Parliamentary Budget Office misses the mark
Canada now has a Parliamentary Budget Office to make budget projections for the Minister of Finance. This office in no small part owes its existence to the CCPA’s Alternative Federal Budget, which under Jim Stanford’s guidance, was the first and only voice to call the then-Liberal government on its excessively prudent (read: wrong) budget projections, and was so for years. Only later on did others, like the major banks, get in on the game and they then crowded out the CCPA on the media stage. Nonetheless, such budgeting practices did become frowned upon and now we have the PBO housed in the Library of Parliament.
However, based on their first report, I am not particularly inspired that this office will speak truth to power. Its Economic and Fiscal Assessment would appear to have been drafted in a windowless room without an internet connection, as if none of the chaos in the financial markets and economic calamity worldwide has seeped through. The PBO report got a few major press stories for its projection of deficits in 2009/10 and 2010/11 but I have to say their numbers are way too conservative.
This is largely because of their underlying economic assumptions. They call for 0.6% growth of real GDP in 2008 in their base case and 0.5% in 2009, roughly equivalent to the Bank of Canada and private sector forecasters (all of whom completely missed any of this looming crisis as of the start of 2008). To put this in perspective, Canadian GDP growth was essentially zero in the first half of the year, so a 0.6% projection is actually a call for recovery to a 1% annualized rate for the second half. And like the rest of the advanced countries there is going to be a recession in 2009, if it has not already started.
To be fair, the PBO has a “low scenario” of a 0.3% drop in real GDP in 2009 but this is rather small. We need to start thinking about what happens if GDP drops by 1-2% next year. The PBO needs to start dealing with reality, fast.
Translated into the status quo budget projections, the PBO estimates a deficit of $3.9 billion (-0.2% of GDP) in 2009/10. This is incredibly small given the economic winds Canada is facing. In their low scenario, the deficit rises to $13.8 billion or 0.9% of GDP, which is a better guess, but again not very helpful given that they do not factor in what a real recession would look like.
But help is on the way! The AFB’s own Economic and Fiscal Update, which has proven more accurate than government and private sector forecasts over the past decade, will be released early next week.
UPDATE (Nov. 25): The Alternative EFU is out.