Show cards on structural deficit, watchdog tells Tories

When Canada’s economy eventually rebounds, will that alone be enough to bring back the days of federal surpluses and balanced budgets?

Or have the Conservatives boosted spending and cut taxes so much that there simply will not be enough revenue left to balance the books, even in good times?

Parliamentary Budget Officer Kevin Page says Ottawa knows the answer – but isn’t saying.

The independent spending watchdog released a new report Monday on one of his favourite topics: the structural deficit. It is a concept that attempts to show whether government finances would be in balance if it weren’t for short term cyclical factors like the current, protracted global economic slowdown.

The statistic is commonly used by other governments. Prime Minister David Camerion is promising to erase Britain’s structural deficit by 2015 while the latest European Union plans included discussion of a structural deficit cap. But in Ottawa, structural deficit forecasts prepared by the government are nowhere to be found.

“That’s standard practice for OECD countries. We’re not getting that,” Mr. Page said in an interview. “We lessen the debate when we don’t use this type of analysis.”

Monday’s PBO report says “Finance Canada could improve fiscal transparency” by publishing its structural deficit estimates covering the medium term. The report says this information is important because it allows a more informed debate as to whether the government’s response to the deficit should include temporary or permanent measures.

“Distinguishing between structural and cyclical components of a government’s budget balance is crucial because, while the cyclical component may be expected to dissipate over a medium-term horizon as the economy returns to its full potential, the structural component may necessitate policy measures,” states the report, prepared by Chris Matier, the PBO’s senior director for economic and fiscal analysis and forecasting. Mr. Matier previously did similar work for Finance Canada during his 14 years working in the department.

The Finance Minister has repeatedly dismissed the warnings of the PBO and Mr. Page regarding a structural deficit. “He's usually wrong,” Jim Flaherty said in March, 2010.

But it was the minister’s own forecasts that had to be revised last month when Mr. Flaherty announced the government is not planning to erase the deficit until 2015-16 – a year later than promised during the 2011 election campaign.

The PBO’s own analysis concludes that if the Conservative government succeeds at reigning in spending as planned over the coming years, the structural deficit will fall from $25-billion this year to only $1.6-billion in 2016-17.

However that does not mean Ottawa’s finances will be sustainable for the long term. The PBO also warns that the federal government faces a long-term cash crunch as the population ages and has called on the government to release estimates of the fiscal impact of this demographic change.

Origin
Source: Globe