A common criticism of the Gillard/Swan ALP governments is that it has deliberately chosen over-optimistic forecasts of economic performance and that this is the reason why promised surpluses have never materialized and why the May 2013 Budget bottom line needed to be revised $12bn downwards just three months later in the August Economic Statement.
In fact this criticism, which originated as a political strategy by Joe Hockey to smear the ALP – listen to the MP3 embedded on the page – has become accepted fact in much of the electorate and is seen as further proof of the supposedly inherent dishonesty of the ALP.
A supplementary criticism has also gained popular appeal that, as most recently evidenced by the horrendous August revision, Treasury figures are proven to be ridiculously inaccurate, always wrong, and that therefore Joe Hockey and LNP are free to use whatever figures they choose in order to frame their alternative budget and campaign promise costings. Naturally this assists the LNP a great deal in their election campaigning.
Where Did The $33 Billion Go ?
It is indeed puzzling to the garden variety voter such as myself why the official 2013-2014 Budget delivered in May was redundant and proven so far wrong within three months. An explanation is necessary.
So I had a bit of a look into it, and I am currently satisfied that the ALP has not deliberately chosen over-estimates and has therefore not been engaged in deceit of the electorate.
New Data, New Figures
The short story is that after the May budget, the Treasury received new data about global and domestic economic conditions. These forced a revision of the May budget. New data, new figures.
One month before the August Economic Statement in which the $33bn revenue write-down over four years was announced, The Australian ran a story by David Uren Treasury to revise down growth forecasts in which various world and domestic economic data were summarized.
It stated that new data relating to the major emerging economies Brazil, Russia, India and China had shown growth in these nations to be lower than expected, as were international commodity prices. None of this was regarded as a revelation of deliberately false over-estimation in the May budget and in fact it was noted that:
Treasury’s budget forecasts that Australia’s growth would average 2.75 per cent this year and 3 per cent next still tally with many private-sector estimates
In making the August Statement, Treasurer Bowen fingered three causes: lower than expected global growth, especially in China, lower commodity prices and lower than expected wages growth in Australia. The hiatus in global growth is forecast to cut nominal GDP growth from 5% to 3.75%, reducing real GDP growth from 2.75% to 2.5%.
Chinese Growth Rates and Credit Policy
Treasury’s forecasts of Chinese growth in the May budget were in line with those shared by most forecasters. ICIS, the world’s largest private sector forecaster of petrochemical commodity prices states that
Even as recently as May the conventional view… was that China’s economic growth would accelerate rather than decelerate in 2013.
Treasury explained the revenue write-down in large part due to policy actions taken by China taken after May, most particularly a tightening of credit controls within China.
The more moderate growth outlook for China reflects an expectation that recent policy actions to address growing risks in China’s financial system will mean a less supportive credit environment than assumed at budget[time].
Treasury applauded China’s actions but noted its deflationary effect:
While contributing to a more stable and efficient financial system, and hence more sustainable medium- to longer-term growth, tighter credit conditions are likely to weigh on China’s economic activity in the near term.
Almost No-one Correctly Forecast Terms Of Trade Deterioration
It is true that Treasury was far more optimistic than Australian private sector economists in their forecast of Terms of Trade for 2013-2014.
Alan Kohler on Inside Business Sunday on August 4th showed that the severity of the deterioration in commodity prices post-May Budget was unexpected by everyone, even private sector experts.
Kohler noted that the Budget forecast a decline in the terms of trade of 0.75 per cent. Kohler then compared that to the forecast of market economists which was a fall of about 2.5 per cent and stated they were wrong too. The severe fall caught everyone out.
Treasury’s now at minus 5.75 per cent for the terms of trade, roughly the same as the market.
The National Australia Bank is also generally supportive of the Treasury view of the sudden deterioration on commodity prices being linked to recent (post-May) developments in the Chinese economy here
..partial indicators of the economy have generally remained disappointing. The situation was further compounded by the recent disruptions to China’s financial markets.
But Treasury Is Still Hopeless
While Kohler’s program demonstrated that the sudden deterioration in commodity prices, and hence a major input into the revision of the revenue of the August Economic Statement was a surprise to most forecasters, his guests went on to claim that the Treasury’s recent record on economic forecasting is poor and indeed hopeless.
CLIFFORD BENNET, CHIEF ECONOMIST, WHITE CRANE REPORT GROUP: Well I think everyone’s record in the private sector is probably better than Treasury’s, to be honest. And it’s not something new, it’s been something that’s gone on for years. And I think there seems to be a pattern of extrapolating recent short term data into the long term, which needs to be looked at.
The views of Kohler’s guests are not shared by all forecasters.
For example, Treasury’s forecasts for nominal GDP growth of 5% in 2013-14 (revised downwards by Treasurer Bowen to 3.75% in the August Economic Update) and 5% in 2014-15 are consistent with those of private economists. Citibank predicted 5.5% in 2013-14; Bank of America Merrill Lynch predicted 4.0% in 2013-14 and 5.1% the year after; Goldman Sachs predicted 3.5% for 2013-2014 and 5.1% the next year.
