major economic aggregates into their various components (wages and salaries, corporate profits, investment income, consumer expenditure, investment, exports, imports, government, etc.). As such, the Finance Department of Finance plays a major role in determining the various tax and expenditure bases for the fiscal projections. We feel that the Government should prepare the economic and fiscal forecasts used for budget planning and be responsible for them.  However, they should continue to consult with the private sector economists.

Third, the Government currently presents revised economic and fiscal forecasts twice a year; first, in the Economic and Fiscal Update in October/November; and, second in the Budget usually in March/April. Given the current volatility in the economic environment, revised economic and fiscal projections should be tabled four times a year, following the release of the quarterly economic accounts.  The Budget, however, should be tabled before the Main Estimates, which means in early- to mid-February.  With the exception of the Budget, the quarterly Updated projections should be presented to the House of Commons Standing Committee on Finance.

Currently, the PBO releases an economic and fiscal outlook twice a year, in November and April. The PBO should be mandated ton release economic and fiscal forecasts four times a year following the release of the quarterly economic accounts.  The PBO should be directed to provide a detailed reconciliation between the Government’s forecasts and those of the PBO.

Details on the economic forecasts, showing the components of income and expenditure, should be published with each Update/Budget.  This would allow financial commentators and others to more fully understand and assess the credibility of the forecasts.

Lastly, economic and fiscal forecasting is not a science.  They will be “wrong” most, if not all of the time. Alternative medium-term economic scenarios should be presented. They would highlight the risks and uncertainties associated with forecasts. A number of fiscal agencies, such as the US Congressional Budget Office, provide estimates of uncertainty around their forecasts. These include a fan chart of probabilities around its projections for the budget balance and real GDP growth, among others.  Such risk analysis would provide a better understanding of the risks inherent in economic and fiscal forecasts.

A number of proposals have been presented, which would significantly improve the transparency and credibility of the budget and election process.  These would involve a greater role for the PBO and more openness by the Department of Finance.      


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