Icgfm Budgeting In Times Of Crisis A Canadian Perspective

Budgeting in Highly Uncertain Times: The Canadian Budget Officer’s Perspective ICGFM Conference May 20, 2009 Kevin Page, Parliamentary Budget Officer

Presentation Outline • Background on Canada and the PBO • PBO Analysis of Canada’s 2009 Budget • Lessons Learned and Longer‐Term Considerations 2

General Background on Canada 3

Canada • Economy: $1.6 Trillion (≈$1.4 USD) • Population: 33 million • Geographically‐dispersed country • Relatively decentralized federation 4

Canada’s Federal Government Westminster‐style Parliamentary democracy: • Executive branch: establishes priorities, proposes measures and runs programs • Legislative branch: broad oversight and management of public funds, Parliament’s “power of the pursequot;

Typical Canadian Budget Cycle 1. Economic and Fiscal Statement o September/October o Sets economic and fiscal stage for public consultations 2. Budget o February/March o Presents executive’s fiscal plan to Parliament 3. Appropriations Process o Main Estimates (February) + Supplementary Estimates (in‐year) o Departmental reporting documents: (RPPs; DPRs)

General Background on Canada’s Budget Office 7

Context for Creating the PBO • Large, recurrent, unplanned budget surpluses • High profile cost over‐runs on major capital projects • Public demand for increased transparency and accountability

Parliamentary Budget Officer (PBO) Created: March 2008 Mandate: Independent analysis to Parliament on: • Canadian economy • Federal budget issues: • Nation's finances • Government estimates • Financial costing 9

Some Challenges Facing the PBO • Limited resources to fulfill a broad mandate • Information asymmetry between the Government and Parliament • Providing scrutiny and challenge while being perceived as non‐partisan

PBO’s Operating Principles I. Independence Advice must be independent, objective and non‐partisan II. Open Publishing Model Fully disclose analysis to Parliamentarians and public III. Collaboration External experts peer‐review major reports IV. Priority‐Setting Research plan reflects priorities of parliamentarians and committees, focusing on risk and material issues

Context for Canada’s Stimulus Budget 12

Budget Context • Sept 2008: Major global financial shock amplifies existing weakness in Canadian economy • Limited scope for further conventional monetary stimulus puts onus on discretionary fiscal policy • Political situation: Nov 2008 economic statement; Dec 2008 prorogation 13

Weakened external environment: Significant downgrading of global economic forecasts IMF 2009 Real GDP Growth Forecasts per cent 4 World* U.S. 3 2 1 0 ‐1 ‐2 April 2008 November 2008 January 2009 Source: IMF * Based on purchasing‐power‐parity weights 14

Impacts: Stock market reversal; commodity price correction (and therefore Canadian dollar depreciation) Commodity Prices & S&P/TSX Composite Index CAN-U.S. Exchange Rate 1975 = 100 1982‐92 = 100 cents U.S. 16000 130 110 120 Bank of Canada Commodity 14000 Price Index (left axis) 100 110 12000 90 100 10000 80 90 CAN‐U.S. exchange rate (right axis) 70 8000 80 6000 70 60 2002 ‐ 2003 ‐ 2004 ‐ 2005 ‐ 2006 ‐ 2007 ‐ 2008 ‐ 2009‐ 2002 ‐ 2003 ‐ 2004 ‐ 2005 ‐ 2006 ‐ 2007 ‐ 2008 ‐ 2009‐ Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Source: Haver Analytics 15

Commodity price strength supported Canadians’ purchasing power on the way up… Annual Growth of Real GDP and Real GDI Percent Real GDI* 5 Real GDP 4 3 2 1 0 2002 2003 2004 2005 2006 2007 2008 *Note: Real Gross Domestic Income (GDI) = Nominal GDP deflated by the final domestic demand price index Source: Statistics Canada and PBO calculations 16