A review of Treasury forecasts for the 10 years ending November 2012 showed that Treasury’s forecasts compare well to others, such as those from Access Economics and the Reserve Bank. They also were about as accurate as other international forecasters.
The private sector group Consensus Economics, which compares about 20 or so Australian forecasting groups, also shows that Treasury forecasts tend to sit in the middle of the pack.
Of direct relevance to Hockey’s slur that the ALP this year deliberately chose misleading figures to hide economic data, the review of Treasury forecasting showed that during the recession in the early 1990s, Treasury’s forecasts also didn’t anticipate that downturn or fall in tax revenue. In other words Treasury has a consistent record of underestimating both downturns and upswings. There is nothing sinister about Treasury figures in this or about any government’s use of them, though many challenge the assumptions and inputs into Treasury modelling.
For example as the Australian Financial Review notes, Treasury currently uses a “structural or long-run” level for Terms Of Trade equal to the average from 2003-04 until 2015-16. This level is the same one used as the private sector firm Deloittes but its about 40 per cent higher than what the OECD uses in its structural budget analysis of Australia.
Finally on this and contrary to popular belief engendered by Hockey and the LNP, Treasury does not provide a range of figures for govt. to select from. It provides a single set of figures with which the government then frames its budgets. The entire pre-conception of Treasury serving up a smorgasboard of figures for government to choose from is just false. A deliberate lie by Hockey which has taken root in the mind of the polity. As Bernard Keane puts it:
Joe Hockey has claimed that Swan had cherrypicked from Treasury’s range of estimates. Hockey, who has been a junior minister in the Treasury portfolio, knows that’s a lie — Treasury does not serve up a range of budget forecasts for the Treasurer.
Here’s Head of Treasury, Dr. Martin Parkinson responding to Hockey’s falsehood on this matter.
“Let me be very clear: Treasury does not provide the Government with a range of numbers; Treasury provides its best professional estimate to the Government,” he said.
“In these circumstances, we in Treasury have struggled to keep pace, and the result has been large revisions to our economic and revenue forecasts,” he said.
“The result has been to undertake a comprehensive review of forecasts overseen by an independent panel.”
The $33bn in revenue write-down over four years is due to a revision downwards of nominal GDP growth in 2013-2014 from 5% to 3.75% and similar reductions through the four years. The Treasury estimate of GDP growth given in the May Budgetwas not unjustifiably optimistic and sits comfortably alongside estimates of some of the world’s major banks. Alongside this Treasury noted a sudden steep reduction in Terms Of Trade. It is true that the Terms Of Trade estimate by Treasury was significantly more optimistic than private sector forecasts. The combination of these two factors (GDP, Terms Of Trade) forced the production of the revised economic outlook in the August Economic Statement.
In short, Treasury received new data after the May budget which forced a write-down of forecast revenue. The new data was in relation to slower growth worldwide and, of particular relevance, China. Commodity prices fell sharply, well beyond nearly all forecasts, well more than double that of the consensus private sector estimate for this year.
Treasury forecasts for more than two decades show under-estimates of both upswings and downturns. This is a consistent record and not, as Joe Hockey and the LNP like to pretend, due to political interference. In general, Treasury estimates are often in the mid-range of the set of forecasts made by economists and various organisations, though since they GFC, as volatility continues, they have tended to be high, over-estimating growth and revenue.
In regard to the concept that the ALP has selected favourable estimates from a range of forecasts, this is an unashamed falsehood by Joe Hockey. Treasury does not provide a range of figures from which government may select. It simply provides a single set, which government then uses.
Finally, the Panel which reviewed Treasury forecasts over the past decade found the Australian Treasury to produce forecasts of good quality, better than the forecasts provided by other Developed economy Treasuries, but with an historical record of larger errors in more volatile economic conditions such as the GFC. That Panel included both private and public-sector experts including Mr. Peter Crone, Chief Economist and Director Policy, Business Council of Australia. Quite obviously Mr Crone is no slave of incorrigible public sector mentality and well able to critique Treasury forecasts from an ‘outsider’ perspective.
A Quick Case Study
[Text in this section drawn from The Mystery of Treasury’s Disappearing revenue: Parkinson explains by Bernard Keane and Glen Dyer at Crikey].
Wayne Swan was pilloried in 2011 and 2012 for non-materializing surpluses. The PEFO statement in 2010 underestimated 2012 revenue by an astonishing $53 billion.
The reason for the discrepency was that the exchange rate didn’t fall in response to deteriorating commodity prices – an eventuality never before seen and therefore not modelled.
The main culprit in this was that Australia’s AAA credit rating continued to attract demand despite falling Terms of Trade. Perversely, the strength of the Australian economy led to a revenue shortfall. Additionally, Treasury found that their model for company tax revenue did not adjust for certain factors such the lower rate of tax that mining companies pay because of their much higher deductions. The model was then tweaked to do so, but that didn’t help Swan in his hour of need.