Why Labor's forecasters have fled away

Outside the 'media room' at Tuesday night's budget lock-up, a desk had been placed across the corridor to funnel journalists into the room where Treasury officials would answer all their questions. 

As your correspondent waited with many others in the corridor, a fairly calm but tired-looking man emerged clutching a briefcase. He looked up the corridor in the direction of the press pack – hundreds of journalists lay that way. He looked the other way, down the empty corridor, and made his decision. With some colleague or other Treasury Secretary Martin Parkinson pushed past the desk and disappeared out the back door.

With a little doctoring, two lines from a Keats poem sum the scene up well: “And they are gone: aye, ages long ago/These economists fled away into the storm”. (The original line was 'these lovers fled away', but that just sounds wrong).

These fleeing men are the ones the Labor government has chosen to blame for the sorry state of the federal budget. Because as explained on Tuesday (Who framed the budget bloopers? May 14), Treasury has had a pretty bad run forecasting the revenue side of federal government.

Every year of the Rudd/Gillard governments they have underestimated revenues by an average of just over 2 per cent of GDP.

Hopeless! Pitiful! Hie thee into the storm of thy own making!

Actually, I'm guessing the reason Parkinson looked relatively calm is that his teams of economists did no worse with their forecasts than just about everyone else in the private and public sector.

It turns out that modelling the domestic economy of a would-be middle-power, against a background of on-again-off-again green shoots in Europe and the US, and unpredictable growth writedowns in China, isn’t as easy as it looks.

So right on cue, the unpredictable global economy is wreaking havoc elsewhere too. News today is that the conservative government of Colin Barnett in Western Australia is watching its own Treasury’s forecasts become shredded by reality – The West Australian reports today “The Barnett government will break another promise, this time to give tax relief worth hundreds of millions of dollars to small business in its continuing scramble to prevent the state budget falling into deficit.”

The WA Treasury was forecasting a surplus three months ago, but those forecasts are being rapidly adjusted based on what Treasurer Troy Buswell called a “material decline” in revenues.

Premier Barnett told ABC radio that he would have “no choice but to significantly increase taxes" if WA wasn’t given back a bigger share of the GST it pays to Canberra each year – something that is likely happen if the Coalition wins the federal election (threatening, amongst other things, the GST flowing to Tasmania).

Hopeless! Pitiful! Etc, etc.

And in the private sector, it’s all shock-horror too. After a long decline in the price of major mining stocks, mining services companies are now taking a pounding as well. Mining and engineering contractor UGL revised its full-year profit guidance yesterday for the second time this year, sending its share price down 17 per cent. It was accompanied by Leighton, Monadelphous and Boart Longyear falling between 4.5 and 9.5 per cent.

The dollar continued its correction, trading late yesterday well below parity at 98.87 US cents. And our bourse headed the opposite direction to Wall Street as traders began speculating that continuing signs of growth would soon have the Federal Reserve pulling back some of its extreme stimulatory measures.

Perhaps all this is why Martin Parkinson ducked out the back door – he didn’t want to keep answering journalists’ questions when all he’s really got to say is: ‘Well you try picking tax revenues through a period like this’. WA can’t do it, miners and mining services firms can’t do it, currency and equity traders can’t do it. So who can?

Well expect Tony Abbott to imply, in his budget reply speech tonight, that he will be able to do it. The last government he was part of had the good fortune to see Treasury get its numbers wrong in the other direction – the error grew year after year, starting with an extra 1 per cent of GDP in 2003-04, and growing to a whopping, and I mean WHOPPING, 7 per cent of GDP in 2007-08  as John Howard was writing cheques to voters try to prevent Kevin Rudd inheriting that cash bonanza.

So after all those upside and downside errors, how would Hockey and Prime Minister Abbott proceed? They will know that Treasury’s forecasts, though out every year, are really not as bad as many other forecasts from state treasuries and the private sector. So surely they would be ultra-conservative on the fiscal side just in case the forecasts were too optimistic yet again (and there’s every sign they will be).

Well that would be nice, but neither side of politics can afford to run the federal budget using assumptions of revenue lower than those in this year’s budget. Fiscal policy is tight as a drum, prompting many commentators to argue that Wayne Swan has booby trapped the budget, or tried to wedge Abbott and Hockey, by making savings that will be hard to maintain post-election.

But that’s the job the Coalition is most likely to have to do – and make other savings on top of those if the budget is to come anywhere near a surplus over the forward estimates.

Otherwise, in the words of Colin Barnett, they’ll have “no choice but to significantly increase taxes". And good luck with that – even the limited encroachments on middle-class welfare measures by Wayne Swan in this budget are eliciting howls of outrage by people who forget that it wasn’t until the Howard era that voters expected to be paid from the public purse to have babies, and then be paid to raise them.

In short, while Martin Parkinson will likely lose his job after September, his sacking will be based on the false assumption that every else got their forecasts right, and he got his wrong. Just not true.

The other guy who will lose his job, Wayne Swan, deserves much more opprobrium for fiscal errors in previous budgets. Even if one forgives the Rudd government, in the chaotic GFC budgets of 2008-09 and 2009-10, for not winding back over-generous welfare payments to  families who didn’t need them, in 2011-12 and 2012-13 not doing so was wrong. Cutting into these measures in 2013-14 was too little, too late.

Swan will bequeath to the Coalition a huge fiscal task that Hockey will claim was all Labor’s fault, and Labor will say was Martin Parkinson’s fault. Neither of those propositions is true.

Given the headwinds the Australian economy will face in 2014, there is unlikely to be a resurgence in tax receipts to make Hockey’s job any easier and further reforms to the tax base will likely be needed.

But then I doubt the Coalition will want to talk about that before the election, when there’s so much it can say instead about Labor and that disappearing man, Martin Parkinson.