… suggesting recent commodity price drop will hit Canadians’ purchasing power particularly hard Quarterly Growth of Real GDP and Real GDI Percent 10 5 0 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 ‐5 ‐10 Real GDI ‐15 Real GDP History PBO monitoring ‐20 Source: Statistics Canada and PBO calculations and monitoring 17

Employment began falling sharply in November 2008 Quarterly Change in Employment Thousands 200 150 100 50 0 ‐50 2002‐Q1 2003‐Q1 2004‐Q1 2005‐Q1 2006‐Q1 2007‐Q1 2008‐Q1 2009‐Q1 ‐100 ‐150 ‐200 ‐250 Source: Statistics Canada’s Labour Force Survey and PBO monitoring 18

Increased uncertainty, declining wealth and income prospects have shaken confidence Consumer Confidence Business Confidence index, 2002 = 100 index, 2002 = 100 105 105 95 95 85 85 75 75 65 65 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 02 03 04 05 06 07 08 09 04 05 08 09 02 03 06 07 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Source: The Conference Board of Canada 19

These developments significantly weakened Canada’s economic outlook Canadian 2009 Real GDP Growth Forecasts per cent 3 2 1 0 ‐1 Budget 2008 2008 Economic and Fiscal Statement Budget 2009 Feb 2008 Nov 2008 Jan 2009 Source: Department of Finance Canada 20

PBO Federal Budget 2009 Analysis 21

Budget 2009 – Canada’s Economic Action Plan • Designed largely as economic stimulus • Worth $39.9 billion over 2009‐2010 (2.5% of GDP) • Estimated impacts: raise real GDP by 1.9%; create/maintain 189,000 jobs by end of 2010 • Guiding principles: timely, targeted, and temporary • Plan to return to budget surplus in 2013‐14 22

PBO Analysis of Budget 2009 • Fiscal planning assumptions • Measuring the size of the stimulus • Assessing measures relative to principles • Clarifying the current fiscal targets • Monitoring budget implementation 23

Budget 2009 projected temporary deficits with a return to surplus by the end of the forecast horizon Budgetary Balance $ billions 10 Budget 2009 status quo 5 +0.2 0 ‐5 ‐10 ‐15 ‐20 ‐25 ‐30 ‐35 2008‐09 2009‐10 2010‐11 2011‐12 2012‐13 2013‐14 Source: Budget 2009 24

Budget 2009 projected temporary deficits with a return to surplus by the end of the forecast horizon Budgetary Balance $ billions 10 Budget 2009 status quo 5 +0.2 PBO January 2009 status quo 0 ‐5 ‐10 ‐15 ‐20 ‐25 ‐30 ‐35 2008‐09 2009‐10 2010‐11 2011‐12 2012‐13 2013‐14 Source: Budget 2009, Office of the PBO 25

Budget 2009 projected temporary deficits with a return to surplus by the end of the forecast horizon Budgetary Balance $ billions 10 Budget 2009 status quo Budget 2009 5 +0.2 PBO January 2009 status quo 0 ‐5 ‐10 ‐15 ‐20 ‐25 ‐30 ‐35 2008‐09 2009‐10 2010‐11 2011‐12 2012‐13 2013‐14 Source: Budget 2009, Office of the PBO 26

Despite similar nominal GDP outlooks, Budget 2009 had much higher revenues than PBO in the outer years Status Quo Revenue Comparison (Budget 2009 minus PBO) $ billions 12 Total revenues 10 8 6 4 2 0 ‐2 ‐4 ‐6 ‐8 ‐10 2008‐09 2009‐10 2010‐11 2011‐12 2012‐13 2013‐14 Source: Budget 2009, Office of the PBO 27

Budget 2009 estimate of the size of the federal stimulus may be overstated Estimates of Federal Fiscal Stimulus 2009‐10 to 2010‐11 $ billions 50 39.9 31.8 21.9 40 Spending reductions Spending reductions and EI rate increase and EI rate increase 30 Contingent on other govt spending 20 10 0 Budget 2009 'Gross' 'Net' Stimulus 'Net' excl. contingent Source: Budget 2009, Office of the PBO 28

