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A Simulation Model of Federal, Provincial and Territorial Government Accounts for the Analysis of Fiscal-Consolidation Strategies in Canada

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  • Yvan Guillemette

Abstract

This paper presents a simulation model of the main budget aggregates of federal, provincial and territorial governments in Canada. The general approach is to use a cyclical indicator (output gap), estimate the sensitivity of government revenue and expenditure to this cyclical indicator using historical data, and use projections of the cyclical indicator to simulate budgetary outcomes under various economic scenarios. Provincial/territorial annual output gaps are estimated going back to 1984. These are used to jointly estimate for all governments the historical sensitivities of the main revenue and expenditure categories to provincial/territorial economic cycles using Seemingly Unrelated Regressions. Projections of potential output by province and territory are then made to 2020 and a multitude of paths for the evolution of provincial/territorial output gaps are generated to 2020. These output gap paths serve as bases for simulating medium-term fiscal outcomes under a variety of possible economic scenarios, allowing the construction of probability densities for fiscal outcomes. The paper also contains an analysis of the cyclicality of Canadian governments’ fiscal policies between 1984 and 2007. Several jurisdictions are found to have had pro-cyclical fiscal policies over this period. Un modèle de simulation des comptes gouvernementaux fédéraux, provinciaux et territoriaux pour l'analyse des stratégies de consolidation fiscale au Canada Ce document de travail présente un modèle de simulation des principaux agrégats budgétaires des gouvernements fédéral, provinciaux et territoriaux du Canada. L’approche générale consiste à utiliser un indicateur cyclique (écart de production), estimer la sensibilité des revenues et dépenses d’un gouvernement à cet indicateur cyclique en utilisant des données historiques, et utiliser des projections de l’indicateur cyclique pour simuler les résultats budgétaires sous différents scénarios économiques. Des écarts de production annuels sont estimés pour chaque province/territoire depuis 1984. Ceux-ci sont utilisés pour estimer conjointement pour tous les gouvernements la sensibilité historique des principaux postes de revenue et de dépense aux cycles économiques provinciaux/territoriaux en utilisant la méthode des Régressions Apparemment Non-Reliées. Des projections de la production potentielle des provinces et territoires jusqu’en 2020 sont ensuite réalisées et une multitude de trajectoires pour l’évolution des écarts de production sont générées jusqu’en 2020. Ces trajectoires servent à simuler les budgets gouvernementaux à moyen terme sous un grand nombre de conditions économiques plausibles, permettant ainsi l’obtention de densités de probabilités pour les résultats budgétaires. Le document de travail contient aussi une analyse de la cyclicalité budgétaire des différents gouvernements Canadiens entre 1984 et 2007. Plusieurs juridictions semblent avoir opéré une politique fiscale pro-cyclique durant cette période.

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File URL: http://dx.doi.org/10.1787/5km7pf8xkvxs-en
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Bibliographic Info

Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 800.

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Date of creation: 26 Aug 2010
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Handle: RePEc:oec:ecoaaa:800-en

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Keywords: simulation; debt; deficit; consolidation; model; budgets; fiscal policy; Canada; budget; Canada; politique fiscale; consolidation; modèle; simulation; déficit; dette;

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