Mike Moffatt has a Budget 2016 watch list. As a budget enthusiast I like this game, so I’ll play too.

While hundreds of analysts bring their own lists to the “lock-up”, no two lists are exactly the same – yes, budget lists are like snowflakes, as everyone’s looking for something a little different in the document.

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That makes the budgets themselves a bit like Rorschach tests – what we see in them tells us something about our own thinking.

Budgets are also like photographs – where we instinctively look for ourselves first, to see if we look good.

  • Government politicians look for budget measures they can tout in their constituencies.
  • The opposition parties look for faults with the government’s plan.
  • Policy wonks look for their ideas in the budget.
  • Lobbyists and accountants look for opportunities for themselves and their clients.
  • Media pundits looks for the impact on political fortunes and inconsistencies

What we look for in budgets, and therefore, what we see in them, largely reflects our respective roles in the budget ecosystem. As a policy person, here’s what I’m looking for in Budget 2016:

1. Does this budget look different?

In the election campaign, the Liberals touted how they would offer a more “open and transparent government”. Since taking office, the last two budget updates were short documents prepared with little lead time.

The first budget of this new government is the real test. It’s a chance to demonstrate Finance Canada’s analytical capacity and establish fiscal credibility. It needs to show its work. Explain why the budget choose its numbers, why certain assumption are appropriate, and provide sufficient details.

2. How much prudence is used and how?

There are plenty of ways for governments to pad budget projections. They can explicitly add a prudence factor (or “contingency reserve”) to the government’s bottom line; they can do it indirectly by reducing the private sector GDP forecast; and they can do it opaquely with overly pessimistic assumptions about how the economic outlook translates into revenue and spending projections.[1]

A key issue, therefore, is whether budget wonks can identify where prudence is used based on how it’s presented. Is the government using reasonable economic and fiscal assumptions in its planning?

Some have said that doubling of contingency reserve from $3 billion to $6 billion per year in the last update was an effort to lower expectations, and thus make it easier to outperform deficit forecasts down the road. But had the government not increased the risk adjustment, these same pundits would have accused the government of taking insufficient account of potential downside risks. Unfortunately, there’s no right answer here, only subjective professional judgement. In this context, the budget needs to acknowledge, explore and sufficiently incorporate the key risks of what might go wrong (such as persistently low oil prices).

3. Will Budget 2016 clarify the fiscal policy targets?

With a deteriorating budget baseline, it’s now unclear whether there’s an overarching policy target or constraint to guide fiscal policy. The budget needs to clarify this issue. I think a promising approach would involve two parts: 1) a medium-term target range for the debt ratio (say aiming between x% and y% between now and 2020); and 2) a long-term “fiscal gap” target, which demonstrates that the fiscal path is sustainable over the coming decades. The latter requires the government to report long-term fiscal sustainability analysis. And this is crucial to build credibility and counter concerns about finances getting out of control due to new initiatives. 

4. Shed light on fiscal stimulus?

Recent months saw much discussion in the Great Canadian fiscal stimulus debates. Bay Street economists called for more spending, others were skeptical the government could impact growth in the near term. Given the size of the new fiscal measures discussed, I’d be surprised if fiscal policy adds more than an additional 0.3 to 0.5 percentage points to Canadian real GDP growth in 2016 and 2017. Cost-shared infrastructure can help build our economic potential in the long run, but it can’t and shouldn’t be expected to do that quickly. It’s unclear if other measures will be specifically designed to take effect quickly.

The devil is in the details, so the government should include estimates of the impacts of its new package of budget measures on the overall Canadian economy, and show how new tax policies are impacting the income distribution.

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5. How closely will the election platform numbers be to the Budget numbers?

During the election campaign the parties have more freedom to toy around with their cost estimates for new measures. Presumably, some numbers will need updating (just as the cost of personal tax changes was) to reflect better insights from Finance Canada officials. Will there be any substantial changes to big ticket items or any big policy pivots relative to the platform? You can bank on the opposition parties and the media looking closely at this.

6. Review tax expenditures or the whole tax system?

While the Liberal election platform called for a review of tax expenditures and government spending, the pre-budget report from the House Finance committee recommended a broader “comprehensive review of the tax system” to make it “simpler, fairer and more efficient”. Will the budget provide details on the scope of future tax reviews and reforms?

7. What measures will be targeted to the resource provinces?

We know that Alberta will receive $251 million in federal stabilization transfers to help cushion a sharp drop in revenues. But will Saskatchewan and Newfoundland and Labrador also qualify for this program, and will any of these provinces take advantage of five-year-interest-free federal loans that might be available?

8. Will new measures eventually be funded over the medium term?

The government expects to run deficits for at least the next few years. The composition and trajectory of these deficits matter more than the headline numbers. Are these deficits expected to fall over time mainly because nominal growth is assumed to pick up, or will most new measures be temporary (like longer EI duration), or will they result in a larger federal government footprint that’s fully funded with new sources of revenue (few of which were described in the election platform)?

The clearest way to see this is for the government to present estimates of both the expected budget balance and the “cyclically-adjusted budget balance” (the balance expected if the economy were operating at its capacity)? This would clarify the government’s view of the Canadian economy’s current and expected performance relative to its capacity (i.e., the output gap). This is a crucial –and thus far largely absent – part of the fiscal stimulus debate. 

9. Will the budget repeal the Balanced Budget Law?

Technically, the federal government might get a pass if it incurred a deficit in 2015-16, since there was a recession at the start of this fiscal year. Evidently, the government disagrees with this basic approach to fiscal policy (at least at the current time). Will they get rid of the law or ignore it?

10. Will the government try to enhance the Canada Pension Plan or reform Employment Insurance?

I doubt the government will be able to address both issues in a meaningful way during a single mandate (while also addressing other bigger things like electoral reform, climate change, refugees, etc.). Both EI and CPP are politically difficult issues that are potentially regionally divisive. Both actions impact payrolls. Perhaps Budget 2016 will tip the government’s hand on which one of these two areas is a higher priority.

Of course, I probably won’t get answers to all of these questions, and there’ll be other new issues that arise. In my next post, I’ll discuss what I’m not looking for in Budget 2016.

Photo: Bill Morneau – Facebook / Fair Use

[1] In this budget, there might even be some upside to Canadian GDP growth lurking beneath the surface, that is, if the private sector forecasters generally didn’t incorporate the government’s full election platform into their economic outlooks, as the Bank of Canada has said.

Stephen Tapp
Stephen Tapp was a Research Director at the IRPP, where he managed a multi-year research initiative titled Redesigning Canadian Trade Policies for New Global Realities. He previously worked at the Parliamentary Budget Office and the Bank of Canada, among other positions. Steve has a PhD in economics from Queen's University. Follow him on Twitter @stephen_tapp.

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