Stimulus – Budget 2009 Guiding Principles Targeted “To Canadian businesses and families most in need to trigger largest increase in Canadian jobs and output” Timely “Begin within the next 120 days” Temporary “Should be phased out when economy recovers to avoid long‐term structural deficits” 29

Targeted: Based on Government estimates, federal measures appear targeted to increase output Federal Measures (2009 to 2010) by Multiplier Impact $ billions 14 12 10 8 6 4 2 0 CIT measures EI premiums PIT measures Other Housing Infrastructure Measures for (0.3) (0.6) (1.0) spending (1.4) investment (1.6) low‐income (1.5) (1.7) Source: Budget 2009 Increasing Multipliers *Budget 2009 estimated multipliers shown in parentheses 30

Timely: Infrastructure is the largest stimulus component, but recent track record may raise concerns Infrastructure Canada Planned and Actual Spending $ billions 8 Actual Planned 7 6 5 4 3 2 1 0 2006‐07 2007‐08 2008‐09 2009‐10 2010‐11 2011‐12 Source: Public Accounts of Canada and Infrastructure Canada’s 2009‐10 Report on Plans and Priorities 31

Temporary: Measures are planned to be largely temporary with $5 billion in ongoing measures beyond 2010‐11 Fiscal Cost of Budget 2009 Measures $ billions 20 15 Spending measures Revenue measures 10 5 0 2008‐09 2009‐10 2010‐11 2011‐12 2012‐13 2013‐14 Source: Budget 2009, Office of the PBO 32

However, structural budget deficits could result if: 1) some temporary measures become permanent… Budget Balance Projections $ billions 10 0 ‐10 ‐20 PBO structural balance estimate Budget 2009 budgetary balance ‐30 ‐40 2007‐08 2008‐09 2009‐10 2010‐11 2011‐12 2012‐13 2013‐14 Source: Budget 2009 and Office of the PBO 33

…and/or 2) if potential output growth slows thereby restraining revenues Structural Budget Balance Estimates $ billions 10 PBO structural balance estimate 8 (2.4% potential growth) 6 PBO structural balance estimate 4 (1.9% potential growth) 2 0 ‐2 ‐4 ‐6 2007‐08 2008‐09 2009‐10 2010‐11 2011‐12 2012‐13 2013‐14 Source: Office of the PBO 34

Budget was unclear on the current status of some previously‐stated fiscal targets Federal Debt‐to‐GDP Ratio and 25% Target by 2011‐12 per cent 35 34 Budget 2009 33 32 Budget 2009 status quo 31 30 29 28 27 26 Budget 2008 objective: 25% by 2011‐12 25 2006‐07 2007‐08 2008‐09 2009‐10 2010‐11 2011‐12 2012‐13 2013‐14 Source: Budget 2009 35

Managing Stimulus Measures Issue: Reconciling political pressures for speed with due diligence and oversight Considerations Government has eliminated some controls (e.g. environmental assessment); and Streamlined internal approval processes. An objective, risk‐based management approach is required 36

Oversight of Budget Stimulus Government is providing quarterly budget reports Before this first report, the PBO suggested key elements to assist Parliamentary oversight and track budget implementation Parliament requires: accurate, timely, and easily understood information on recent economic and fiscal developments and the implementation and effectiveness of budget measures 37

PBO’s Oversight Framework Inputs Which programs, how much funding allocated? Processes What are the key legislative requirements, delivery mechanisms and risks? Outputs What results will be achieved through federal efforts? Outcomes How will these help Canadians affected by the recession and stimulate the economy? 38

Budget Progress Reports Government’s first report in March 2009 focused on spending authorizations (inputs) • Limited information on: expected outputs; outcomes; implementation benchmarks; or Canadian economy Future reports may allow for real‐time assessment of program implementation and results vs. objectives 39

