Democracy Gone Astray

Democracy, being a human construct, needs to be thought of as directionality rather than an object. As such, to understand it requires not so much a description of existing structures and/or other related phenomena but a declaration of intentionality.
This blog aims at creating labeled lists of published infringements of such intentionality, of points in time where democracy strays from its intended directionality. In addition to outright infringements, this blog also collects important contemporary information and/or discussions that impact our socio-political landscape.

All the posts here were published in the electronic media – main-stream as well as fringe, and maintain links to the original texts.

[NOTE: Due to changes I haven't caught on time in the blogging software, all of the 'Original Article' links were nullified between September 11, 2012 and December 11, 2012. My apologies.]

Wednesday, October 15, 2014

Mr. Harper’s peek-a-boo budget deficit

Nobody should have been surprised when Prime Minister Harper recently let slip that the federal deficit for 2013-14 came in at $5.2 billion, substantially lower than the $16.6 billion forecast in the February 2014 budget. Deficits forecasts are political props now — part of the theatre of budget-making.

A government’s fiscal credibility — with voters and with bond rating agencies — rests on its ability to beat its own forecasts. So the Finance Department must set the forecast accordingly. That’s no easy task, given that tiny shifts in two very large numbers — budgetary revenues and budgetary expenses — can lead to huge swings in the balance, as can hard-to-predict shifts in the wider economy. When things go right, they go really right. When they go wrong, they go wrong completely — and repeatedly.

During the 1980s, governments consistently missed their deficit forecasts year after year. This failure can be attributed to the assumption made each year by the Finance Department that interest rates would decline over the forecast period. They never did, of course — for obvious reasons — and by the end of the 1980s, the fiscal credibility of the Finance Department was in tatters, something which was reflected in the risk premiums embedded in 10-year government bond rates.

When Paul Martin became minister of Finance, he soon warned the department he wasn’t prepared to put up with the kind of errors that had bedeviled his predecessors. He wanted to establish fiscal credibility, he said, come “hell or high water”.

Five-year budget forecasts disappeared and were replaced by two-year rolling forecasts. Contingency reserves and economic prudence reserves were written into the budget forecasts to ensure that the deficit target would never be missed.

As a result of actions taken in the 1995 and 1996 budgets, combined with strong global growth, the deficit was eliminated by 1997-98, much earlier than everyone expected. Fiscal credibility was restored and the ten-year government bond rate plummeted.

After 1997-98, an odd thing started happening. The government began to record growing surpluses — much larger than the Finance Department was forecasting. Critics started accusing the department of deliberately low-balling the surplus forecast.

At the time, Stephen Harper was one of the loudest voices accusing the government of wilfully underestimating the surplus. His dismay with the Finance Department’s forecasting record led to his commitment, in the 2006 election, to create a Parliamentary Budget Office. (And we all know how well that turned out for him.)

Now we appear to have come full circle. For the last two years the final deficit outcomes have come in substantially below the budget forecasts. What’s surprising about this latest deficit forecast is the very wide gap between the forecast and the outcome — from $16.6 billion to $5.2 billion. That’s one wide margin of error. Notwithstanding this huge shift, the prime minister has said the government still “intends” to post a deficit in 2014-15 — a strange choice of words, to say the least.

The government must have been aware for some time that the deficit outcome in 2013-14 was going to be much lower than expected. The Fiscal Monitor for April 2013 to March 2014 clearly indicated that the deficit outcome for 2013-14 would be lower than forecast. The Parliamentary Budget Officer, in his latest Economic and Fiscal Update, stated that the deficit outcome for 2013-14 could be as low as $11.6 billion. We suggested on this page that the deficit could be as low as $10 billion. Minister of Finance Joe Oliver was completely silent on the subject, saying only that the government remained on track for a balanced budget in 2015-16.

The PM attributed much of the improvement in the deficit to “one-time” factors. Those factors include: not needing the budget “risk adjustment factor” of $1.5 billion; a downward adjustment of $1.2 billion with respect to the government’s liability for the 2013 Alberta floods; and asset sales of $1.3 billion. The Annual Financial Report suggested those one-time factors could add up to as much as $4 billion.

Which still leaves $7.4 billion of the deficit improvement attributable to underlying economic factors. Most of these factors would be expected to carry forward into 2014-15 and beyond. If all of them carried forward into 2014-15, and taking into account the ‘risk adjustment factor’ built into the budget, a surplus of $0.7 billion is possible for 2014-15. Now you see the deficit — now you don’t.

Given the risks involved — like we said, when things go wrong they go completely wrong — the government could be forgiven for hesitating before announcing a surplus for 2014-15, opting instead to simply tack it on to its 2015-16 surplus commitment.

But deficit forecasts are political props, remember. And what that amounts to in this case could be the government’s hole card.

In other words, at some point over the next few weeks Mr. Oliver might ‘miraculously’ discover new revenues providing for a substantial surplus this year. In that case, all bets are off — and the Fall Fiscal Update becomes a mini-budget.

Which could work for the Conservatives on four fronts. First, it would allow their promised tax cuts to take effect in the 2014 tax year, not at the end of 2015.

Late last Friday, Mr. Oliver tabled a Ways and Means Motion in Parliament to allow for the expansion of the child fitness tax credit, which the prime minister had just announced a few days earlier. He could just as easily do the same to introduce other promised tax measures, such as income-splitting, so that voters could feel the love before the 2015 election.

Second, implementing the tax changes early would reduce the surplus available to the Opposition parties to use in their election platforms. They’d be boxed in by the tax cuts; either they’d have to support them (doing the government’s work for it) or they’d have to explain why tax cuts should wait on other policy initiatives — not an easy case to make in the heat of a campaign.

Third, a mini-budget would allow the government to table another budget omnibus bill, which could include a lot of things that — as with previous budget omnibus bills — have nothing to do with the budget. That could include, for example, the government’s controversial plan to give political parties free and unrestricted use of news media in their political advertising.

Finally, implementing the tax changes in a mini-budget would still leave extra cash to cover more goodies in the 2015 budget. In fact, a combination of a fall mini-budget and a second budget next February could pave the way to an early election.

In other words, the next deficit forecast — depending on when it comes — should signal how, and when, the Harper government intends to fight the next election.

Original Article
Source:  ipolitics.ca/
 Author: Scott Clark and Peter DeVries

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