It takes no brains to kick Treasury
When they get it pretty right that's no better than it should be. But when they get it wrong - for whatever reason - they're fools and probably knaves as well.
The obvious truth is no economists are consistently good at forecasting the economy. It's those non-economists who forget this - including Wayne Swan and Julia Gillard - who are the fools, not the economists who cater to humankind's irrational but unquenchable desire to pretend the future can be known.
Budget week is open season for anyone who can find a microphone to claim Treasury's forecasts are wildly optimistic. But though the econocrats' record is pretty bad, I've yet to discover any non-official forecaster whose record is better.
And whereas the budget-time know-alls are rarely held to account, the econocrats are always accountable. Their forecasts are on the record for the whole world to judge after the event.
The proof of their high standard of accountability is that they often conduct systematic reviews of their forecasting accuracy, which they make public so as to keep themselves humble and to warn users of their forecasts' fallibility.
According to my quick squiz, the leading business economists' forecasts for real gross domestic product are only a fraction lower than Treasury's, but their forecasts for nominal GDP are significantly lower, mainly because they expect our terms of trade (export prices, essentially) to fall by a lot more than Treasury does.
If they are right, you'd expect Treasury's revenue forecasts again to prove too high. But to give the business economists their due, they haven't been trumpeting their differences with Treasury, either for cheap publicity or to prove what fools they are in Treasury.
No, this year the vociferous criticism of Treasury's forecasts and assumptions has come from the Opposition (they would say that), partisan economists and shock jocks who wouldn't know the difference between a forecast and a projection if it bit them on the backside.
The irony is, this is a less dishonest budget than the past few that Swan produced as he realised the long-promised return to surplus in 2012-13 would need help from performance-enhancing accounting.
One trick used extensively last year was to take spending planned for the early weeks of 2012-13 and switch it into the later weeks of the old year, thereby overstating spending in the old year and understating the budget year. Every $1 you switch increases the difference by $2.
This year Swan's creative accounting has been limited to bringing forward $1.1 billion in payments to local government - presumably to hide the fact that the budget year's deficit is actually a little higher than the previous year's.
As every accountant knows, the trouble with shifting expenses is that it comes back to bite you the following year. The government's strategy requires it to limit the real growth in its spending to 2 per cent a year, on average.
The games played in last year's budget caused real government spending to grow by 4.8 per cent the previous year, then fall by 3.2 per cent in 2012-13. But that year's fall means, despite this year's restraint, spending is expected to jump by 4.3 per cent. The comparison would be even worse without this year's fiddle.
Another trick last year was to use Swan's fiscal bulldozer to push spending commitments off into the future beyond the forward estimates, where they became invisible.
This year he's done something new, showing how the offsetting savings (including sinful tax increases) are more than sufficient to cover the growing cost of the disability scheme and the Gonski education reforms, not merely over the forward estimates but over the next 10 years.
Those who think politics but never economics saw this move as a cunning attempt to "wedge" Tony Abbott. If so, it didn't work. But I see it as a marked improvement in budget transparency, needed to prove the fiscal bulldozer had been left in its shed.
The transparency has, however, allowed Saul Eslake, of Merrill Lynch - who invariably produces the most penetrating analysis of the budget - to note that, though the disability scheme will cost only $1.9 billion over the four years to 2016-17, the linked increase in the Medicare levy will raise $11.6 billion in that time.
Eslake says about two-thirds of the net improvement in the budget balance attributable to policy decisions over the four years to 2015-16 comes from this discrepancy.
He further notes that, if you switch your focus from the "underlying" to the "headline" cash balance (thus taking account of the off-budget building of the national broadband network), the budget should still be in deficit in the last two years of the forward estimates.
Twitter: @1RossGittins
Frequently Asked Questions about this Article…
The article argues that Treasury and Reserve Bank forecasts are fallible: no economists are consistently good at forecasting the economy. However, the so-called 'econocrats' are accountable — they publish systematic reviews of their forecasting accuracy for public scrutiny, which can help investors understand the limits of official forecasts.
According to the article, leading business economists have real GDP forecasts only slightly lower than Treasury's but much lower nominal GDP forecasts because they expect a larger fall in Australia’s terms of trade (export prices). If their view is right, Treasury's revenue forecasts could prove too high — a point investors should watch when assessing fiscal projections.
The article describes 'creative accounting' as moving spending between financial years (for example, switching early-year spending into the previous year) to make deficits look smaller. These shifts can mask true year-to-year spending trends and lead to a bigger spending bounce-back later, which investors should consider when judging the credibility of short-term budget improvements.
The article says Swan used a range of tactics: last year he shifted spending to change the timing of deficits and pushed commitments beyond the forward estimates so they became less visible. As a result, real government spending grew by 4.8% one year, fell 3.2% the next, and is expected to jump 4.3% — numbers that are influenced by the timing games and can complicate interpreting fiscal restraint claims.
This year the article notes $1.1 billion in payments to local government were brought forward, presumably to hide that the budget-year deficit is a bit higher than the previous year’s. For investors, such timing moves are important because they can temporarily improve headline budget metrics while creating funding pressures later.
Saul Eslake (of Merrill Lynch) is quoted in the article noting the disability scheme costs about $1.9 billion over four years to 2016–17, while the linked increase in the Medicare levy is expected to raise $11.6 billion in the same period. Eslake says roughly two-thirds of the net improvement in the budget balance from policy decisions over four years to 2015–16 comes from this discrepancy, a key detail for investors assessing fiscal policy drivers.
The article explains that the 'underlying' cash balance excludes some off-budget items, while the 'headline' cash balance includes them (for example, the off-budget building of the national broadband network). Eslake points out that if you focus on the headline cash balance, the budget would still be in deficit in the last two years of the forward estimates — a reminder for investors to check which measure is being cited.
The article says criticism often comes from the Opposition, partisan economists and shock jocks during budget week, but it cautions that many non-official forecasters don't have better records than the econocrats. For investors, this means treat loud criticisms skeptically, compare multiple credible forecasts, and remember official forecasts are transparent and testable against future outcomes.
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