2018 gn-pbo assembly: economic analysis (for fiscal policy)

2018GN-PBOAssembly:EconomicAnalysis(forFiscalPolicy)

RandallBartlett,CFA

ChiefEconomist

InstituteofFiscalStudiesandDemocracy

June 19,2018

©Copyright2018IFSDInstituteofFiscalStudiesandDemocracy.AllRightsReserved.

Overview of the morning§ Explanation of the relationship between

economic and fiscal forecasts§ Examples of changes in budget planning

due to economic shocks subject to different political constraints

§ Exercise on practical planning implications of a changing economy and political commitments

Economics and the budget

Questions to consider§ What is the state of the economy?§ Does the state of the economy matter for

politicians and fiscal policy? § What is the impact of the economy on the

government’s fiscal position?

Budget and economic context

PoliticalReality

EconomicReality

Good Fiscal Policy

Business of Supply (the ideal)

Economic survey says …

The magic of fiscal forecasting§ Average private-sector forecasts get

thrown into internal Finance Canada economic and fiscal models

§ Complete ’black box’ on how private-average forecasts become federal fiscal forecasts

§ Federal government is much less transparent than other governments

Changing economic views …Federal Fiscal Impact Estimates of Economic Forecast Errors

billions of dollars Year 1 Year 2 Year 5

Total revenues -4.2 -3.7 -4.1

Total expenses 0.7 0.8 0.7

Budgetary balance -4.8 -4.5 -4.9

Total revenues -3.7 -3.4 -3.6

Total expenses -1.5 -1.4 -2.1


Total revenues 1.4 2.0 2.8

Total expenses 2.0 3.4 5.6


Source: Finance Canada. Note: Values are taken from Annex 2 of Budget 2018.

Estimated Impact of a One-Year, 1-Percentage-Point Decrease in Real GDP Growth

Estimated Impact of a One-Year, 1-Percentage-Point Decrease in GDP Inflation

Estimated Impact of a Sustained 100-Basis-Point Increase in All Interest Rates

… with changing economic newsFederal Fiscal Impacts of 2017 Economic Forecast Differencesbillions of dollars, unless otherwise indicated Year 1 Year 2 Year 5

Real GDP growth (percentage points) 0.1GDP inflation -0.13-month Treasury bill -0.110-Year GOC bond -0.2

Total revenues 0.4 0.4 0.4Total expenses -0.1 -0.1 -0.1Budgetary balance 0.5 0.5 0.5

Total revenues -0.4 -0.3 -0.4Total expenses -0.2 -0.1 -0.2Budgetary balance -0.2 -0.2 -0.1

Total revenues -0.2 -0.3 -0.4Total expenses -0.3 -0.5 -0.8Budgetary balance 0.1 0.2 0.4

Total revenues -0.2 -0.3 -0.4Total expenses -0.5 -0.7 -1.1Budgetary balance 0.4 0.5 0.8

Sources: Finance Canada, Institute of Fiscal Studies and Democracy.

Difference in the 2017 Economic Forecasts (Budget 2018 less FES 2017)

Estimated Impact of the Difference in Real GDP Growth Forecasts

Estimated Impact of the Difference in GDP Inflation Forecasts

Estimated Impact of the Difference in Interest Rate Forecasts

Total Fiscal Impact of 2017 Economic Forecast Differences

Budget 2018 was a ‘nothing burger’

0.5 0.5

-0.2 -0.1

0.1 0.2

-20

-18

-16

-14

-12

-10

-8

-6

-4

-2

0

2

2017-18 2018-19 2019-20 2020-21 2021-22 2022-23

Difference FES 2017 Budget 2018

billions of dollarsEvolving Federal Budget Deficit Outlook

Sources: Government of Canada, Institute of Fiscal Studies and Democracy.Note: The difference is the Budget 2018 less Fall Economic Statment 2017 (FES 2017) fiscal deficits.

Economic changes and the budget

Pre-budget policy measures

Lower spending before Budget 2018

-7

-6

-5

-4

-3

-2

-1

0

1

2

2017-18 2018-19 2019-20 2020-21 2021-22 2022-23

Direct program expenses Infrastructure reprofile Other spending Total spending

billions of dollars

Revisions to the Spending Outlook since FES 2017

Sources: Government of Canada, Institute of Fiscal Studies and Democracy. Notes: The difference reflects changes since the Fall Economic Statement 2017 (FES 2017) but before policies in Budget 2018.

