OTTAWA — The federal government is leaving itself vulnerable to a major miss in its deficit-reduction plans by failing to build in contingencies and a detailed assessment of risks, says Canada’s budget watchdog.
The new fiscal report by Parliament Budget Officer Kevin Page being released Wednesday takes issue with the government’s official projections showing a balanced budget in five years.
But in an interview Page concedes that neither he, nor Finance Minister Jim Flaherty, nor private sector economists, have a crystal ball that can accurately predict the Canadian and global economies for the next half decade.
Page says his biggest concern with the slim economic update produced by Flaherty last month was the lack of analysis of the many risks that could throw Ottawa off track, or a Plan-B should it happen.
“We are not predicting the sky is going to fall,” Page said. “We just need to be cognizant (that the risks are included in) the planning environment.”
“We didn’t see that from Minister Flaherty (so) we’re going to do our very best to make sure parliamentarians get that kind of analysis.”
Flaherty issued a five-year schedule last month showing the deficit on a steady downward path from last year’s record $55.6 billion to a tiny $2.6 billion surplus in 2015-16.
Wednesday’s analysis will show that the public budget office believes the government is too optimistic, both on revenues and how well it can restrain spending.
“We will publish a different budget balance track, different revenue, different expenditure track,” he said.
Page said his latest report will do something never done before in Canada — provide probability estimates for reaching the government’s budget targets.
He will do this by calculating the margin of error in economists’ consensus projections for growth used by the Finance Department the past dozen years, and apply them to the current outlook.
Page says the results provide sobering reading, suggesting that counting on private sector forecasts for budget planning may be as much art as science.
The Finance Department should get back to doing its own forecasts, he adds. An independent study has shown Ottawa historically has been more accurate than private sector economists, possibly because outlier estimates can overly skew the average.
Although Page also uses private sector economists for his projections, he says his report will show a range of probabilities.
“There’s currency risk, household debt risk, sovereign debt crisis in Europe risk … there is still significant downside risk out there,” he said.
“What are the probability of achieving any of these targets, to get deficits anywhere near zero?”
Given the considerable range of risk, Page said Flaherty should have built in a bigger cushion than $10 billion from revenue projections to protect Ottawa from falling further into deficit.
And he said the government should set itself firm targets and contingency plans to meet them if the economy underperforms.
The watchdog has feuded with the finance minister in the past over Ottawa’s budget assumptions, and Wednesday’s report will be no different. Page said Flaherty has yet to concede the country has a structural deficit, which he says means Ottawa will be in deficit even when the economy is operating at full capacity.
Liberal finance critic Scott Brison said he is looking forward to the budget office’s latest estimates.
“The PBO’s record of accuracy when predicting this government’s budget deficits versus the finance minister’s record of missed deficit targets suggests we listen to the PBO,” he said.