Abstract:
The 1990s were a high point for Canadian macroeconomic policy.
However, some commentators argue that the overall approach to fiscal
policy remains deficient, due to a lacking medium-term framework for
planning. This paper, therefore, explores a new approach to Canadian
fiscal policy.
I illustrate this framework using a stochastic simulation model
which takes the debt-to-GDP ratio five years ahead as the
medium-term policy target. The model emphasizes the interaction
between economic fluctuations and fiscal outcomes to estimate the
probability of achieving this target under alternative policy
choices.
This new framework, which draws on the lessons from the success of
inflation targeting, appears promising. This approach: delivers an
objective assessment of how new policies impact fiscal
sustainability; explicitly recognizes the uncertainties of
forward-looking policymaking; allows some flexibility in achieving
the target; does not depart radically from current targets; may
improve accountability; and is easily communicated.
Finally, the model demonstrates that the
existing long-run
debt-to-GDP targets are so readily-achievable that they provide
little policy guidance.