You have stated recently that you intend to stay on as finance minister until the next election, or when the deficit is eliminated, whichever comes first. Your November 2012 Update of Economic and Fiscal Projections forecast the deficit would be eliminated in 2016-17, one year later than the forecast in the March 2012 budget.
The prime minister quickly “updated” your update to say that the deficit would still be eliminated by 2015-16. Given that the next election is likely to be in the fall of 2015, your 2015 budget likely will show a surplus for 2015-16, since the final outcome will not be known until the fall of 2016.
Assuming that you remain minister until the 2015 election, you will have served in that portfolio for ten years. That’s a long time to be a finance minister: Michael Wilson served just seven years in the job under Brian Mulroney and Paul Martin put in eight years under Jean Chretien.
Both Mr. Wilson and Mr. Martin established credible policy legacies in the job. Mr. Wilson introduced major reforms to the personal and corporate income tax systems, replaced the federal manufacturers’ sales tax with the Goods and Services Tax, privatized several Crown corporations, and helped negotiate NAFTA. These were major structural reforms which had a positive impact on economic growth, especially over the medium and long term.
Mr. Martin averted a major fiscal crisis, eliminated the deficit in three years, reduced the government’s debt, strengthened the Canadian banking system and reformed the Canada Pension Plan. With the deficit eliminated and with growing budget surpluses, he also implemented major structural reforms, especially in education, research and innovation. He put transfers to the provinces on a more sustainable basis and began the progress of lowering personal and corporate income taxes in the 2000 budget.
So far, your legacy after seven years is not that solid. Fortunately, you still have three more budgets to go — three more chances to enhance your legacy. More importantly, in the 2013 budget you could be forecasting surpluses beginning in 2015-16. How you use these future surpluses will go a long way to determining your credibility — and the government’s credibility — in the lead-up to the 2015 election.
At the start of your current round of budget consultations, you asked Canadians for suggestions on how to “strengthen our economy in the face of global economic threats” with “cost-neutral or low-cost measures”, focusing on “more efficient and effective spending” that builds on the “government’s belief of respecting taxpayers’ dollars” and “encourages private sector growth and leadership”. These are pretty much the same questions that you raised in last year’s pre-budget consultations.
Since the recession, the government has had a number of expenditure review exercises focusing on eliminating waste and inefficiency. Now you’re asking Canadians to identify even more. Were the previous expenditure review exercises a failure? How often can the government go to the “efficiency/effectiveness well” before finding it bone-dry?
The real purpose of your consultations seems to be to deliver photo ops, quotes and conditioning for the upcoming budget. We note that the prime minister has now decided to get into the pre-budget consultation exercise. Rarely do your “public” consultations ever lead to any policy actions. In fact, in the past, most major fiscal actions have been taken without consultation.
You did not, for example, consult with your provincial counterparts before announcing the change to the Canada Health Transfer escalator. It wasn’t even an item at the federal/provincial finance ministers’ meeting. You caught everyone by surprise.
Did the prime minister consult with Canadians before announcing that the elderly benefit system was financially unsustainable and the age of eligibility had to be raised? He did not — even though the Department of Finance had concluded in its own analysis that the system did not threaten the long-term financial sustainability of the federal government.
What about the House of Commons Standing Committee on Finance? In its 2011 pre-budget report, the Finance Committee recommended that the government take action to simplify the tax system. Nothing has happened on that front so far — notwithstanding the fact that tax simplification would meet all the criteria that you have set out. In 2011, the committee recommended major changes to the Scientific Research and Experimental tax credit. The 2012 budget included only minor tinkering that tax experts agree will have no positive affect.
On December 12, 2012, the Finance Committee tabled its pre-2013 budget consultations report “Jobs, Growth, Productivity and Demographic Change: Challenges and Opportunities for Canada”. The report contained sixty recommendations covering a wide range of topics. Once again the committee recommended that the government undertake a comprehensive review of the tax system and proposed that a Royal Commission be established.
