Finance Committee on March 26th, 2009

[The Chair, Conservative, James Rajotte]

Thank you very much for that.

The second issue I want to address is the whole issue of forecasting. It's a very important issue. I think you mentioned this as well, Mr. Drummond.

The budget 2009 forecast was actually more bleak, conservative, or whatever you want to say, than the private sector forecast. There was some contingency built in there, but as all of you have mentioned, the forecasts have gotten much worse since then. That's been in the last six months, certainly since last August, and all the forecasts have got worse almost every quarter. That obviously has a tremendous impact.

Putting on your hat now as a former Department of Finance official, what is a prudent course of action for the government to take? The government doesn't want to be way more bleak and negative than the private sector forecast. You want to be as close as you can to where the economy is going, but if you misjudge it, then it affects all your variables in terms of revenues, in terms of deficit projections.

What's a prudent course of action here? It's a very fluid situation, and forecasting is a very tough thing. It's very frustrating as a government to be in that situation of trying to guess where we're going, but at the same time not being overly bleak so that we affect consumer confidence and we then make the situation worse.

I know that's a tough question, but it's a tough issue we're wrestling with.

[Don Drummond]

It's a tough question, but it's one I have a lot of experience with. I started in the Department of Finance in 1977, and that debate has been going on every single minute since then.

[The Chair, Conservative, James Rajotte]

Well, I need you to solve it for me here today.

[Don Drummond]

Invariably, every new Minister of Finance wants you to put out something positive, because you don't want to depress markets. With over 30 years of experience, I've come to see that the only way is to do the best forecast you possibly can, and whether that's viewed as pessimistic or realistic, that's the way you go.

The history of the making of this budget follows a tradition that Paul Martin started in 1994. The normal procedure is to base it on the average of the private sector forecast, so as is usual, a month before the fall update, the Department of Finance did a survey of the private sector forecasts.

I'll refer to nominal GDP because that's the key economic variable. The average of the private sector forecast was 1.9% growth in 2009. At that moment I was sitting with a decline of 3.2%. Just to give you an element of what we're talking about, the difference between my forecast and the average would have been $15 billion on the federal deficit, so it was a huge range of uncertainty. I was aghast. I thought that 1.9% was totally inappropriate as the basis of a budget.

During the course of the discussions it was agreed that the update assumptions would be held open for another week to see if anybody wanted to lower any forecasts, and indeed, if you look in the fall update, instead of the 1.9%, it was 0.8%.

Then when Finance came in mid-January to do their last survey, the average nominal GDP forecast in the private sector was a decline of 1.5%, and again I didn't believe that. I didn't have the impression that officials at the Department of Finance believed that, and I was urging them.... You know, you're not locked into this pattern of using the average of the private sector. In fact, in one of the budgets that Ralph Goodale did, they broke that mould as well: when they were troubled by the average in the private sector, they adjusted it.

I said, “Do that. Do your own. Knock it down; otherwise, you're just going to have to come and revise it and you're going to look silly on the budget forecast.” To their credit, instead of using that average of a decline of 1.5%, they used 2.6%. It still wasn't down as low as mine, and my current forecast for the decline in nominal GDP is 4.5%, which is why I have this $18 billion higher deficit.

I think Finance and the minister and the budget did the right thing in January by not getting locked into this pattern of using the average of the private sector. I just wish they had gone with a number that was even lower.

[The Chair, Conservative, James Rajotte]

Okay, thank you. Time is up.

Go ahead, Mr. Hodgson, very briefly.

[Glen Hodgson]

I had one other thought. You're supposed to forecast on your anticipated revenues and expenses, but there is also the matter of how you actually budget. One of the points I've made to the minister and to the department on a number of occasions is that we have to build margins into our budgeting process. At one point we had a $3 billion contingency fund. I continue to see around $5 billion, which is still a very small share of the national budget. The federal budget is now to about $225 billion; how much of a slush factor do you want to build in to ensure you've got some marge de manoeuvre? It's what good companies do. It's what good organizations do. For me, it's part of good budget planning going forward.

[The Chair, Conservative, James Rajotte]

Okay, thank you.

Mr. McKay, you have one minute.

[John McKay, Liberal, Scarborough—Guildwood, ON]

I want to question Mr. Hodgson's optimism in the light of two hours of conversation in which we seemed to be going down and down and down.

The issue here is that the government has put a stimulus package of just under 2% into the budget. I am taking their figures. We now really appear to be going down a great deal, so I question your optimism on the usefulness or the efficacy of the fiscal stimulus at the size the government has projected in its budget. Is it fair to say that the government should substantially increase the stimulus package in order to have any impact on the economy?

[The Chair, Conservative, James Rajotte]

Go ahead, Mr. Hodgson, very briefly.

[Glen Hodgson]

I think there's a real difference between how much you do and what you do. For example, I advised a different composition of action. I would like to have seen more that dealt with displaced workers and more put into the employment insurance system. If I had a chance right now, frankly, I would reinvent employment insurance to shorten the waiting period and increase the coverage ratio and things like that, knowing that a lot of it leaks into imports. People don't save that; they're going to go out and spend it.

I say that because I would like to see the stimulus happen sooner. The $12 billion infrastructure spending is going to happen in the second half of this year. Don thinks it might even drift into 2010. How much you do is maybe not as important as what you do, and the composition really does matter.

[The Chair, Conservative, James Rajotte]

Thank you.

I want to thank all of you for being here this morning. This has been a fascinating discussion, a fascinating two-hour session. Thank you all. You're certainly welcome to come back at any time. If there's any further information, please submit it to the clerk or to me, and we'll distribute it to all the members.

The meeting is adjourned.