The economic debate and Canada's Parliamentary Budget Officer

By Peter W.B. Phillips

Canada's new Parliamentary Budget Officer is now an active contributor to the economic debate in Canada. It seems fair, given his public interventions in the discussion, to ask ‘how does that help us?'

The PBO was created in the Federal Accountability Act of 2006. The PBO is responsible for providing an independent analysis of the state of the economy, the nation's finances and the government's expenditure plan and (upon request of parliament) to undertake analysis of the expenditure estimates of any government department or agency. The Officer is also mandated to provide an estimate of costs for any proposal that falls within the jurisdiction of the Parliament of Canada. 

So far the PBO has issued a report on its operations and mandate (based on consultations), two reports on costing the Afghanistan Mission, a comment on the November 2008 economic statement and a series of briefing notes and presentations on the budget process, and economic and fiscal developments.

Apart from the small flurry of interest in the costing of the Afghanistan mission, the PBO seems to get most of press for comments on the economic and fiscal situation.

As a former government economic forecaster, I am puzzled at the nature of the PBO interjections. While the PBO asserts that they do not produce alternate economic or fiscal forecasts, the net effect of their work has been to interject another quasi-forecast into public and parliamentary debate.

But what does that add to public debate? By the PBO's own admission, there are ample external, independent economic forecasts produced and publicized many times a year by think tanks, universities, banks and brokerage houses. Do we really need one more forecast?

The PBO actually develops many of their estimates by canvassing those same dozen or so private sector and university forecasters for a handful of economic variables and then calculates the range between high and low estimates and then pick some in-range estimate of the core variables to calculate the fiscal balances. While this may seem to be a reasonable approach, it offers little new information.

Beyond being a simple audit on the government planning parameters and budget estimates, PBO forecasts of the headline economic and fiscal variables-rates of change in GDP, the unemployment rate, employment or the fiscal balance-have limited policy value. Old-time economic forecasters are quick to point out that "forecasts like dead fish begin to smell within a few days."

Economists have invested significant effort over the past generation in forecasting the economic future, often with disappointing results. Some jokingly congratulate the profession on successfully forecasting 10 of the last three recessions. More disappointing is that economists have failed to anticipate and advise governments of the options in most of the major economic contractions over the past generation: 1973, 1979, 1982, 1987, 2001 and, now, 2008.

This hubris about the power and self-sufficiency of economics is reflected in the appointment of the PBO. Generally, the PBO has fallen back on the notion that they are likely to be either less biased or more prescient than the various economics teams in the federal system. That is a standard that will be hard to meet.

Rather than another forecast, what Canada really needs is some independent and credible analysis of the risks facing the economy, the effect of those risks on key economic variables and their ultimate impact on the government's fiscal position. In short, we need to know what the important variables are and how different levels of those variables might influence our economic and fiscal balances.

Ultimately, we need less forecasting and more foresighting. Forecasts attempt to predict the future, assuming that the key influences are known and to some extent locked-in. Hence we are told GDP will fall by x%, unemployment will rise to Y% and the deficit will rise to $Z billions. This may make sense for firms that have little influence on those variables, but it is problematic for national governments. Foresighting, in contrast, assumes the future is not predictable or predetermined-rather the future can be influenced by our choices.

Foresighting by the PBO could involve setting up a range of scenarios, looking at the effect of key external factors, such as global financial or economic conditions, global inflation or the value of the Canadian dollar. Based on the range of possible or even highly unlikely but plausible circumstances, the PBO could then provide some sense of the key risks to our economy and our fiscal situation.

While we all would like to hope for the best, we need to have a much greater focus on planning for the worst. The PBO would be advised to give up trying to second-guess the government (which has no better or worse record than anyone else in forecasting the key variables) and instead help us plan for the uncertain economic future.

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Phillips, a professor in the Johnson Shoyama Graduate School of Public Policy at the University of Saskatchewan, was an economic forecaster in industry and government earlier in his career.

Peter W.B. Phillips, PhD
Professor, Johnson Shoyama Graduate School of Public Policy
University of Saskatchewan
9 Campus Drive, Saskatoon, Canada S7N 5A5
tel:  (306) 966-4021    fax:  (306) 966-5250
email: peter.phillips@usask.ca