Revised Outlook and Prospects for Recovery 40

Revised Outlook and Recovery • As a small open economy and commodity exporter, Canada’s recovery depends crucially on global economic and financial developments • Global and domestic monetary and fiscal policy actions will help • Downgraded economic outlook since Budget 2009 exceeds expected positive incremental fiscal stimulus impacts 41

Near‐term weakness in real GDP offsets the expected increase from Budget 2009 stimulus Budget 2009 Stimulus – Real GDP Impact index, Budget 2009 2008Q4 = 100 106 104 102 100 Budget 2009 baseline real GDP before stimulus 98 96 2008 ‐ 2009 ‐ 2009 ‐ 2009 ‐ 2009 ‐ 2010 ‐ 2010 ‐ 2010 ‐ 2010 ‐ Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Source: Office of the PBO * total stimulus plan (i.e., with leverage) 42

Near‐term weakness in real GDP offsets the expected increase from Budget 2009 stimulus Budget 2009 Stimulus – Real GDP Impact index, Budget 2009 2008Q4 = 100 106 Budget 2009 real GDP 2010Q4: 104 +1.9% with stimulus* 102 100 Budget 2009 baseline real GDP before stimulus 98 96 2008 ‐ 2009 ‐ 2009 ‐ 2009 ‐ 2009 ‐ 2010 ‐ 2010 ‐ 2010 ‐ 2010 ‐ Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Source: Office of the PBO * total stimulus plan (i.e., with leverage) 43

Near‐term weakness in real GDP offsets the expected increase from Budget 2009 stimulus Budget 2009 Stimulus – Real GDP Impact index, Budget 2009 2008Q4 = 100 106 Budget 2009 real GDP 2010Q4: 104 +1.9% with stimulus* 102 100 Budget 2009 baseline real GDP before stimulus 98 2008Q4 actual and PBO 2009Q1 estimate 96 2008 ‐ 2009 ‐ 2009 ‐ 2009 ‐ 2009 ‐ 2010 ‐ 2010 ‐ 2010 ‐ 2010 ‐ Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Source: Office of the PBO * total stimulus plan (i.e., with leverage) 44

Job losses to‐date more than offset the expected employment impacts from Budget 2009 Budget 2009 Stimulus – Employment Impact thousands 17,500 Budget 2009 employment levels with stimulus* 2010Q4: 17,325 +189K 17,150 Budget 2009 employment prior to stimulus 16,975 239,500 net job losses in the first quarter of the year 16,800 2008 ‐ 2009 ‐ 2009 ‐ 2009 ‐ 2009 ‐ 2010 ‐ 2010 ‐ 2010 ‐ 2010 ‐ Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Source: Office of the PBO * total stimulus plan (i.e., with leverage) 45

Longer‐Term Considerations and Conclusions 46

Post‐recovery issues Economic • Will there be longer‐term impacts on Canada’s potential output growth? Policy Considerations • What are the fiscal targets and objectives going forward? • What are the fiscal and monetary policy exit strategies? 47

General Lessons and Opportunities from the Crisis 1. Global financial crisis underscores importance of transparency in financial reporting and decision‐making 2. Increased scrutiny provides opportunity to improve budget oversight and reporting to Parliament for Budget 2009 and beyond 3. Manage near‐term expectations, with focus to address long‐term policy challenges and preserve policy credibility 48

Longer‐Term Policy Challenges • Population ageing • Climate change • Productivity and structural adjustments • Regional and household income disparities 49

PBO Lessons Learned 1. Parliament and other stakeholders have a strong desire for additional economic and fiscal analytical capacity. 2. The PBO’s existence and operating model challenge a well‐established system (similar initial experiences shared by other offices, e.g. CBO) 3. Openness, transparency and independence are crucial for the PBO to operate effectively 50

Contact us Office of the Parliamentary Budget Officer 50 O’Connor Street Ottawa, Canada K1A 0A9 +1 613 992 8026 tel pbo‐dpb@parl.gc.ca www.parl.gc.ca/pbo‐dpb

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Icgfm Budgeting In Times Of Crisis A Canadian Perspective

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