Can the private sector do it?

There was some interesting back and forth through the fall about whether the private sector could fulfill the role of the PBO. I argued no.

But, in the UK, it strikes me that many aspects of what the PBO does in Canada are currently covered very well by something called the Institute for Fiscal Studies. The IFS doesn't do macro forecasting, but they do look at the budget balance on a monthly basis. They also do extensive evaluations of the annual budget, and of particular policies. The IFS is a registered charity, with very diverse funding sources.

We have lots of thinktanks in Canada, and some really interesting and well-done work comes out of them now and again. But, I think even people from our leading thinktanks would agree that none in Canada reaches the combination of academic and policy credibility that has been accumulated by the IFS. Some might come close on particular items, but not with the scale or depth of the IFS.

So, why don't we have an IFS in Canada?

In my view, an important aspect is geography. In London, you have the business, academic, and political centres of the country all accessible by a short tube ride. (Even Oxford and Cambridge are only an hour by express train.) Someone could hold office hours with students in the morning, attend a workshop over lunch at the IFS, then give a presentation to government or business officials in the afternoon--and then be home for dinner. Hard to do in Canada.

By the way, when I visited the IFS for a couple of days in the Fall I heard that the Canadian PBOfficer had been in London the previous week. The Conservatives have proposed a similar institution for the UK should they win the next election expected this year, and people in the UK are interested to hear the Canadian experience. It will be interesting to watch what happens in the UK.

(Speaking of elections in the UK, wouldn't it be cool to announce results with all candidates together in person like they do in the UK? Love those big party ribbons they wear. It would be so fun to watch the daggers emanating from the eyes of the losing candidates.)

So, to sum up, the IFS experience suggests that it might be possible for the private sector to perform many of the roles now allocated to the PBO. However, we might have to geographically shmoosh Ottawa, Toronto, and Montreal together in order to get the required convergence of factors. Moreover, the PBO is clearly doing things now that were not being provided by the private sector pre-PBO, so I don't know why we would expect the Canadian private sector to suddenly change what they do in the absence of the PBO.

Defending the PBO, again

There is an anti-PBO op-ed in the National Post today. I don't agree much with it, but I will outsource the commentary to Stephen Gordon. I endorse Stephen's words.

Let me pick up on one point. The Fraser Institute authors claim the following.

In addition to the multitude of private organizations supplying economic forecasts and fiscal projections, others still go to great lengths to scrutinize the accuracy of government budget numbers and assess its fiscal policies and programs. These include think tank institutions (including our own), lobbyist groups, and professional and academic economists. In a sense, the government already has multiple “watchdogs” keeping it honest and disciplined.

Where are these watchdogs? Have you seen them? Where are the detailed, credible, timely, and transparent costings of government and opposition tax policy initiatives? I don't see them. Not at the Fraser Institute, not elsewhere. I don't mean opinion pieces. I mean solid, objective, transparent policy work.

Speaking for myself, I am one of those academics who has a great interest in matters of public finance. But, with the other demands on my time (teaching, publishing, committee work, and once in a long while some leisure) I seem barely capable of writing one blog post a week, let alone doing fully costed pricing analysis of policy initiatives. The incentives are simply not there for me to spend my time on being a fulltime watchdog.

I am not convinced that the PBO guys are going to be better macro forecasters than anyone else. On that point, I have some sympathy for the Fraser Institute argument. But that's not what we're paying the PBO to do. We're paying them to a) translate those macro forecasts into fiscal projections and b) price policy initiatives coming out of Parliament.

I just don't see anywhere else in Canada that you have 5 or 6 economists devoted full time to these tasks, with access to the data necessary to do it. Yes, banks and thinktanks do produce the occasional report. But this is far short of what can be done by even a small fulltime staff dedicated to this task.

The three million dollars that the PBO costs is a rounding error on a budget of $260 billion. In fact, let me do the math. It's 0.00154% of 260 billion. In terms of time, the federal government spends 3 million every 6 minutes. I think it is worth spending 0.00154% of our federal budget to monitor and study how the other 99.99846% is spent.

Let me leave with one more quote from the National Post piece:

Indeed, this switch has minimized the government’s ability to fudge budget numbers for political advantage.

Were these Fraser Institute guys even around in the Fall of 2008?

The private sector chimes in

I've been on vacation, so I'm just now catching up with some of the stories about the OPBO.

An interesting one in today's Hill Times. Douglas Porter of BMO says that the OPBO is important because of the lack of credibility of numbers that come through the political filter.

The government's economic reports and forecasts have become too politicized and there should be a source of impartial numbers on the economy and country's finances, says Douglas Porter, Deputy Chief Economist at BMO Capital Markets.

Mr. Porter said the economic numbers put out by the Congressional Budget Office in the United States are more detailed and trustworthy than what is typically available in Canada. The CBO, which was founded 35 years ago, is well established in the U.S. political landscape and has a solid reputation for "high-quality, low-profile work." Its numbers provide a solid basis for debate on economic matters.

"The whole process in Canada has just become so political," Mr. Porter said. "Every budget number, even when we had a surplus, is used as a target by the opposition or a bragging point for the government. And unfortunately that just made the whole process a little less useful to analysts in general, because we don't know for a fact that the latest estimate is a true estimate, and how much of it is a political message."

Mr. Porter is not entirely uncritical of the OPBO, though:

Mr. Porter said that although the Parliamentary Budget Officer—a new, smaller entity which was created to serve a similar purpose to the CBO—is doing a "solid job" as far of the analysis it has provided, it hasn't had a long enough track record to tell whether it is truly reliable. He said he would prefer the PBO, which since its inception last year has been a constant source of headlines because of its provocative reports and ongoing disputes with the government over its mandate, "turned down the volume a bit" and maintained a lower profile like its American counterpart.

That's fine. I didn't sign the open letter to defend every operational decision that has been made at the OPBO. I signed it because I think the changes proposed by the committee would leave the OPBO unable to fulfill its potential.