We have responded to your requests for pre-budget submissions for each of the past four budgets. No surprise, not one of our recommendations has seen action. We have worked as policy advisers to finance ministers for over thirty years. During that time we were fortunate to work with ministers who wanted to hear advice and engage in discussion before they made decisions. That’s how good policy decisions are made.
Our most important recommendation is that you implement a “real strategy” to support economic growth and job creation and not focus on more tax expenditures. Private sector demand and economic growth are slowing and the unemployment rate remains stubbornly high at 7.2 per cent. Despite this, your sole goal is to eliminate the deficit by 2015-16, even though there is no fiscal crisis. Indeed there is no serious fiscal problem at all. Your own budget forecast numbers show the deficit declining rapidly and the debt burden falling. We suggest a strategy which could fund tax cuts and/or new investments to modernize Canada’s infrastructure. This strategy would strengthen economic growth, and create jobs, while maintaining a sustainable fiscal structure.
We also make a number of simple but important recommendations, which if implemented would go a long way to restoring transparency, accountability and credibility to the budget process:
Make sure the budget is based on realistic forecasts
In its report to the G-20 at its meeting last November in Mexico, the IMF observed that “a modest reacceleration of activity is expected, assuming policies are sufficiently supportive. Recent developments so far support staff’s projection of a slow reacceleration of growth.” That forecast was based on two assumptions: that decision-makers in the eurozone would act to gradually restore confidence and ease financial conditions, and that U.S. policymakers would effectively avoid the fiscal cliff and raise the debt ceiling.
Uncertainty about global economic prospects hasn’t diminished since then. The eurozone is in recession for the second year and any significant strengthening in economic growth in the next year or two seems remote. EU leaders have shown some progress in committing to institutional reform and there has been some shrinkage — or at least no worsening — in bond yields in the peripheral countries. Institutional reforms will take years (if not decades) to implement and so will the internal structural reforms necessary to restore competitiveness within the eurozone. Don’t expect much support for global economic growth from the EU for some time.
Both the U.K and Japan are in recession and no one knows how long it will last. The U.S. escaped a self-imposed “fiscal” cliff only to run into a self-imposed “debt ceiling”. It remains to be seen if and when the U.S. will actually get around to dealing with its longer-term fiscal problems and economic challenges. We think your “best in the G-7” boast will be good for some time, primarily because of the failure of politicians in the G-7 countries to act.
This is unfortunate, since Canada’s economic prospects depend on the U.S. and, to a lesser extent, on Europe and Japan — and those prospects don’t look good. Nor do the prospects in emerging market countries; the same IMF report concluded “G20 emerging economies will remain an engine of growth, but the rate of expansion is expected to drop to 5.6 per cent this year from 7.1 per cent in 2011, before rebounding to 6.2 per cent in 2013. However, growth could be much lower if either of the two critical policy assumptions is not satisfied.”
This kind of conditional outlook is not promising for Canada. Our economic growth has been slowing and forecasts are being reduced. The deputy governor of the Bank of Canada just recently expressed his concern about Canada’s economic prospects.
In your Fall Update the private sector average forecast was for growth of 2.1 per cent in 2012 and 2.0 per cent in 2013. The forecast for 2013 was down significantly from the Budget 2012 forecast of 2.4 per cent. But even this outlook is based on those key policy assumptions in the eurozone and the U.S. mentioned in the IMF report. Just as important, there was a significant deterioration in the terms of trade since the spring of last year as a result of falling energy and commodity prices. This had a significant impact on budgetary revenues and the deficit.
You will soon be meeting with your group of private sector forecasters to get their view of economic prospects. We have recommended in the past that you use the Department of Finance’s forecast — because the department has greater expertise and because its forecasts have been shown to be more accurate by independent reviewers. No doubt you will continue to use the private sector average. We would still recommend that you provide more detail on the components of both the economic and budget forecast, to allow for independent review and analysis.