Add it all up to a new balance

Budget balance, put differently

Revenues are tied to the economy,

… unless they’re not

-0.2 0.1 0.6 0.8 0.8 0.8

-4.0

-6.0

-5.0

-3.0

-2.0 -2.0

-7

-6

-5

-4

-3

-2

-1

0

1

2

2017-18 2018-19 2019-20 2020-21 2021-22 2022-23

GST Other revenues Nominal GDP

billions of dollarsRevenue Changes since the FES 2017

Sources: Government of Canada, Institute of Fiscal Studies and Democracy.Notes: The difference reflects changes since the Fall Economic Statement 2017 (FES 2017) but before policies in Budget 2018.

GST revenues are questionable

1.71

1.68

1.67

1.66 1.66 1.66

1.70

1.69

1.701.70

1.691.69

1.60

1.62

1.64

1.66

1.68

1.70

1.72

2017-18 2018-19 2019-20 2020-21 2021-22 2022-23

Fall Economic Statement 2017 Budget 2018

percent of GDP

GST Revenue Forecast as a Share of GDP

Sources: Government of Canada, Institute of Fiscal Studies and Democracy.

Adjustment for risk – fudge factor #1

Adjustment for risk comes full circle

-1.5

-6

0

-3-3

-6

0

-3

-7

-6

-5

-4

-3

-2

-1

0

Update 2015 Budget 2016 FES 2016 Budget 2017

Year 1 Year 2 Year 3 Year 4 Year 5

billions of dollars

Federal Government Adjustment for Risk

Source: Government of Canada.

DPE is another major fudge factor

Is austerity around the corner?

6.2 5.7

18.1

-0.3

-2.7-1.4 -1.3 -1.4

6.9

4.4

9.5

0.61.6 1.8 1.2 1.6

-5

0

5

10

15

20

Year 1 Y2 Y3 Y4 Y5 Y6 Y7 Y8

Last 8 years of PM Harper First 8 years of PM Trudeau

%Growth in Direct Program Expenses

Source: Government of Canada.Note: The 2015-16 fiscal year is attributed to Prime Minister Trudeau as 'Year 1', while Y3 through Y8 are forecasts from the Fall Economic Statement 2017. The 2007-08 fiscal year is 'Year 1' for Prime Minister Harper.

Looking for savings from OPEX

Looking to trim in an election year?

86.0

95.6

93.191.9

92.9

94.9

97.3

0.4

80

82

84

86

88

90

92

94

96

98

2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23

Budget 2018 operating expenses Estimated election cost

billions of dollars

Federal Government Operating Expense Forecast

Sources: Department of Finance Canada, Elections Canada, Institute of Fiscal Studies and Democracy.Note: Election cost estimate is calculated by the Institute of Fiscal Studies and Democracy.

2019 is an election year

Savings to be found in personnel?

38.3

11.9

10.2

Personnel Professional and special servicesOther subsidies and payments Acquisition of machinery and equipmentRentals Repair and maintenanceUtilities, materials and supplies Transportation and communicationsAcquisition of land, buildings and works Information

FY 2016-17 Departmental Operating Expenses ($ billion)

Source: Government of Canada.

Past exercises have shown as much

-10

-5

0

5

10

15

20

-6

-4

-2

0

2

4

6

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Federal government Employees (LHS) Direct program expenses (RHS)

Growth in Federal Employees versus Growth in DPE% %

Sources: Government of Canada, Statistics Canada, Institute of Fiscal Studies and Democracy.

Without personnel, cuts don’t last

0

10

20

30

40

50

1999-00 2001-02 2003-04 2005-06 2007-08 2009-10 2011-12 2013-14 2015-16 2017-18 2019-20

Personnel Personnel-linked expenses Acquisition of structures and M&E

Operating Expense Component Forecastsbillions of dollars

Sources: Government of Canada, Institute of Fiscal Studies and Democracy (IFSD).Notes: Values from the 1999-00 through 2016-17 fiscal years is from the Public Accounts of Canada. The forecasts for the 2016-17 through 2019-20 fiscal years were produced by the IFSD. M&E refers to machinery & equipment.

Personnel cuts on the horizon?

-6,787

-2,770

-8,000

-7,000

-6,000

-5,000

-4,000

-3,000

-2,000

-1,000

0

2018-19 2019-20

ESDC PWGSC Environment INAC StatCan Infrastructure FEDASO Other

Cuts to Federal Full-time Equivalent EmployeesFull-time equivalent employees

Sources: Government of Canada, Institute of Fiscal Studies and Democracy.

Some more realistic FTE numbers

354

343340

342344

349347

345

300

310

320

330

340

350

360

2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20

thousandsNumber of Federal Government Full-Time Equivalents

Sources: Government of Canada, Parliamentary Budget Officer.Notes: The 2010-11 and 2011-12 fiscal year values are taken from PBO (2012). The 2012-13 through 2016-17 fiscal year values are taken from the Public Accounts of Canada. The 2017-18 though 2019-20 fiscal year values are taken from Departmental Plans, modified to reflect ongoing programs that have not yet received Parliamentary approval.

