About That PBO Expalnation Re: OAS Being Sustainable...

I previously posted about PBO Kevin Page releasing a report in 2011 stating federal finances were unsustainable, and his flip-flop last week about how federal finances were in fact sustainable, and no changes or reforms were needed to OAS. Another Blogging Tory,h/t PlattyTalk, contacted the PBO for an explanation, and received this reply:

"It’s good to hear from you again Mr. Platten. I would be more than pleased to provide clarification.

The short answer is that over the period of time from Mr. Page’s initial (September 29 2011) comment, which pertains to our September 2011 report (http://www.parl.gc.ca/PBO-DPB/documents/FSR_2011.pdf), to his recent comment (that pertains to our February 2012 note http://www.parl.gc.ca/PBO-DPB/documents/Sustainability_OAS.pdf), our assessment of the sustainability of the federal fiscal structure changed as a result of the Government of Canada’s December 2011 renewal of the federal Canada Health Transfer (CHT) – no other assumptions or projections underlying our fiscal sustainability analysis have changed.

Our September 2011 report was based on the assumption that the federal CHT would continue to grow at 6% annually beyond 2016-17. However, on December 19 2011 the Government of Canada announced that beyond 2016-17 (to at least 2024) growth in the CHT would be limited to nominal GDP growth (with a 3% minimum guaranteed). This fundamentally changed the federal fiscal structure given that we projected nominal GDP growth to average 3.8% beyond 2016. Following the renewal of the CHT, the PBO published a note in January 2012 (http://www.parl.gc.ca/PBO-DPB/documents/Renewing_CHT.pdf) which indicated that as a result of the change to the CHT the federal fiscal structure was now sustainable.

In February 2012, the PBO published another note (http://www.parl.gc.ca/PBO-DPB/documents/Sustainability_OAS.pdf) that reiterated the updated federal results and compared various projections of elderly benefits. The main contribution of our February note was to provide an analytical framework for assessing the sustainability of the federal elderly benefits program. With growth in the federal CHT beyond 2016-17 limited to nominal GDP growth, the current federal fiscal structure has sufficient room to absorb the cost pressures arising from the impact of population ageing on the federal elderly benefits program. Indeed, PBO baseline estimates that there is some scope (0.4% of GDP annually) for reducing federal revenue and/or increasing federal program spending (relative to PBO’s projections) while maintaining fiscal sustainability at the federal level.

However, the mirror image of the change to the federal CHT structure is reflected at the provincial-territorial level – the provincial-territorial fiscal situation has deteriorated. As a result of the change to the CHT, the amount of policy action required to achieve fiscal sustainability at the provincial-territorial level has increased from 1.5% of GDP annually (published in our September 2011 report) to 2.9% of GDP (published in our January 2012 report). At the same time, the federal situation has improved from requiring 1.2% of GDP annually in policy action to achieve fiscal sustainability to having 0.4% of GDP in fiscal ‘room’ to reduce revenue and/or increase program spending while maintaining fiscal sustainability. That said, at the consolidated (i.e., combined) federal and provincial-territorial level, the overall fiscal structure remains unsustainable over the long term.

I hope this helps to clarify Mr. Page’s comments and our analysis. I would be pleased to discuss further and provide additional information, so please don’t hesitate to contact me.

Thank you kindly for your interest in our fiscal sustainability analysis and I would encourage you to continue to follow it closely.

Best regards,Chris Matier
Office of the Parliamentary Budget Officer
50 O'Connor Street, Room 912B
Ottawa, Canada
K1A 0A9

Notice the parts highlighted in blue? The only calculation that caused Page to change his doom and gloom prediction to a rosy one was a result of the federal government limiting the escalating clause, currently at 6% until the year 2017, to one linked to nominal GDP growth, which Page himself projects to be 3.9% yearly. That's a reduction of 2.1% yearly in the Canada Health Transfer increase to the provinces and territories.

The second line highlighted actually seems to somewhat contradict what Page stated last week, that OAS was sustainable in it's present format. He states as a result of the changes to CHT, provincial and territorial finances were not sustainable. So in effect Page now thinks that by dumping more health costs to the provinces, Ottawa can afford an increase of $106 billion in OAS payments in the year 2030. Given that the CHT in 2011 was roughly $30 billion, it seems unfathomable that a 2.1% reduction in the CHT escalation , which Page himself projects to be 3.9% from 2017 forward, could result in a net yearly savings of $106 billion 2030 onward.

In fact, even if the government were in fact able to save the $106 billion through reduced CHT increases, it would still be a wash, making the federal finances unsustainable as Page alluded too in September 2011.

Update: In order to properly assess Page's prediction, it would be helpful if he made public the CHT projected amount in 2030 both before and after Flaherty's announcement of changes to the escalation clause.