Drop the ideology: adopt a pro-growth/pro-jobs strategy
You have said that the 2013 budget will be a “bare-bones” budget. By this we assume you mean a budget without much, if any, new spending. Given your government’s ideological commitment to smaller government and to eliminating the deficit by 2015-16, this is not surprising. Despite government rhetoric about a commitment to jobs and growth, there is no such strategy. The government, for example, allowed another increase in the EI premium rate in January, an action that hardly promotes job creation.
The government allowed this increase because it needs the EI revenue to hit its deficit elimination target. The only goal of this government is to eliminate the deficit.
In your request for public consultations, you asked for suggestions that would be “cost-neutral and encourage private sector growth and initiative”. In our submission to you last year, we recommended that the government undertake a substantive review to simplify the tax system.
We are sure that you understand that the current personal and corporate tax systems have become overly complex and inefficient. Today the tax code, with the addition of the latest technical tax bill, runs close to 4,000 pages. The income tax system distorts market decisions, creates inefficiencies and reduces productivity and economic growth.
Your government has repeatedly claimed it wants lower taxes. And you have lowered taxes — just not the right ones. You also have unfortunately chosen to provide special tax expenditures for specific groups, picking winners and losers, which has only added to the complexity of the tax system without enhancing economic growth or fairness.
We recognize that there have been few attempts at tax simplification because of the great political risk involved. Tax simplification means eliminating special tax breaks for specific groups, individuals, industries and sectors that can no longer be justified (or were never justified in the first place).
A tax simplification review would take time and require political commitment. But the payoff in financial and economic terms would be substantial. A conservative estimate suggests tax simplification could yield savings of almost $6 billion annually.
That money could be re-invested in the economy to support economic growth through lower income taxes for all middle-income Canadians, or through modernizing Canada’s infrastructure.
Both you and the prime minister have stated that, if another global recession hits, the government would be prepared to launch a second round of stimulus spending. We agree that this would be the appropriate policy response. The 2011-12 deficit of $26.2 billion is only 1.5 per cent of GDP and there is plenty of fiscal room to take the right actions.
In the past, you have said that the government had done all that it could to support the private sector and that it was now up to the private sector to step up and support economic growth. Both you and the governor of the Bank of Canada have lectured the private sector for holding on to too much “dead capital”.
But private sector support for economic growth is very weak. The trade sector is recording record deficits. Households are cutting back on their borrowing (which is what the government and the Bank of Canada want). The housing sector is weakening, the federal and provincial governments are withdrawing support for growth and companies are too worried about economic prospects to expand.
The Bank of Canada’s estimate of the output gap for the third quarter of 2012 was 0.8 per cent of GDP. The unemployment rate for the third quarter was stalling out at 7.2 per cent. With forecast growth of 2 per cent, neither the output gap nor the unemployment rate can be expected to decline in the next two years. And the risks are clearly on the downside that the output gap will widen and the unemployment rate will increase.
Despite this, you seem to be quite satisfied that there is nothing left for the government to do. You’ve set policy on autopilot.
The only sector that has the fiscal capacity to provide support to the economy is the federal government, but your ideology and commitment to eliminating the deficit by 2015-16 is preventing you from doing so.
We believe that the government should put aside its sole policy commitment of eliminating the deficit by 2015-16, and introduce a medium-term strategy to support job creation and economic growth.
The federal government has the fiscal room here to act. There is no fiscal crisis. There is not even a serious fiscal problem. Your own numbers show this to be the case. In your most recent budget forecast the deficit in 2015-16 is forecast to be only 0.1 per cent of GDP. Even if you are unwilling to simplify the tax system you could start a new medium-term program to modernize Canada’s infrastructure.
A 10-year program at $5 billion a year would only raise the deficit to 0.3 per cent of GDP in 2015-16. The deficit likely would be surplus the following year. However, combining this with annual savings from tax simplification of $6 billion would give the government the resources to both cut income taxes for middle-income Canadians and modernize Canada’s infrastructure.
Yes, deficit elimination would be delayed — perhaps by a year — and yes, Canada’s debt would rise. But the debt burden would fall, productivity would increase, jobs would be created and the unemployment rate would decline. Without such a strategy, you will be stuck with an unemployment rate of 7 per cent or higher when the next election comes around.
