Thursday, January 29, 2009

Deficit Watch 2009: What happened to truth in budgeting?

It’s only the first day of Deficit Watch and already its not looking good for the Conservatives, with leading economists and the International Monetary Fund casting doubt on Jim Flaherty’s overly optimistic projections of future economic growth. In short, it will take the Conservatives longer to retire these deficits than they’re admitting.

A day after Finance Minister Jim Flaherty tabled a budget projecting that the global and Canadian economies will rebound moderately next year, the International Monetary Fund has thrown a spanner into the assumptions that underpin the government's numbers.

The latest global outlook is in line with Canadian economic expectations in Flaherty's budget for this year -- a 1.2 per cent gross domestic product retreat -- but the two part company over the expectations for next year.

The IMF says Canada's economy will begin to grow at a tepid 1.6 per cent pace, while Flaherty is counting on a 2.4 per cent advance followed by even stronger momentum, to make good his prediction that the government will balance its books four years from now.

Remember the days of Liberal governments regularly running healthy surpluses, a practice Deficit Jim thought was just horrible, but most saw as sound financial planning (particularly in hindsight)? That wasn’t by mistake.

When the Liberals took office from the Mulroney Conservatives (and inherited a big deficit by the by), it had been common government practice for a much larger than forecast deficit to be revealed when the books were closed at the end of the fiscal year. That was because they'd made a habit of basing their budget projections on the most wildly optimistic projections of future growth and revenue. The best-case scenario. It made the bottom-line look better on budget day but it was artificial, a mirage. They wanted to hide the true situation until less people were watching.

When the Liberals and Paul Martin moved into the finance portfolio he changed this practice, adopting a policy of basing his budget projections on an averaging of the more conservative forecasts of both public and private sector economists, essentially erring on the side of underestimating potential growth rather than overestimating.

This policy, along with the contingency reserve (also abandoned by the Conservatives), allowed for a budget cushion should growth be hampered. As a result, each year the Liberal government was able to do a little better fiscally than anticipated, allowing leftover funds to bring down the inherited deficit faster, and then be targeted to a combination of debt repayment and priority program spending. And when the September 11 attacks put severe fiscal demands on the government overnight, we were able to bear them without deficit.

While this all seemed like sound financial planning to me, the Conservatives disagreed. They thought all this fiscal prudence was a totally bad idea. Overtaxation, they'd cry. (ed: So do they consider a deficit undertaxation then?) They killed the contingency reserve. And ironically, given this Flaherty budget, which uses overly rosy revenue projections to downplay and hide the true size and length of this deficit, they also ran in 2005/06 on Truth in Budgeting, and bringing transparency back to the budget process.

Yet another Harper broken promise, as Deficit Jim fiddles with the numbers to cover-up the true size of his deficit. (He knows what he's doing there) I hope the finance committee will put Flaherty on the hot seat over his attempts to cover-up the true scope of the deficit. Kevin Page would be a good witness too.

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The Rational Number said...

Without transparency, can there be real accountability?

Another of Mr. Harper's planned misdirections. As long as you don't SEE any unaccountability, it doesn't exist.

Barcs said...

A graph:

From the numbers on page 9 of the audited financials of the government dating back decades:

The numbers show Goodale (and the spend everything version of Martin) had only a 1.5 B surplus, and that the Tories pushed that back up.

(For that matter they show that Mulroney actually pushed Trudeau's Deficit into an operating surplus, it was interest on the debt that pushed it into a fiscal deficit.. all that despite the financial market troubles of the late 80's)

And since TRN (and you) are demanding transparency..... what happened to the Liberal surpluses that Martin created? Why with all that surplus that martin had was Harper able to do more debt repayment? Why? Because the liberals chose to spend their windfall... every year. 10B surplus??? throw a bit into debt and then spend 9B on top of the budget.

That's what the "spendthrift" liberal surplus was.. a slush fund to be spent at the end of the year.

You can try to spin it as a cushion all you want.. all it is is over-taxation to feed extra spending. Over taxation that could have been left in peoples pockets to spend in the economy.

