The 2006 Federal Budget: Rethinking Fiscal Priorities

The 2006 Federal Budget: Rethinking Fiscal Priorities
Charles M. Beach, Michael Smart and Thomas A. Wilson (eds.), 2007 (Paper ISBN: 978-1-55339-125-8 $34.95) (Cloth ISBN: 978-1-55339-126-5 $85.00)

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Preface . . . iii
Charles M. Beach, Michael Smart and Thomas A. Wilson

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Session One: Budget Making and Budget Context

The 2006 Budget: Political Context
Andrew Coyne

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Lessons from the United States for Canadian Tax Policy Under the New Conservative Government
Joel Slemrod

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The 2006 Budget: Economic Context
Jack M. Mintz

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Session Two: Tax Alternatives and Evaluation of the Budget

The 2006 Federal Budget: A Quantitative Appraisal
Peter Dungan, Steve Murphy, and Thomas A. Wilson

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The Budget and Tax Reform: A Lost Opportunity?
Robin Boadway

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The GST Cut and Fiscal Imbalance
Michael Smart and Richard Bird

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Session Three: Panel on Fiscal Imbalance and Equalization

Turning a New Leaf: The Federal Strategy for Fiscal Arrangements Reform
Paul Boothe

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Fiscal Imbalance and Equalization: Possible End Games
Fred Gorbet

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When Fiscal Imbalance Becomes a Federal Problem
Alain Noël

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Session Four: Child Benefits and Daycare

Of Beer and Popcorn: Federal Policy on Child Care and Child Benefits
Kevin Milligan

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Rose Anne Devlin

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Session Five: Productivity Agenda and Competitiveness

Canadian Competitiveness
Richard Harris

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Session Six: Sustainability of the Fiscal Plan -- Wrap-Up Panel

Economists Need to Do a Better Sales Job If They Want Their Agenda Adopted in Budgets
Don Drummond

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Risk and Uncertainty in the Federal Budget
Gregor Smith

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Sustainability of the Fiscal Plan: Problems, Cheers, Boos and Hopes
William B.P. Robson

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Charles M. Beach, Michael Smart and Thomas A. Wilson

The 2006 federal budget was the first for a new Conservative government after 13 years of Liberal governments. This was also a minority government, elected under a prime minister from the West who had made some distinctive election promises and set out a clear set of fiscal priorities. The budget was a major platform for implementing a number of these promises and priorities. It thus represents an occasion to rethink fiscal priorities in Canada such as cutting the Goods and Services Tax (GST), addressing "fiscal imbalances" with the provinces, and implementing a different approach to child care and child benefits. The objective of the June 22–23, 2006, conference on the 2006 federal budget, and the papers and commentaries in this volume, is to better understand the directions of the new budget, their likely effects on the economy, and their implications for the budgeting process and future initiatives by the new administration.

Major Measures and Themes of the Budget

The general themes of the budget reflected both the circumstances of a new and minority government and the perspective and election promises of the Conservative leadership. The budget was devoted to implementing a number of major planks of the Conservative election platform. Its focus was largely on the short-term (two-year) horizon, and it sought to establish the fiscal credibility of the new government and a governing party, which had been out of power for so long. As several commentators in the following papers have noted, it was very much a political — rather than a straight economic — document, which aimed to see the Conservatives through a period of minority government to — hopefully, on their part — a majority in the next election.

The budget contained a number of tax reductions and credits that sought to put more money in the hands of taxpayers, who could then choose how to spend it — or not — as they saw fit. Not surprisingly, the budget was estimated to create a fiscal stimulus to the Canadian economy resulting largely from the expenditure-enhancing effects of the range of tax reductions, of which by far the largest was the GST rate cut. Greater reliance on individual choice and decision-making was also manifested in the new Universal Child Care Plan introduced by the budget rather than providing government subsidies to child care providers and increased government-funded daycare positions.

Entitled "Focusing on Priorities", the budget did not seek to be all things to all people, but outlined which of the major Conservative campaign promises would be tackled in 2006 and which postponed to 2007. While the budget did not directly address the so-called fiscal imbalance with the provinces — leaving this for the following budget — it was accompanied by a major budget background paper, "Restoring Fiscal Balance in Canada: Turning a New Leaf", which laid out a framework for a fiscal federalism for the government to follow. Overall, the 2006 budget had little to say directly on issues of competitiveness and economic performance. But it offered a commitment to a competitiveness agenda — again, with an eye toward the 2007 budget.