You have said over and over that the priority of the government is jobs and growth. Now is the time for action over slogans.
Provide real leadership
Like it or not, Canadians see you as the lead finance minister for ‘Canada Inc.’ So you have a responsibility to provide leadership to all Canadian governments in dealing with long-term structural issues. There is a growing federal-provincial fiscal divide in Canada. Although the federal government is not facing a serious long-term fiscal sustainability problem, the same cannot be said for the provinces.
According to the Parliamentary Budget Office, the fiscal structure of the provincial-territorial government sector is not sustainable (Fiscal Sustainability Report 2012), given their current debt structures and the pressures that they will face from an ageing population. Provincial governments are now faced with the need to cut services and/or raise taxes.
What is emerging is a widening “fiscal divide” between a federal government of diminished size with sound finances, and provincial governments with deepening fiscal imbalances resulting from growing spending pressures (health, education, infrastructure) and slower economic and revenue growth. This growing fiscal divide is not sustainable. Unfortunately, right now Canada Inc. is without economic and financial leadership. This is a void that you can and should fill.
One of the benefits of having a sustainable fiscal structure is that it provides a government with the flexibility to respond to critical policy issues. As we said above, the federal government now has that flexibility and the provinces don’t. The federal government needs to start using its fiscal flexibility to refocus its policy priorities to help narrow the federal-provincial “fiscal divide”.
Fix the timing of the budget
This is an easy recommendation for you, and it is one that would significantly improve the budget process and parliamentary accountability. The issue here is the relationship between the budget and the Main Estimates.
Under current “supply” rules, Main Estimates for the upcoming fiscal year must be referred to the standing committees before March 1. For the Main Estimates to be relevant, they should be based on the economic and fiscal assumptions in the budget. This implies that the budget should be tabled in late January or early- to mid-February, in order to give the Treasury Board Secretariat time to make the Main Estimates consistent with those presented in the budget.
Budget 2012 was tabled on March 29, 2012. This meant that Main Estimates, which were tabled by March 1, 2012, were based on economic assumptions presented in the Fall 2011 Update and not in the 2012 budget. It also meant that the expenditure cuts contained in that budget were not included in departmental spending estimates.
As a consequence, Parliament was asked in June to approve department spending estimates without knowing exactly what departments were planning to spend. Five of your seven budgets have been tabled after the Main Estimates.
All of this could be avoided if the government simply committed to tabling its budget before the middle of February. We recognize that the fourth quarter GDP numbers might not be available at the time of the budget. Considerable economic and financial data, however, would be available and the remaining uncertainty could be covered by the “risk adjustment” factor included in the budget.
Provide greater transparency — and save the PBO
For years, we have been urging the government to be more transparent in its budget planning. After all, the government promised greater transparency and accountability in its Federal Accountability Act. Unfortunately, it hasn’t delivered.
The government consistently has refused requests by the Parliamentary Budget Officer for data. Only recently did the Department of Finance release a study on the long-term sustainability of federal government finances — a study that had been promised in 2007. And it did so only after the auditor general brought the issue to light.
However, it only released information relating to the federal government, even though it promised in 2007 to present analyses on the total government sector. The auditor general also has recommended that the federal government provide long-term sustainability analyses for the total government sector. So did the International Monetary Fund in its November 2012 report to the minister.
To date, you have refused to do so. For some mysterious reason you seem intent on holding information back from the public, rather than engaging Canadians in a discussion of critical policy issues. Why? The analysis already exists in your own department.
Given this lack of transparency, the PBO has turned out to be a credible resource for Parliament and Canadians. The term of the current Parliamentary Budget Officer expires in March 2013. The next PBO will need to be someone who understands the budgetary and estimates processes and is willing to stand up to his or her major critics: the federal government.
In the 2006 election campaign, the Conservative party promised an independent office, reporting to Parliament with virtually full access to all relevant information. The government has since consistently opposed this; the legislation creating the PBO fell far short of that commitment. It’s time for that 2006 election commitment to be honored, and for the PBO to become an officer of Parliament.
We have never understood your desire — and the desire of your government — to fight with the PBO from the very outset. Many of these disagreements with PBO have become personal disagreements, rather than professional. This is unbecoming in a minister of finance. The PBO has turned out to be right in every disagreement it’s had with you. Unfortunately, this has reduced your credibility and the credibility of the department.
We would strongly recommend that you work with the new PBO (assuming there will be one), even when there is a disagreement. Your department is more than capable of engaging the PBO in a professional debate. It will, however, require a greater degree of transparency by your department and the government. The Liberal government in 1995 made data on departmental cuts public, and that provided credibility to the expenditure restraint exercise. What have you got to lose — unless, of course, the information doesn’t exist or it would contradict government statements?
These irrational brawls with the PBO inevitably end up making the government look like it has something to hide and cannot be trusted. Both your credibility and the credibility of the government have suffered as a result.
Reconcile government spending estimates
No one in Parliament, or in the government, can tell Canadians exactly what the government is planning to spend. If we were to ask you — the minister responsible for budgeted spending — and the president of the Treasury Board about government spending plans, we’d get two different answers.
The two of you have no idea what the government is planning to spend. In the budget, program spending is forecast to go up; in the Main Estimates tabled in the same month, spending is forecast to go down.
There are explanations for these differences, such as different accounting concepts and different definitions of what constitutes spending. But there is no good reason why the Main Estimates can’t be drafted on the same basis as the budget estimates.
Until that happens, a detailed reconciliation of any difference between the budget and the Main Estimates should be provided in the Main Estimates themselves. The last time such reconciliation was provided was in the March 2007 budget.
Stop throwing Parliament under the ‘omnibus’
The two bills associated with the 2012 budget were a disgrace, and an insult to Parliament and Canadians. The use of budget omnibus bills has grown to the point that they seriously undermine the credibility of the budget process and the authority of Parliament. Little information is provided in the budget, so it has become impossible in reading the budget documents to fully understand what the government is actually proposing to do.
There is an urgent need to restore the role of Parliament and its committees in assessing, reviewing and approving proposed legislation. Without sufficient information, Parliament and its committees cannot properly assess the budget. Parliamentary debate is stifled, public involvement is ignored and good public policy is derailed.
The budget needs to be much more explicit on proposed policy initiatives, providing details and background information sufficient for Parliamentary assessment and a better understanding by the public. Budget omnibus bills should be restricted to proposed tax changes only and all proposed spending initiatives should be presented either through the Main Estimates or through separate legislation, submitted to the applicable parliamentary committee for review.
Given the vagueness and opacity of the 2012 budget and the size and breadth of the two budget ominous bills, it’s hard for us to understand how a minister of finance could agree to them in the first place. Your credibility has suffered as a result.
Mr. Wilson and Mr. Martin had significant independence in creating their legacies. It appears to us, on the other hand, that much of your legacy has been imposed on you.
Unlike your predecessors, your legacy so far is one of a minister of finance who inherited a surplus and immediately eliminated it with a two-point cut in the GST, against the advice of all economists (including the ones in your own department) except one — the prime minister. You inherited a strong financial system, which you tinkered with somewhat. You freely lectured other ministers of finance, both domestically and abroad, but rarely worked constructively with them.
It was you, along with the prime minister, who in the fall of 2008 stated the country would avoid a recession and never go into deficit. We all know how that went. You were subsequently forced to go ‘Keynesian’ and bring in a budget which introduced a major temporary stimulus program. This was the right thing to do, but it was imposed on you by the G20 and the rules of political survival. In your 2010 and 2012 budgets you introduced cuts in spending designed to eliminate the deficit over the “medium-term”. This seems to have become the only achievement that you want for your legacy.
We believe you can do much more. There is a need now for the federal government to take action to support medium-term growth and job creation, while maintaining a long-term sustainable fiscal framework. The government has the fiscal flexibility to do exactly that.
But first, you have to turn off the policy “autopilot” and take action.
Original Article
Source: ipolitics
Author: Scott Clark and Peter DeVries
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