OTTAWA – If you had to create a bet how Canada’s economy was going to fare later on, you’d need to be putting your hard earned money on private-sector economists’ predictions than the forecasts of the authorities.
It seems non-governmental forecasts for nominal growth going back a lot more than 20 years – and used as a guide for Ottawa’s budget planning – have been pretty near to just right, according to new research.
Research by Scotiabank Economics attempts to answer some nagging concerns about private-sector forecasts utilized by the Finance Department for budget planning, including whether these estimates are “steadily bad.”
The short response is they aren’t. Government padding of non-public consensus forecasts is much more likely the main reason those predictions don’t bear out.
“There is enormous leeway in how Finance’s budgetary projections can unfold in ways which are fully divorced from what economists predict will happen to the economy,” the report states.
In this example, the research looks limited to nominal gdp – a reading that often is available in greater than real GDP, which takes inflation into account.
The federal budget includes a yearly $40-billion “adjustment” within the growth forecasts. In the budget released Tuesday, for instance, the nominal GDP utilized by the federal government is $1,996 billion – $40 billion less than the average private sector economic forecast.
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“Using private-sector forecast inputs to guide budget planning is really a practice that has been in position since 1994 in keeping with guidelines internationally, and thus we’ve over 2 decades of forecast performance that we can assess,” Scotiabank says.
So, exactly how often did these private sector analysts over-estimate economic growth by $40 billion or more? Only once in 22 years, according to the study. But that miss “was a doozy,” with a $66 billion “swing and a miss to the downside” – understandable, perhaps, trained with arrived 2009 when the country was still within the so-called “Great Recession.”
“Governments are naturally more worried about downside risk – blame the economists – than good news – take credit,” the report says. “The forecast misses nevertheless don’t always try to the downside of projections.”
For example, actual growth beat forecasts by $40 billion or even more in 1999, 2000 and 2002. Put one other way, the economy outperformed estimates by two percentage points or more in 1994, 1999, 2000, 2001, 2002 and 2004.
“So there have been more periods when actual growth exceeded forecasts by a fair margin than many years of disappointment,” says the study, which was done “simply to provide a historical perspective on the private sector input in to the federal budget.”
The moral from the story? “Quit blaming economists,” Scotiabank offers.
“There is enormous leeway in how Finance’s budgetary projections can unfold with techniques which are fully divorced from what economists predict will happen towards the economy.”
This includes spending beyond that which was forecast inside a given budget, “and hence outside of so what can be assessed by way of forecast accuracy.”
It’s too early to judge this week’s budget – the first Liberal fiscal plan since 2005, when Paul Martin was pm and Ralph Goodale held the Finance portfolio.
But Prime Minister Justin Trudeau’s 2016 fiscal document forecasts total expenses of $317.1 billion – 14.6 percent of the adjusted nominal GDP – along with a $29.4-billion deficit. Although time may seem like it falls inside the the $40-billion margin of error included in the GDP forecast, Avery Shenfeld, chief economist at CIBC World Markets, says not so fast.
“Instead of doing $40 billion worse compared to consensus (as projected in the budget), let’s imagine you did $50 billion better than the consensus on GDP, you’d probably have a balanced budget in the fifth year,” he said. “The final point here is, if the economy does better than what economists expect within the next 5 years, you could conceivably possess a budget in balance within the fifth year.”
Financial Post
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