Double vision: Flaherty's fiscal forecasts win out over watchdog's

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Parliamentary Budget Officer Kevin Page releases his latest forecast Thursday challenging the Conservatives' deficit numbers, but a review of his record to date reveals his estimates are less accurate than the government's.

Mr. Page's Thursday report – which is expected to expand on the PBO's concern that Ottawa faces a long term deficit due largely to demographics – comes in advance of Finance Minister Jim Flaherty's fall economic update, which has not yet been scheduled.

‬Since his March 2008 appointment as Canada's first Parliamentary Budget Officer, Mr. Page's numbers have been at odds with government estimates over everything from fighter jets to infrastructure spending, and most recently the deficit.

Now, after three years of prognosticating since Mr. Page's arrival on the national scene, it is possible to look back and see which side has the better track record when it comes to Ottawa's bottom line.

An analysis by The Globe and Mail reveals the edge goes to the government. Reports from Finance and the PBO since Mr. Page's appointment show that in 15 comparable forecasts, the government beat the PBO nine times. The PBO forecasts were more accurate four times and there were two ties.

Measured another way, the Finance Ministry comes out slightly ahead with an average forecasting error – the difference between the projected surplus or deficit and the final number – of $12.6-billion, compared to $13.2-billion for the PBO.

Deficit forecasts are particularly important now amid growing warnings the world economy will slip back into recession. Deficit targets are also being used as justification to cut government spending – Mr. Flaherty has vowed his Conservative government will erase the nation's $29.6-billion deficit by the 2014-15 fiscal year – without major public-service layoffs or cuts to health and social transfers to the provinces.

Mr. Page, meanwhile, warns that Canada faces a permanent, long-term structural deficit unless Ottawa cuts deeper than planned or raises taxes to cover the costs of Canada's aging population.

Some independent economists told the House of Commons finance committee Monday that Mr. Flaherty may have to push back that target if the economic growth continues to slow.

Finance and PBO each released two reports at the onset of the recession in late 2008 and 2009 that are the source of their most dramatic forecasting errors. Finance's 2008 fall update for 2009-10 proved to be off by $49.7-billion. A similarly timed report by PBO – its first forecast – was off by an even greater amount, $51.7-billion.

But the accuracy of the forecasts from both sides has improved since the peak of the recession.

Both Finance and PBO were provided with the opportunity to review the Globe and Mail's comparison and provide input and comment.

"We will let the chart speak for itself, which I think it does well," Chisholm Pothier, Mr. Flaherty's spokesman, said in an e-mail.

Mr. Pothier pointed out that private-sector economists and the International Monetary Fund were also caught off-guard by the depths of the global recession and its impact on government bottom lines around the world.

For his part, Mr. Page noted that the differences are minor and based on a very small sample of three years.

"All told, the difference between Finance and PBO forecasts (on average) is very small," he said in an e-mail. "I think it should be kept in mind that PBO provides its forecasts and analysis essentially with a full-time staff of three people, whereas Finance has an entire branch that is responsible for preparing budgets and updates."

The Conservatives created the PBO, but the government has since faced questions about the level of funding provided and its willingness to hand over government spending data.

Finance Canada says the department has 10 full-time employees who work on fiscal analysis and forecasting, but only five of those work solely on fiscal forecasts.

Until this June, the PBO and Finance both relied on the same average of private-sector forecasters for assumptions regarding the strength of economic growth. That means any differences of opinion were focused on the impact of fiscal decisions like government spending or restraint.

In June, PBO announced that it will produce its own forecasts for economic growth and will no longer rely on the private-sector average.

The last time Ottawa erased the deficit in the mid-1990s, some accused Liberal finance minister Paul Martin of using excessively dire deficit projections to justify painful spending cuts to health, education and employment insurance. The ultimately inaccurate forecasts also set the stage for the government to later boast of beating its own targets.

One of the economists critical of the Martin approach, Jim Stanford of the Canadian Auto Workers, sees this tactic playing out again with the Conservatives.

"The billions in spending cuts that Mr. Flaherty is considering are, in my view, wrong and I think he too has painted the fiscal outlook darker than it is to try to justify those planned cuts," he said.

Yet Mr. Stanford acknowledges his theory doesn't explain why the PBO – an independent body – warns Ottawa won't meet its deficit targets.

"I think the PBO folks are too bleak about the deficit numbers, too – especially their claim that we have a 'structural" deficit,' which I do not accept," Mr. Stanford said.

Methodology

To compare the forecasting record of Finance and the PBO, The Globe and Mail based its calculations on seven reports per organization covering the period of November, 2008, to June, 2011. These reports were chosen because they could each be paired with a comparable forecast released around the same time, based on the same public information.

The forecast covers three years, but only the first two years are measured against final numbers. The final deficit number for 2010-11 have not yet been announced. For that year, the forecasts are measured against the latest deficit estimate in the June budget.