Why?

Posted by ealboim under All

Elly Alboim

Two days into the $50 billion dollar deficit and I still don’t understand why. There are actually a few whys I don’t understand.

Why was the forecasting so far off?

Why has the deficit risen so high, so quickly?

And why are we getting a new deficit projection not even two months into the new fiscal year?

I was involved in ten full budget cycles while consulting at Finance Canada. I learned a lot about how the data flows in, how projections are made, what considerations come to bear in public reporting, and when in the cycle adequate certainty develops.

No part of what’s going on now makes much sense.

Usually, Finance Canada is hard pressed to come up with internal forecasts for the coming fiscal year by the normal end of June internal accounting for cabinet summer planning sessions. This is a full month earlier than that.

Normally, Finance Canada is loathe to update projections without providing the underlying data to reconcile the numbers. It has not done so beyond vague and notional reasons provided in a fifteen second scrum burst by the Minister. There is no paper. There has been no updating of the underlying economic assumptions that drive fiscal calculations.

For that matter, public economic projections by private sector economists continue to have large variances. The Bank of Canada’s forecasts have been, to be generous, fluid.

The data about personal income tax flow is at best fragmentary at this point. Corporate tax returns for the first quarter of 2009 are also still being assessed and are not entirely germane for the 2009/10 fiscal year (which began on April1) though they provide directional clues. Corporate losses for 2008 ARE in but no one can know for how long they will be carried forward and against what profits in what future year they will be applied. The same is true for personal capital losses in calendar 2008 and the early part of calendar 2009 – the period of significant market losses.

Presumably, given the state of the economy, internal reporting has been accelerated and scrutiny is much more intense. But it is very unlikely the department has much confidence yet in its assessment of fiscal 2009/10. Further, to issue a forecast so much larger than the budgetary forecast would cause great angst within Finance and strong internal demand for a high level of certainty

There is no imperative, legislative or precedential, to report out publicly less than 60 days into a fiscal year unless there are fiscal actions being planned for an imminent economic statement. But there is no hint of that. In fact, given the need to build consumer confidence, most would argue that releasing fragmentary and unsupported negative projections would have the opposite impact.

Further, after its performance in November and its general contempt for transparency, it is unlikely the government has suddenly decided the public has a Right to Know. 

There must be strategic political reasons to have released the new projection.

Perhaps it is to justify a refusal to move on EI. Or to allow for a rethink of the rate and size of the release of infrastructure spending. Or to raise the apparent stakes of forcing an election in the middle of a deteriorating fiscal framework. But the inevitable impact on the credibility of the Minister, Department and government would have been obvious. The political cost/benefit analysis is not at all clear cut.

So back to the questions. Why? And why now?

Journalistic reporting has thus far been on the fact of the $50 billion. It’s now time to start looking beyond that.

Update:

After some calls, some aditional information that helps answer some of the whys.

• It is likely that Finance did NOT book the probability of the GM settlement in fiscal 2009/10 even though it was a virtual certainty. Prudence would have had the department do it. But legally, there is no need to do so until the deal is signed. Further, if Finance takes the entire amount into the framework for 2009/10, that is a signal that it doesn’t expect to get any of the money back — if it reaches that judgment, accounting principles say it has to. It appears the deal will involve a sizeable number added to the fiscal year’s bottom line.
• There is a view that the $34 billion projection in January was low-balled. Some say that even then, the likely deficit was north of $40 billion but because of the November projection, Finance or the Minister decided that the optics of going higher than $40 billion would have been horrific in the white-hot political environment of the budget. So, in essence, because of the possible fiddling then, the increase now is actually less than it appears to be.
• There is a suspicion that the monthly Fiscal Monitor for March 2009, due out soon, is going to show a higher monthly deficit figure than expected. Remember that it is the final month of fiscal 2008/09 and would render the budget’s projection for that year’s deficit far too low. Pressure would have built on the budget projection for 09/10 because of the carry forward from the previous year. Private sector economists would revise their own projections on that basis and the public environment for the June report card would have changed. So better to get out in front goes the reasoning.
• Further, although the tax data is still incomplete, federal officials do have a handle on the flow of cash in and out. If cash receipts from corporate and individual tax filings have been lower than normal and rebate checks going out have been higher, that will indicate a weakening of revenue and an increase in future financial requirements. That helps in projecting fiscal outcomes. That is further aided by knowing the monthly take up of EI benefits.
• Put all of that together and it begins to say that maybe they didn’t have much choice but to get the number out now, that reconciling the numbers is less difficult and that they have a bit more certainty than appears at first blush. Although of course Mr. Flaherty was careful to suggest that $50 billion was notional and the final result might be higher.

Elly Alboim is an associate professor in the School of Journalism and Communications and a principal in the Earnscliffe Strategy Group, specializing in strategic communications and public opinion.