A Job for the Parliamentary Budget Officer?
The Parliamentary Budget Office (PBO) was established in response to the systematic underestimation of federal budget surpluses. Its job was to provide independent estimates of the available surplus to keep Finance Canada honest ( “truth in budgeting” as the Conservatives said at the time).
With the federal government headed into deficit, the PBOâ€™s purpose is less clear. In theory, it could provide independent estimates of the federal deficit.
But the deficit’s sizeÂ depends more on policy decisions than on forecasting.Â To project the size of deficits in the upcoming budget, the key question is what size of stimulus package the government will enact not what forecasting assumptions it will employ.
The main difference between the PBOâ€™s Economic and Fiscal Assessment and the governmentâ€™s Economic and Fiscal Statement was not a discrepancy in underlying forecasts. The governmentâ€™s document simply proposed austerity measures to cover the deficit forecast by the PBO.Â While Marc was undoubtedly correct that the PBO should have been less optimistic in its forecasts, we are now in unchartered economic waters that makeÂ forecastingÂ inherentlyÂ more uncertainÂ than before.
Another challenge to the PBOâ€™s mandate came from the (Liberal) Speakers of the Senate and House of Commons shortly after its inaugural report on the cost of the (Liberal) war in Afghanistan. They argue that theÂ PBO should report to the Parliamentary Librarian, who in turn reports to them, andÂ oppose the PBO reporting publicly. Last week, the (Liberal-appointed) Parliamentary Librarian publicly endorsed those views.
The Speakers also contend that the PBO should only assess “new initiatives” rather than “existing or continuing activities” (e.g. Afghanistan). This interpretation would severely limit the PBOâ€™s scope, although the Speakers make a valid point that scrutinizing ongoing government programs duplicates the Auditor Generalâ€™s role.
Indeed, there is also a large apparatus within government (most of the Treasury Board Secretariat plus parts of other central agencies) devoted to scrutinizing the cost-effectiveness of every dollar of public spending. But there is no scrutiny at all, either within government or by the Auditor General, of the cost-effectiveness of tax cuts.
The same situation prevails south of the border.Â Â A recent Paul Krugman column refers to “the demand of many politicians for proof that the benefits of the proposed public spending justify its costs – a burden of proof never imposed on proposals for tax cuts.”
This void strikes me as a useful one for the PBO to fill. It could provide independent cost-benefit evaluation of ongoing and proposed tax cuts.
The lastÂ couple ofÂ Economic Statements have projectedÂ annual federal expenditures rising by about $50 billion from 2006-07 through 2012-13. By comparison, the tax cuts enacted since 2006 had a projected annual cost of $40 billion by 2012-13.
Whereas about half the spending increase simply reflects inflation, every dollar of tax cuts reflects a deliberate policy decision. Even though the economic crisis will likely increase government spending and reduce the cost of existing tax cuts, the tax cuts may still be as large as inflation-adjusted spending increases and are certainly large enough to warrant significant scrutiny.
Although I do not expect anyone to hike taxes during the recession, appropriate tax rates will be needed to prevent Canada from carrying a structural deficit into the recovery. It is certainly not too soon to assess whether particular tax cuts provided “bang for the buck” or “money for nothing.”