Finally, the 2006 budget and the process leading up to it changed the approach to budgeting in a number of regards from that of recent years. There was little reliance on medium-term fiscal targets, and the substantial "prudence factor" built into the fiscal projections of recent Liberal budgets was eliminated. Underestimated revenue forecasts had repeatedly led to "surprise" budgetary surpluses followed by year-end expenses and ad hoc expenditure growth that had not passed through the standard budget-debate process. The 2006 budget sought to get rid of such end-of-year activity and revert to more conventional budgeting processes. This could lead to greater transparency and accountability in the budgetary process, as William Robson points out in his summary remarks.

More specifically, the 2006 budget included a one-point reduction in the federal GST effective July 1, 2006. It provided a phased-in reduction in the lowest personal income tax rate and an increase in the basic exempt amount of income for the personal income tax, but these were actually smaller than the PIT reductions commited by the previous Liberal government in its November 2005 fiscal update. It also included a phased-in reduction of two points in the general corporate income tax rate, and it eliminated the corporate income surtax both of which were originally committed by the previous government. The budget also accelerated the elimination of the federal capital tax. A new Canada Employment Credit for employees' work expenses was introduced as a tax credit on employment income with a phased-in rising upper limit. The budget contained some favourable tax treatment for small business and for tradespeople's work expenses. It also gave more generous tax treatment to post-secondary students. Expenditures were increased for the Canadian military and national security activities. Additional funding was also provided to provinces and territories to help support post-secondary education infrastructure investment and to increase direct support for R&D investment.

Economic Evaluation of the Budget and Themes of the Conference

There was a surprising degree of agreement at the conference on the general evaluation of the budget. It was thought that the budget was generally quite successful in accomplishing the goals or objectives of a leadership that wanted to convey its priorities and do what it said it would do. The budget was indeed pretty straightforward and transparent. But as pointed out by Don Drummond and several others, the budget was more a political than an economic document because some of the choices it made reflected political favour rather than most economists' recommendations. The prime example here was the one-percentage-point cut in the GST rate. Most economists would argue that it is better to tax consumption rather than people's savings, so if taxes are to be cut, it is preferable to reduce general income tax rates, so as to reduce taxes on both savings and consumption, rather than reduce taxes on consumption alone. But the election promise to cut the GST was evidently a clever political strategy aimed at distinguishing the Harper team from past Liberal (and Conservative) governments. Politics may trump economics in election campaigns — and in minority Parliament budgets as well.

More broadly, several commentators noted that the budget represented a missed opportunity given the substantial fiscal room available. The budget could have reduced taxes on savings and investment, or income tax rates cut, rather than cut the tax rate on consumption. Robin Boadway expressed the need to use the occasion for some fundamental tax reform in Canada, something that hasn't occurred in quite a long time. Michael Smart and Richard Bird argued, however, that cutting the federal GST rate could serve as an opportunity to re-balance the federal-provincial tax structure and make Canada's overall tax structure more rational. It will remain for later budgets to see whether this occurs or whether the GST cut is simply a stand-alone measure. Many economists such as Don Drummond expressed disappointment that the budget did not advance the cause of sustainable economic improvement or noticeably seek to improve Canada's economic performance. But this was largely attributed to the general public (and hence politicians) essentially not buying into the economists'advice. The latter clearly need to do a better job of convincing the former of the potential long-run benefits of such an economic agenda as so far, this has not really caught the public's attention.

Overview of the Papers

The first three contributions in this volume provide some political and economic background to the 2006 federal budget.

In "The 2006 Budget: Political Context", Andrew Coyne points out that the budget was not a coherent conservative budget but quite pragmatic — "a budget a Liberal finance minister could have happily delivered". He reviews the major Conservative campaign promises and shows how the budget was very much devoted to implementing the major fiscal and economic planks of the Conservatives' election platform — "to reassure their base and yet avoid alarming the broader public". In contrast to recent budgets, though, the Conservative government has largely chosen not to spend more but to tax less and make greater use of tax credits to deliver programs such as the new Universal Child Care Plan. At the same time, the government's budgetary choices show internal contradictions and have often boxed the government in and gone against a number of traditional conservative principles. While preferring smaller, less intrusive government, for example, the Conservatives are actually spending more than the previous Liberals. The off-budget foundations that the Liberals had made ample use of have been brought back onto the government books — as an improvement in clarity and transparency. But then the Conservatives carried on the previous Liberal approach of committing substantial future spending — for example, on post-secondary education. The budget acknowledges a fiscal imbalance with the provinces, but seems rather vague about what the government plans to do about it. Indeed, the budget background paper "Restoring Fiscal Balance in Canada" reads as if what the new government means by restoring balance is more akin to the traditional conservative idea of disentangling federal spending from areas of provincial jurisdiction. Coyne thinks that the subsequent negotiations for a new fiscal federalism will likely involve the federal government seeking a quid pro quo from the provinces to improve the general workings of the Canadian economic union, such as a reduction of provincial trade barriers and improved labour mobility.

Joel Slemrod in his paper "Lessons from the United States for Canadian Tax Policy under the New Conservative Government" inquires about what lessons can be drawn for Canada from recent US tax policy changes and tax policy thinking. He focuses his remarks on a US dalliance with fundamental tax reform in the form of a presidential commission and on the interaction between tax levels and spending levels in the United States. This commission was charged with recommending alternative ways of structuring the federal tax system that would remain revenue-neutral. The commission's report, delivered in November 2005, offered two alternative reform proposals — "an income tax framework with generous tax-preferred savings accounts ... and a consumption tax framework with tax on capital income flows". Both proposals would repeal the alternative minimum personal income tax, among many other reforms, but they also rejected a value-added tax (VAT) such as the GST in Canada as being too "hidden". The general response to the report was not enthusiastic, perhaps because entrenched tax constituencies preferred to keep their current entitlements, and consequently, the commission's proposals are not likely to be adopted. A cautionary note for Canada that may come out of this experience is to be wary of adding "bells and whistles" to our current personal income tax system.

The second area of Slemrod's comments on the recent US experience has to do with the huge US fiscal deficit. If it is viewed that major tax cuts are a way of "starving the beast" and forcing smaller government expenditures, this has resoundingly not worked in the United States, because federal expenditures have failed to decline. The result is very large deficits that lower national savings at a time when a large number of people are getting older and will be easing into retirement and facing higher health costs. Canada should seek to avoid such a long-run fiscal imbalance.

The paper "The 2006 Budget: Economic Context" by Jack Mintz also emphasizes the budget's intent to implement the promises of the Conservatives' election platform and to create trust in the new government. "This budget was more about winning a majority government in the future than responding to critical economic issues." Mintz reviews three economic issues that federal budgets will need to address. The 2006 budget did little to address the issue of Canada's international competitiveness or to improve productivity. The aging Canadian workforce and impending baby boom retirements raise problems of savings, pensions, labour shortages, and again, productivity, which will also have to be addressed in future budgets. Finally, fiscal imbalance will have to be addressed sooner rather than later to stop Canada transforming itself from a stable into an unstable federation.

The next three contributions in this volume evaluate the macroeconomic effects of the 2006 budget and examine alternatives to the current tax structure in Canada.

In "The 2006 Federal Budget: A Quantitative Appraisal", Peter Dungan, Steve Murphy and Tom Wilson use the FOCUS macroeconomic model of the Canadian economy at the University of Toronto's Institute for Policy Analysis to evaluate the overall fiscal impacts of the budget. The Budget Plan 2006 indicates that overall, the fiscal measures implemented, including those committed by the previous government in November 2005, provide a large fiscal stimulus of $15.2 billion in 2006–07 and $16.1 billion in 2007–08. Dungan et al. estimate that the impacts of just the new measures introduced in the 2006 budget, however, provide a more modest fiscal stimulus of $6.6 billion in 2006–07 and $7.4 billion in 2007–08. "Tax reductions account for most of the fiscal stimulus — $4.5 billion in 2006–07 and $6.0 billion in 2007–08.... Of the revenue reduction, the lion's share is accounted for by the one-percentage-point cut in the ... GST" — $3.6 billion in 2006–07 and $5.2 billion in 2007–08. When no monetary response to this stimulus is built in, the authors estimate that real GDP will increase by 0.3% in 2006–07 and by 1.1% in 2007–08, CPI inflation is reduced by 0.5 and 0.2 percentage points respectively, and the unemploy-ment rate is reduced by 0.1 and 0.6 percentage points respectively as well. With a monetary response built in, the 2007–08 figures are only slightly dampened.

Robin Boadway's paper on "The Budget and Tax Reform: A Lost Opportunity" notes that while the budget contained a large number of tax measures, none of them represented fundamental tax reform — which the Canadian tax system needs and has not seen for a long time. Boadway considers what kind of tax reform would have been suitable. He begins with a discussion of some of the main problems facing the current Canadian tax system, such as that capital income is taxed too highly, different forms of asset income are taxed differently, the taxation of business income is seriously compromised, and the current system of provincial sales taxes imposes serious inefficiencies.

Boadway then sets out a "tax reform manifesto" of four proposed major tax reforms for Canada. The first reform would involve a dual income tax system that has different rate structures for capital and non-capital incomes — capital income with a proportional tax rate and non-capital income subject to a progressive tax rate structure — similar to what has been adopted in the Nordic countries. The second proposal is a reform of the sales tax system by replacing the federal GST and the system of provincial retail sales taxes (RSTs) with a national VAT combined with an explicit revenue-sharing agreement between the feds and the provinces — similar to that used in Australia. Third, the system of business taxation should be rationalized to address major shortcomings, particularly with respect to the tax treatment of the resource sector. The fourth and possibly quite contentious proposal "would ... maintain fiscal balance in the federation by retaining and consolidating the federal share of the tax room" rather than turning over tax points to the provinces. Boadway argues that there is much to be gained from such an agenda of fundamental tax reform for Canada.

Michael Smart and Richard Bird, in their contribution, "The GST Cut and Fiscal Imbalance", argue the position that the government's commitment to reducing the GST rate may actually serve as an opportunity to re-balance the federal-provincial tax structure in Canada more rationally by working out an arrangement to harmonize the provincial RSTs and the current Harmonized Sales Tax (HST) to the federal GST tax base. The authors broadly outline Canada's current fiscal arrangements and then discuss how consumption taxation — particularly in the five provinces that have retail sales tax systems — can best be shifted or realigned from Ottawa to the provinces. The latter's "badly broken" RST systems can then be reformed by moving to a broader value-added tax base like the GST, but allowing for different tax rates across provinces — including the HST provinces. Among the consequences of such a change would be large reductions in the statutory tax burdens on business, and especially business capital inputs, thus offering improved incentives for business investment. After the introduction of the HST in 1997, for example, investment per capita in the reforming provinces rose relative to those provinces that retained their RSTs. The equalization system would then be adjusted through reduced transfers to accommodate such a shift in taxation.

Paul Boothe, in his remarks on "Turning a New Leaf: The Federal Strategy for Fiscal Arrangements Reform", addresses the government's budget background paper "Restoring Fiscal Balance in Canada: Turning a New Leaf" and reviews and evaluates its arguments. The budget paper "outlines the framework within which the debate and ultimate reform of fiscal arrangements would take place". It seeks to change the direction of the federal government on the fiscal imbalance issue, articulate the quid pro quo for fiscal arrangement reform in order to enhance the economic union, and set out benchmarks for success and the process the government would follow. The three areas of quid pro quo identified are better recognition of professional and technical qualifications across provinces and for new immigrants, more common security regulation, and greater tax harmonization across provinces with separate RSTs. Benchmarks for success would include, for example, enhanced accountability, fiscal responsibility, and predictability of transfers. Boothe considers three possible ways that this process could unfold, and he thinks that "the new government is on track to significantly alter Canadian fiscal arrangements".

Fred Gorbet was a member of the federal Expert Panel on Equalization and Territorial Formula Financing. His contribution, "Fiscal Imbalance and Equalization: Possible End Games", offers some personal observations on the fiscal imbalance issue and on the panel's conclusions (the O'Brien Report), and it suggests two possible outcomes of the fiscal imbalance discussions. Gorbet believes that the fiscal imbalance issue is real and needs to be addressed in a comprehensive manner. "[The panel's] overriding concern was to move Equalization away from ad hoc agreements, or ‘treaty federalism', and return to a program that is based on a set of principles, that has a clear formula supporting it, that is transparent, and that treats all provinces identically." One of the principles underlying the panel's work is that of equity: essentially, that no province receiving equalization payments should have a higher fiscal capacity than a province (such as Ontario) not receiving payments. The panel thus recommended that a cap on equalization payments be introduced to give effect to this principle. It estimated that by 2007–08, this cap will limit payments to Saskatchewan and to Newfoundland and Labrador.

The report has generally been well received by the provinces and by public commentators, and Gorbet thinks that any fiscal arrangements will, consequently, likely be modelled along the lines of the report. What he would like to see as an eventual arrangement is the core element of the report being adopted, along with the federal government transferring GST points to the provinces, a dollar-for-dollar reduction in the Canada Health Transfer (CHT) and Canada Social Transfer (CST) to the provinces, and some form of harmonization of the provincial RSTs with the GST. But what he expects to see adopted is a package of core elements of the report along with additional post-secondary education transfers to help get more money to Ontario.

The third contribution to this general discussion of fiscal imbalance is by Alain Noλl, one of the early proponents of the concept. In "When Fiscal Imbalance Becomes a Federal Problem", Noλl reviews the recent political history of initiatives to address fiscal imbalance in the federation. The initiator of the fiscal imbalance debate was the 2002 report of the Quebec Commission on Fiscal Imbalance. It saw that the "vertical fiscal gap between the two orders of government was such that Ottawa accumulated surpluses, while the provinces had difficulties maintaining balanced budgets; transfers proved insufficient, unstable, and often conditional; and the federal government often used its fiscal capacity to intervene in provincial areas of jurisdiction. As a result, the country became less and less true to the federal principle, social programs were poorly financed, and transparency and accountability were lacking". The commission proposed abolishing the Canada Health and Social Transfer (CHST) and replacing it with additional tax room for the provinces, such as leaving all the GST to the provinces. The federal government's reaction was that such an imbalance was not possible "since all governments had access to all sources of revenue".

In 2005, the Council of the Federation set up an Advisory Panel on Fiscal Imbalance, which the following year recommended an increase in the CHT and the CST, a new Tax Point Adjustment program, and a major reform of equalization (based on a ten-province formula that takes full account of natural resource revenues). However, the election of the Conservatives to government significantly changed the message coming from Ottawa. They set up the Expert Panel on Equalization and Territorial Formula Financing, which reported in May 2006. Details of this report have already been reviewed in the preceeding chapters by Boothe and Gorbet. A significant feature of the report is the recommendation for only a 50% rule for natural resource revenues. "... the panel identifies the deficiencies of the current equalization program and proposes solutions that are coherent and in many ways in line with what is proposed in the earlier documents. Because it insists on the autonomy principle, on the unconditional character of equalization, and on provincial prerogatives regarding natural resources, this report also brings the discussion closer to the perspective first put foward by the [original Quebec] Commission on Fiscal Imbalance."

The next three chapters examine the specific issues of the budget's new Universal Child Care Plan (UCCP) and the extent to which the budget advances a Canadian competitiveness and productivity agenda.

In his paper, "Of Beer and Popcorn: Federal Policy on Child Care and Child Benefits", Kevin Milligan analyzes the government's new child care initiative from the perspective of efficient private and social decision-making. The budget's UCCP makes good on one of the Conservatives' election promises. The plan calls for a straight transfer of $100 per month to be paid to the parents of each child up to age five. It essentially replaces the Canada Child Tax Benefit of $249 per year. The plan also involves a commitment to assist in creating up to 25,000 new child care spaces per year. This plan contrasts with the previous Liberal government's arrangement of $1 billion per year in a specific block grant to the provinces for child care programs (essentially more organized daycare spaces), with differing agreements across provinces. Milligan sets out an economic-choice framework for analyzing under what circumstances and to what end the government should involve itself in child care decisions. Of principal focus are the roles of externalities, income constraints, and information inadequacies in family child care decision-making. His "analysis strongly suggests that parents' information and their capacity to make effective choices is central to determining which types of policies are desirable and is the determining difference between the two main party positions.... Liberal policies are more justifiable if one thinks parents are poorly informed or equipped to make decisions about their children, while Conservative policies are more justifiable if not".

Rose Anne Devlin, in her "Comments" on the Milligan paper, takes issue with Milligan's framework of analysis and hence with his conclusions. The standard economics debate about the choice between money versus in-kind transfers is meaningful for an equivalent-valued in-kind subsidy. But $100 per month per young child is not close to being an equivalent value of a subsidized daycare space. Furthermore, child care is linked with a family's labour market decision, particularly of the mother. Parents seeking the best option for their child may find that $100 per month is simply not enough to really affect their decision. And for families living in poverty, the main option allowing the mother to contribute to household earnings is a subsidized child care space. "I would claim that the substantive difference across the two policies is that the former provides a real daycare alternative to low-income households, while the latter does not."

In the chapter "Canadian Competitiveness", Richard Harris considers Canada's major challenges with respect to competitiveness, discusses what may be going on with respect to Canadian productivity growth, and then reviews some specifics of the 2006 federal budget that may affect Canada's competitive position. Harris identifies three major challenges affecting Canada's competitiveness: a (possibly permanent) increase in real commodity prices, especially energy; a shift in US growth and trade patterns that is adjusting to a lower dollar and reduced consumption levels and may possibly turn protectionist; and the advent of a changed mechanism by which productivity gains have distributionally quite different real income effects, dramatically favouring the very top end of the income distribution. Among the factors contributing to this changed productivity growth paradigm are the increasing contestability of labour markets, stronger protection of innovations and innovation rents by incumbent firms, and the increased global market size associated with globalization and the revolution in information and communication technologies. He concludes, "Unfortunately, if I am correct, the trade-off between growth and inequality may have taken a turn for the worse, both at the level of the individual and across national economies." Harris reviews a number of measures in the 2006 budget for their effects on productivity in Canada and finds that overall, the budget had relatively little to say on the issue of competitiveness, but generally its effects were in the right direction.

The final three contributions contain panelists' comments from the wrap-up panel of the conference, paying special attention to the broad sustainability of the 2006 budget's fiscal plan. Don Drummond leads off with the sentiment "Economists Need to Do a Better Sales Job If They Want Their Agenda Adopted in Budgets". He argues that the budget was more a political than an economic document and what made it "popular" were precisely the tax breaks — such as the one-percentage-point cut in the GST rate — that most economists criticized as inefficient. What he most liked about the budget was that it dropped the economic prudence factor so that smaller unanticipated surpluses can arise and fiscal activities are more transparent and accountable, the government's commitment to a competitiveness and productivity agenda for the next year's budget, and the framework laid out for improvements to fiscal federalism. Items on economists' wish list to reform — such as a move to value-added sales taxes by several provinces, tax incentives to help protect the environment, and Employment Insurance reform — are tough sells to the public when there is no crisis. Economists will have to come up with a more convincing sales job before politicians will take notice.

Gregor Smith's piece addresses issues of "Risk and Uncertainty in the Federal Budget", and it comments on the risk and uncertainty associated with the macroeconomic forecasts involved in the budget. He briefly reviews macroforecasting results of the effects of the budget by the major banks in Canada, the Bank of Canada, and the IMF and OECD. He notes that the risks in the macro projections underlying the budget (such as, a rise in inflation as well as interest rates) are correlated, but the analysis in the budget documents does not seem to allow for this correlation. He also questions how meaningful it is for the budget to provide point forecasts for its surplus. It might be better to use information about the dispersion in private-sector forecasts for macroeconomic variables as an estimate of uncertainty in these variables, and this could then be translated into confidence intervals for federal revenues and the budget surplus. The budget also mentions several external risks (such as a fall in US housing prices or a rise in the Canadian dollar), but it does not discuss their implications for the budget. This contrasts with the 2006 Ontario budget, which includes quite a detailed discussion on this topic. "It is hard to avoid the conclusion that the [budget's] ... forecasting exercises are somewhat half-hearted."

In "Sustainability of the Fiscal Plan: Problems, Cheers, Boos and Hopes", William Robson expresses a criticism of federal budgeting practices over the previous decade. In the name of avoiding budget deficits, the government underestimated the amount of fiscal room available by using misleadingly low forecast numbers for revenues, then padding expenditures with economic prudence and contingency reserves. These practices resulted in "surprise" surpluses, which were then largely converted into additional year-end expenditures, even though they had not gone through the evaluation process as part of the original budget — a process that is less than ideal for overall transparency and accountability. And some of the end-of-year numbers involved here were really quite large. He is encouraged that the 2005–06 fiscal year just ended "marks a welcome break from a pattern of ad hoc growth in federal spending". He hopes that the new government will resist the pressure for such ad hoc end-of-year spending. He makes recommendations for two changes to the fiscal budgeting process that he believes will improve the chances for a sustainable fiscal framework. He would like to see the formal acknowledgement of risk and uncertainty in the budget's fiscal projections, say through use of probabilistic forecasts, rather than the approach of padding expenditures with contingency funds and low-balling prospective surpluses. He also calls for some independent agency other than the Department of Finance (such as, a Parliamentary Budget Officer) to lay out the economic and fiscal backdrop for the budget's fiscal plan.

As of this writing, the Conservatives have presented their second budget — for 2007 — and there does not appear to be a combined effort by the Opposition to defeat the Harper government any time soon. So the 2006 budget may be the beginning of a new fiscal regime and a new set of priorities and attitudes in Ottawa that will carry on for some while yet.

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