Prudence and Sound Budgetary Policy

The front page of the October 17 edition of La Presse featured anarticle by financial columnist Claude Picher, accusing the former FinanceMinister, the Honourable Paul Martin, of pulling off an "artful bit offinancial camouflage" ("From prudence to camouflage," LaPresse, p. A1). While acknowledging that Mr. Martin’s "legendaryprudence" "played a key role" in "puttingCanada’s public finances in order," Mr. Picher asserted that for the2001-2002 fiscal year, the former Finance Minister switched from prudence tocamouflage.

According to Mr. Picher, the reason the 2001-2002 federal budget has ended upwith an $8.9 billion surplus, whereas Mr. Martin had not projected anysurplus when he tabled the budget on December 10, 2001, is that the formerMinister "cooked the books." Mr. Picher maintains thethen-Finance Minister based himself on "wilfully pessimistic"economic projections, fully aware when he tabled the budget of private-sectorprojections "much closer to reality."

This accusation of camouflage is serious, groundless and unfair to Mr. Martinand the Government of Canada.

As indicated in the December 2001 budget documents, the private-sectorprojections Mr. Picher referred to were based on the results of an October 2001survey of forecasters. At the time, they were projecting average Canadian GDPgrowth of 1.5 % for 2001 and 2002. But on November 30, 2001, StatisticsCanada announced that 2001 third-quarter GDP had dropped 0.2 % comparedwith the previous quarter, the first quarterly downturn in the economy since1992. In light of the changing context, the Finance Department consultedprivate-sector economists again in early December as to what adjustments mightbe required (see The Budget Plan 2001, p. 153). The scenarios thebudget was based on, 1.3% GDP growth in 2001 and 1.1% in 2002, reflected thosenew consultations.

It must be remembered that the economic situation was extremely uncertain atthe time. There was also the worrying post-9/11 context. Mr. Picher himselfwrote on December 8, 2001, that "the Canadian economy has entered arecession [...] The negative impact on public finances should mainly befelt in the second half of the fiscal year" ("A no-surprisesbudget", La Presse, p.E3). On December 11, 2001, he added that"with his meagre reserves, the Minister can only cross his fingers andhope that the recession won’t last too long." ("No more wiggleroom," La Presse, A1). In writing those words, Mr. Picherdemonstrated healthy prudence and was not engaging in any camouflage.

Fortunately, Canada has weathered the economic downturn better than any otherG7 country : the International Monetary Fund (IMF) estimates its GDP will growby 3.4% in 2002, clearly higher than the 1.1% private-sector forecasts availablewhen the budget was tabled. This largely explains why the Government of Canadaaccumulated an $8.9 billion surplus in 2001-2002.

Over the same period, the IMF projects GDP growth of only 2.2% in the UnitedStates and an average of 1.4% for the G7 countries in 2002. The US federalgovernment projected a US$230 billion surplus when it tabled the 2001-2002budget; it is now projecting a US$165 deficit. In Europe, France, Italy, Germanyand Portugal are experiencing serious financial problems. It can be seen thatpendulum effects on budgets are very considerable and dictate the greatestprudence. Our surplus, which scarcely represents 5% of federal revenues, woulddisappear as quickly as snow in summer if we relaxed that prudence, while thefederal debt burden of $536 billion is over twice as high as that of theprovinces.

Mr. Picher reproaches the Government of Canada with not doing enough to helpthe provincial governments. As Intergovernmental Affairs Minister, I would saythat the Government of Canada’s budgetary prudence does not prevent it fromhelping the provinces as best it can under the circumstances. Federal transfersto the provinces will increase by 6% a year in the coming years, while federalrevenues will rise by only 2% a year. The Government of Canada has saidrepeatedly that if it can find the flexibility to do more in the next budget, itwill. This is not a matter of so-called fiscal imbalance, but rather of federalresponsibility.

The Government of Canada helps the provinces partly through transfers, butmainly by fostering the good economic health of the country. If Canada has beenable to avoid the economic downturn of the past couple of years, it is in largepart because the Bank of Canada was able to lower interest rates when the timewas right. It was able to do so notably because public finances, both federaland provincial, were in the best shape they had been in for 10 or 20 years. Atthe end of the day, the federal surplus is great news for all Canadians, afinancial situation that would be the envy of taxpayers in other countries.

For the 2002-03 fiscal year, the August 2002 Fiscal Monitor by FinanceCanada, indicates that the federal budget surplus for the first five months ofthe year ($4.6 billion) is less than half of the surplus reported for thesame period last year ($11.4 billion). While it is difficult at this pointto project the end-of-year budget balance, these results show that theGovernment of Canada’s financial situation is less favourable this year thanit was last year.

Accordingly, in light of market uncertainty and the risk of war, the currentFinance Minister, the Honourable John Manley, intends to maintain the "legendaryprudence" that has served Canada so well and been rightly hailed by Mr.Picher.

Open letter which Minister Stéphane Dion sent to newspapers on October18, 2002.