Trudeau Budget `Excessive' in Low-Balling Growth, Watchdog Says

Watchdog Says Liberals Underestimating Growth in Budget
  • Fiscal plan overstates impact of measures, job growth: PBO
  • March 22 federal budget builds in C$6 billion risk cushion

Prime Minister Justin Trudeau is underestimating growth for the economy and likely setting himself up for smaller-than-expected deficits, according to Canada’s budget watchdog.

Trudeau’s government predicted annual growth in nominal gross domestic product that was C$40 billion ($30.4 billion) below what private-sector economists estimated. That conservatism is excessive, Parliamentary Budget Officer Jean-Denis Frechette said in a report Wednesday.

The new Liberal government’s March 22 budget promised C$118.6 billion in cumulative deficits over six years, a mix of lower growth forecasts and C$50 billion in new spending intended to boost a stagnant economy. However, Trudeau built in an annual C$6 billion risk adjustment based on those lower forecasts.

“Based on the past performance of private sector forecasters, it is likely that the actual outcome for nominal GDP in 2016 and 2017 will exceed the levels used for fiscal planning purposes,” the PBO said, adding the government’s changes erode the element of independence that using the average private-sector forecast provides.

Speaking after the watchdog’s findings were released, Trudeau said “experts are often mistaken by about C$40 billion” and his government used lower estimates to guard against surprises. “We want to be sure we’re giving accurate information, and that is the reason we took that approach,” the prime minister told reporters in Montreal.

Estimate Variance

Trudeau’s budget made it more difficult for Canadian lawmakers to accurately scrutinize public finances, and it overestimates the impact of the budget measures on the economy, the PBO said.

The budget will add 0.5 percent to GDP growth in the fiscal year that began this month, the PBO predicted, matching the government’s own forecast. However, in the 2017-2018 fiscal year, the PBO projects the budget will add 0.8 percent to growth while the government predicts a 1 percent impact. The difference is due in part to the PBO’s prediction that Trudeau’s income tax changes will actually reduce growth by 0.1 percent, while Finance Canada had predicted no impact.

The watchdog’s forecast of a smaller budget impact “reflects differences in fiscal multipliers as well as the sensitivity between changes in real GDP and employment.”

Trudeau is also overestimating the number of jobs that will be created or maintained by the budget, the PBO found. Trudeau’s government forecasts a total of 143,000 jobs created or maintained over its first two fiscal years, while the PBO projects 86,000.

Open and Transparent?

The government made changes to the budget presentation that “made it more difficult for parliamentarians to evaluate government policy and scrutinize the fiscal framework,” the PBO report said, a sharp criticism of Trudeau, who won power last fall while pledging a more open and transparent government.

For example, the government shortened the time horizon of cost estimates to two years from five. “You can’t really see how the budget is evolving -- how the spending and financing of those measures is evolving over time -- if you don’t have that detail,” Assistant Parliamentary Budget Officer Mostafa Askari said in an interview. “You have the bottom line, but how are you getting to the bottom line?”

The government also didn’t provide detailed tables identifying the impact of its adjustments to private sector forecasts and released “key fiscal information” outside the budget cycle with no reconciliation, the PBO report said.

To Askari, that suggests the government is “not really believing the private sector forecast” in its budget-making process. “Then why actually use the private sector forecast if that’s the case?”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE