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The Globe and Mail

Ottawa shouldn't rely on private economic forecasts

Parliamentary budget officer Kevin Page appears before the Commons government operations and estimates committee on Wednesday, June 1.

Adrian Wyld/Adrian Wyld/The Canadian Press

The Parliamentary Budget Office has decided to start producing its own economic forecasts (pdf). This is welcome news, but not because the PBO can be expected to make exceptionally good forecasts.

Firstly, the PBO publishes error bands representing its uncertainty about how the economy will evolve. This is a continuation of a promising trend; the Bank of Canada already provides 'fan charts' for its inflation forecasts, and it would be a good thing if more forecasters did the same.

Secondly, the fact that the PBO has now started producing forecasts should put some pressure on the Department of Finance to -- as former senior Finance official Peter DeVries puts it -- "take full responsibility for the economic and fiscal forecasts presented in its budgets and economic and fiscal updates."

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The political advantages of outsourcing forecasting to the private sector are clear enough: it deprives the opposition of a whole category of potential talking points. Questions about the underlying assumptions behind the budget projections can be neatly deflected to the consensus forecast.

But aside from that, the current practice of using a consensus of private-sector forecasts is difficult to defend. I noted in an earlier Economy Lab post that private-sector forecasters have an agenda of their own that can affect the quality of the consensus forecast. And as Mr. DeVries notes, the number of forecasters who are able to produce the sort of medium-term projections necessary for the budget is very small; only three such organizations participated in the 2010 budget. Most private-sector forecasters focus their attention on the short term.

More fundamentally, it doesn't make much sense to use a consensus of projections made under the assumption of no policy changes as a basis for forecasting what will happen after new measures are implemented. The Department of Finance has the expertise and the resources to provide forecasts that are consistent with the government's policy initiatives. It should do so.

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About the Author

Stephen Gordon is a professor of economics at Laval University in Quebec City and a fellow of the Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE). He also maintains the economics blog Worthwhile Canadian Initiative. More

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