Interest on debt another fudge factor

Federal debt tilted to short term …

… and it’s increasing due to deficits

0

100

200

300

400

500

600

700

800

2007–08 2009–10 2011–12 2013-14 2015-16 2017-18*

billions of dollarsComposition of Market Debt

Domestic bonds Treasury bills Foreign debt Retail debt CPP

Source: Government of Canada. * Projected.

Why does this even matter?

-80

-70

-60

-50

-40

-30

-20

-10

0

10

20

30

1991 1996 2001 2006 2011 2016 2021

Cyclically-adjusted budget balance Cyclical budget balance Budget balance

billions of dollars

Total Government Cyclical & Cyclically-Adjusted Budget Balances

Sources: Government of Canada, Institute of Fiscal Studies and Democracy.Note: Historical numbers are taken from the 2017 Fiscal Reference Tables. Forecast is by the IFSD.

Forecast

Questions to consider§ What is the state of the economy?§ Does the state of the economy matter for

politicians and fiscal policy? § What is the impact of the economy on the

government’s fiscal position?

Example – Great Recession

Great Recession (2008-09)§ Political reality: Commitment by the

federal Conservative government to run balanced budgets or surpluses

§ Economic reality: Worst global economic downturn since the Great Depression

§ Outcome: Domestic political crisis led to comprise in the form of Canada increasing spending dramatically and contributing to coordinated global fiscal stimulus

My, how the economy can change

4.4

0.8

4.44.8

-1.2

4.24.8

-4.6

4.1

-6

-4

-2

0

2

4

6

2008 2009 2010

Update 2008 Budget 2009 Update 2009

%

Evolving Nominal GDP Growth Forecasts (2008 to 2010)

Sources: Government of Canada, various federal Budgets and Updates. Note: 2008 value is not available for Update 2009, and was therefore set equal to the Budget 2009 value.

Revenues fell as a result

-1.4

4.0 4.2

-2.5

-4.9

6.7

-3.8

-7.1

7.6

-10

-8

-6

-4

-2

0

2

4

6

8

10

2008 2009 2010


%

Evolving Revenue Growth Forecasts (2008 to 2010)

Sources: Government of Canada, various federal Budgets and Updates.

Expenses rose to fight the crisis

2.3

4.3 4.2

2.0

8.9

4.3

2.6

14.1

2.2

0

2

4

6

8

10

12

14

16

2008 2009 2010


%

Evolving Expense Growth Forecasts (2008 to 2010)


Budget deficits plunged in response

0.8 0.1 0.1

-1.1

-33.7-29.8

-5.8

-55.9

-45.3

-60

-50

-40

-30

-20

-10

0

10

2008 2009 2010


billions of dollars

Evolving Budget Balance Forecasts (2008 to 2010)


Example – Oil Price Shock

Oil Price Shock (2014-15)§ Political reality: Commitment by the

federal Conservative government to run balanced budgets or surpluses

§ Economic reality: Unexpected sharp and prolonged drop in oil prices

§ Outcome: Real and nominal GDP growth turned negative in the first half of 2015 and was slow to rebound, causing revenues to fall and expenditures to rise

Texas tea and the economy

4.4 4.3 4.44.4

1.6

4.9

4.4

0.9

4.1

0

2

4

6

2014 2015 2016

Update 2014 (PM Harper) Budget 2015 (PM Harper) Update 2015 (PM Trudeau)

%

Evolving Nominal GDP Growth Forecasts (2014 to 2016)

Sources: Government of Canada, various federal Budgets and Updates. Notes: 2014 value is not available for Update 2015, and was therefore set equal to the Budget 2015 value.

Revenue growth fell with oil prices

2.2

6.1

4.4

2.8

3.94.2

3.9

2.2

3.4

0

2

4

6

8

2014 2015 2016


%

Evolving Revenue Growth Forecasts (2014 to 2016)


Expense growth slowed, then rose

1.3

4.3

3.7

1.6

2.7

4.1

1.3

3.93.7

0

2

4

6

2014 2015 2016


%

Evolving Expense Growth Forecasts (2014 to 2016)


Budget balance slipped in response

-2.9

1.9

4.3

-2.0

1.4 1.71.9

-3.0

-3.9

-6

-4

-2

0

2

4

6

2014 2015 2016


billions of dollars

Evolving Budget Balance Forecasts (2014 to 2016)


ThankYou

RandallBartlett,CFA

ChiefEconomist

InstituteofFiscalStudiesandDemocracy

June 19,2018

©Copyright2018IFSDInstituteofFiscalStudiesandDemocracy.AllRightsReserved.

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2018 gn-pbo assembly: economic analysis (for fiscal policy)

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