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 PBO’s purpose is less clear. In theory, it could provide independent estimates of the federal deficit.

But the deficit’s size depends more on policy decisions than on forecasting.  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 PBO’s Economic and Fiscal Assessment and the government’s Economic and Fiscal Statement was not a discrepancy in underlying forecasts. The government’s document simply proposed austerity measures to cover the deficit forecast by the PBO.  While Marc was undoubtedly correct that the PBO should have been less optimistic in its forecasts, we are now in unchartered economic waters that make forecasting inherently more uncertain than before.

Another challenge to the PBO’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 the PBO should report to the Parliamentary Librarian, who in turn reports to them, and 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 PBO’s scope, although the Speakers make a valid point that scrutinizing ongoing government programs duplicates the Auditor General’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.  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 last couple of Economic Statements have projected 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.”

UPDATE (Jan. 19): Today’s Ottawa Citizen features a letter from the Parliamentary Budget Officer and a good report on efforts to muzzle him.

5 comments

  • This is a tough issue for the left. Anyone with half a macroeconomic model in their head understands that tax cuts are effectively a spending program (how effective is open to debate). 95% of the population does not understand tax cuts in these terms. The right has overwhelming populist support on their side. Even if you could get the PBO to carry out the cost benefit analysis via a model that demonstrated the relative ineffectiveness of tax cuts as a spending program it would fall on deaf populist ears. “It is my money”…bang for macro-economic buck is a hard sell.

  • Eric’s post under ‘cutting to zero’ got me thinking about targetted/specific approaches again, and the discussion here gives me the idea that maybe we need specific approaches to tax, and to get a better handle on private finance’s Pandora Box.

    Like, where the heck did all those bailout billions actually end up? And the crony Harperites’ further projected tax gifts to banks, finance and insurance co’s ? Maybe the PBO can track where some of the existing corporate handouts have gone, exactly. Maybe the data forthcoming from such a project will give us a better sense of the real state of the economy. (Hint: once it goes into the financiers’ Pandora’s Box we’re not able to find out where our tax dollars go because of privacy law, subject to completely non-free trade deals.)

    And the Liberal attempt to further stream reports away from direct public scrutiny is pathetic. Same with limiting the coverage of scrutiny.

    Where’s the scrutiny of what happens with our tax dollars after they’re given away to the same financiers that created the collapse?

  • Travis, I largely agree with you. But we need to start somewhere and formally evaluating tax cuts as rigorously as new spending would not be a bad starting point.

    I am more optimistic because the populist case for tax cuts has in fact weakened. At the end of the 1990s, it was unassailable. Even an NDP government was delivering massive, regressive, across-the-board tax cuts.

    Today, I think that there is more public consciousness that tax cuts reduce the funds available for other important things. Not only have right-wing parties had to campaign on more than just tax cuts, but left-wing parties have made headway by explicitly campaigning against them.

    The federal NDP recently won its second-most seats ever through a campaign focussed on rejecting Harper’s corporate tax cuts. US Democrats have been successful in critiquing the Bush tax cuts. Nancy Pelosi is calling not for allowing those tax cuts to expire in a couple of years, but for passing a bill to repeal them right away.

  • Erin,

    I generally agree with you that it is now possible to talk against tax cuts without sounding instantly like a kwack.

    But it really depends on which taxes and which groups are going to lose out on the proposed tax cut. The perception is that corporate taxes are paid by corporations and hence it is not public suicide to suggest that corporations pay their fair share. This was especially true when profits were high, corporations had lots of undistributed profits stashed away. Try as they could, right of center economists could not convince the general public that the price of their chocolate bar was going to go up or down with level of corporate taxes. The NDP argument against corporate tax cuts came during at at the end of the orgy of announcements about record profits.

    However, when Canadians were polled on whether or not they thought income taxes should be part of the stimulus package a good number, a majority I think, said yes. And the state of Canadian household finances suggests that any tax-cut would help service their private debt loads. Now try to make the argument that in the aggregate those tax cuts will be better spent on government spending programs.

    So I gues I would ask you if you think the NDPs position would have been as successful had they campaigned against middle class tax cuts?

    The US is a little different. Two wars and two huge deficits give politicians more room (and necessity) to argue that for the good of the nation tax cuts are counterproductive. But even Obama had to frame his tax package as redistributing from the rich to the middle class. That is to raise taxes he had to cut taxes.

  • I agree that the distribution of tax cuts affects their popularity. But the distribution of tax cuts also affects their actual merit. A dollar of middle-class tax cuts is less objectionable than a dollar of tax cuts for stock-market income or corporate profits.

    Of course, the total dollar-cost of any given tax cut also matters. The projected annual revenue losses from Harper’s tax cuts were $11.2 billion of personal income tax, $14.2 billion of GST and $14.8 billion of corporate income tax. Therefore, the corporate tax cuts were not only least equitable, but also most expensive.

    You are undoubtedly correct that the NDP would have had less success campaigning against middle-class tax cuts. However, this point is somewhat moot because it was entirely appropriate for the NDP to focus its campaign against the corporate tax cuts.

    The fact that Canadians are not lining up to voluntarily pay more taxes for more public services (although maybe they are) should not dissuade us from mounting public critiques of the most objectionable tax cuts.

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