With 68 billion in surplus between the liberals first surplus and the Martin defeat the Debt went down only 65 B in 8 years of surpluses.

The tories in contrast had 35 B surpluses in 3 year (wtf I thought you said they did away with that and the cupboard was bare???) And paid down about 38 B in only 3 years.

This red ink budget (demanded by the liberals and the NDP who were going to spend 30 B last fall and more to come in the budget) pusts us 34 B back down. Our debt at the end of this year will not be as deep as it was when the Tories took over even. And our economy has grown since then.

Martin was the one that always claimed that it was the Debt to GDP ratio that mattered, not the actual debt.... Where is that pragmatism from the "fiscally responsible liberals" now? Our debt/gdp ratio still being one of the lowest in the G20....

And on a final note... wtf are you talking about fiscal demands from sept 11.... in 2001 the liberals ran a surplus of 8 Billion still. Was it so poorly managed that you expected the budget to be more than 10+% low year after year (like the 2 years previous?

I don't know about you, but I could sure use 10% less taxes. That's $1500 for the average person earning the lowest income tax bracket...isn't it?? What would it have meant to the economy if you put more than 1000 into every taxpayers pocket back when martin was finance minister??? Oh but you had a "stabilization surplus".......right??

A BCer in Toronto said...

wow man, and i thought I can be verbose at times...but seriously, yes PM the PM spent rather madly trying to fulfill a thousand number one priorities...which didn't work out super well IIRC, a lesson perhaps for Stephen H.

I can grant you the basic veracity of a surplus being overtaxation. I'd me more emphatic if I believed any fiscal con would ever then accept the collary to that, that a deficit must be undertaxation. I'm more likely to be told no, lower taxes even further because it will grow the economy and therefore increase general revs, and bye bye surplus. To which I'd have to say history shows that's BS.

But my verbosity is showing. While we can debate whether or not the Liberal surpluses on average were too big, I still maintain that a cushion, and contingency reserve, of some size is a good idea to help avoid going into a deficit. Because the economy does have ups and downs. Shit happen. It's neither good economics or good politics to raise and lower taxes each year, based on projected revenues that year. Better to set a broad framework and work within it.

Oh, and about tax cuts, if you go back and look at Liberal budgets post budget balancing, you'll see substantial across the board personal tax cuts.

But anyway, I think we've veered massively off topic. The thesis of my original post was truth in budgeting in one simple area: forecasting projected economic growth, and government revenue.

It seems to me that the Conservatives are abandoning what I'd call the sound fiscal planning philosophy of taking the more conservative estimates and basing their projections on that, to err on the side of caution. Rather, the Cons seem to be going with the more liberal projections, painting an overly rosy picture to mask the time it will take to climb out of deficit.

Shady forecasting. That's my issue here.

The Rational Number said...

I don't understand what you mean by overtaxation. If the government overspends creating a deficit, then they must compensate by collecting enough revenue (e.g. taxes) to pay down the debt created by the deficit. A zero deficit budget with $500B debt means you still have to carry the interest on that debt. If you have no surplus and no deficit, your debt isn't going up or down.

So, if you plan to run deficits you must (symmetrically) run corresponding surpluses.

Running a surplus to pay down a debt isn't overtaxation.

Barcs said...

Yeah... I can ramble alot sometimes :)

"Running a surplus to pay down a debt isn't overtaxation."

I believe that was my point TRN... it wasn't to pay down the debt since most of the debt repayment came within the Martin budgets and the "surplus" mostly went to extra spending.

The under-taxation argument is an interesting one Jeff, and I am not sure I can disagree. I would more be more likely to call it overspending rather than under-taxation until the government is small enough to warrant being called too small.

And I am aware that you and I differ in our definitions of how large a government should be and how much it should spend.

As far as the forecast go, the IMF is only one forecaster, and it is one of the most pessimistic. I don't think that the budget forecast that the tories chose is too far different that the average. Maybe not as conservative as it should be, but not as out to lunch as IMF thinks.

For claritys sake, I didn't mean to suggest that the liberals didn't cut taxes during their reign... Just arguing that given conditions I didn't think they cut them enough.