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Prudence and Sound Budgetary Policy
The front page of the October 17 edition of La Presse featured an
article by financial columnist Claude Picher, accusing the former Finance
Minister, the Honourable Paul Martin, of pulling off an "artful bit of
financial camouflage" ("From prudence to camouflage," La
Presse, p. A1). While acknowledging that Mr. Martin’s "legendary
prudence" "played a key role" in "putting
Canada’s public finances in order," Mr. Picher asserted that for the
2001-2002 fiscal year, the former Finance Minister switched from prudence to
camouflage.
According to Mr. Picher, the reason the 2001-2002 federal budget has ended up
with an $8.9 billion surplus, whereas Mr. Martin had not projected any
surplus when he tabled the budget on December 10, 2001, is that the former
Minister "cooked the books." Mr. Picher maintains the
then-Finance Minister based himself on "wilfully pessimistic"
economic projections, fully aware when he tabled the budget of private-sector
projections "much closer to reality."
This accusation of camouflage is serious, groundless and unfair to Mr. Martin
and the Government of Canada.
As indicated in the December 2001 budget documents, the private-sector
projections Mr. Picher referred to were based on the results of an October 2001
survey of forecasters. At the time, they were projecting average Canadian GDP
growth of 1.5 % for 2001 and 2002. But on November 30, 2001, Statistics
Canada announced that 2001 third-quarter GDP had dropped 0.2 % compared
with the previous quarter, the first quarterly downturn in the economy since
1992. In light of the changing context, the Finance Department consulted
private-sector economists again in early December as to what adjustments might
be required (see The Budget Plan 2001, p. 153). The scenarios the
budget was based on, 1.3% GDP growth in 2001 and 1.1% in 2002, reflected those
new consultations.
It must be remembered that the economic situation was extremely uncertain at
the time. There was also the worrying post-9/11 context. Mr. Picher himself
wrote on December 8, 2001, that "the Canadian economy has entered a
recession [...] The negative impact on public finances should mainly be
felt in the second half of the fiscal year" ("A no-surprises
budget", La Presse, p.E3). On December 11, 2001, he added that
"with his meagre reserves, the Minister can only cross his fingers and
hope that the recession won’t last too long." ("No more wiggle
room," La Presse, A1). In writing those words, Mr. Picher
demonstrated healthy prudence and was not engaging in any camouflage.
Fortunately, Canada has weathered the economic downturn better than any other
G7 country : the International Monetary Fund (IMF) estimates its GDP will grow
by 3.4% in 2002, clearly higher than the 1.1% private-sector forecasts available
when the budget was tabled. This largely explains why the Government of Canada
accumulated an $8.9 billion surplus in 2001-2002.
Over the same period, the IMF projects GDP growth of only 2.2% in the United
States and an average of 1.4% for the G7 countries in 2002. The US federal
government projected a US$230 billion surplus when it tabled the 2001-2002
budget; it is now projecting a US$165 deficit. In Europe, France, Italy, Germany
and Portugal are experiencing serious financial problems. It can be seen that
pendulum effects on budgets are very considerable and dictate the greatest
prudence. Our surplus, which scarcely represents 5% of federal revenues, would
disappear as quickly as snow in summer if we relaxed that prudence, while the
federal debt burden of $536 billion is over twice as high as that of the
provinces.
Mr. Picher reproaches the Government of Canada with not doing enough to help
the provincial governments. As Intergovernmental Affairs Minister, I would say
that the Government of Canada’s budgetary prudence does not prevent it from
helping the provinces as best it can under the circumstances. Federal transfers
to the provinces will increase by 6% a year in the coming years, while federal
revenues will rise by only 2% a year. The Government of Canada has said
repeatedly that if it can find the flexibility to do more in the next budget, it
will. This is not a matter of so-called fiscal imbalance, but rather of federal
responsibility.
The Government of Canada helps the provinces partly through transfers, but
mainly by fostering the good economic health of the country. If Canada has been
able to avoid the economic downturn of the past couple of years, it is in large
part because the Bank of Canada was able to lower interest rates when the time
was right. It was able to do so notably because public finances, both federal
and provincial, were in the best shape they had been in for 10 or 20 years. At
the end of the day, the federal surplus is great news for all Canadians, a
financial situation that would be the envy of taxpayers in other countries.
For the 2002-03 fiscal year, the August 2002 Fiscal Monitor by Finance
Canada, indicates that the federal budget surplus for the first five months of
the year ($4.6 billion) is less than half of the surplus reported for the
same period last year ($11.4 billion). While it is difficult at this point
to project the end-of-year budget balance, these results show that the
Government of Canada’s financial situation is less favourable this year than
it was last year.
Accordingly, in light of market uncertainty and the risk of war, the current
Finance Minister, the Honourable John Manley, intends to maintain the "legendary
prudence" that has served Canada so well and been rightly hailed by Mr.
Picher.
Open letter which Minister Stéphane Dion sent to newspapers on October
18, 2002.
| For information : |
André Lamarre
Special Advisor
Telephone: (613) 943-1838
Fax: (613) 943-5553 |
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