Minister of Finance Ralph Goodale released an independent study of the government’s approach to economic and fiscal forecasting used in budget planning, which makes a variety of recommendations for improving the process.

The minister tabled the study in the House of Commons. “We commissioned this study last September to get an independent assessment of our economic and fiscal forecasting,” says Goodale.

“Our fiscal record–seven consecutive federal surpluses–is the best in the G-7. But we wanted to make sure we are equipped with the best processes and projections possible. This report offers comprehensive, concrete recommendations on increasing the transparency of information and improving the quality and analysis of the data we use,” he says.

The report, written by Tim O’Neill, finds a number of points of concern with the forecasting process. “My analysis has led me to conclude that most of these concerns can be addressed within the current forecasting structures by improving transparency, data accuracy and analysis,” O’Neill says in a letter to Goodale.

“However, a key conclusion of the analysis of forecast accuracy is that the government’s commitment to never run a deficit under any circumstances has been a major cause of ‘implicit prudence’ in fiscal forecasting (of revenues and spending) which has contributed significantly to the persistent upside surplus surprises,” it adds. “Accordingly, the report concludes that the government should consider adopting a different rule that is more appropriate to its fiscal circumstances and to its increased focus on medium- to long-term commitments.”

The report says the consultation found overwhelming agreement on two fundamental points: the consistent underestimate of future surpluses constitutes a problem because it hinders public and Parliamentary debate about the main budget choices available between tax cuts, increased spending, and/or debt reduction; and this record of larger-than-forecast surpluses as the logical outcome of two forces – the government’s determination to stay out of deficit, combined with several years in which the Canadian economy grew faster than expected.

O’Neill makes 14 recommendations to improve transparency, data quality, forecasting rules and the institutions, which feed into the process. It does not propose the creation of an independent agency for forecasting, but notes, “there may be a role for such an agency to undertake analyses of medium to long-term economic and fiscal issues.”

O’Neill is an independent consultant and the former chief economist and executive vice-president of BMO Financial Group. He was the first Canadian economist to be elected to the Board of Governors of the U.S.-based National Association for Business Economics, and served as its President in 2003. He holds a Ph.D. in economics from Duke University.