There’s a new appendix in the Budget papers – the review of Treasury’s performance on forecasting economic indicators.
Even Treasury admits its results in recent years have been pretty dismal.
The chart above shows the overall forecasting performance since the 1990s being solid apart from 2001, caused by economic activity all over the western world practically coming to a halt following the September 11 attacks.
But overall, it’s a reasonable record – apart from the past five years.
To be fair the ongoing washup from the crashing economic wave that was the GFC has played havoc with the ability of economists to predict trends confidently.
Australia – with its largest trading partner now being China, the dollar being drawn into the global currency wars, and the national economy’s fortunes being hitched to commodity supply and demand – is more than ever at the mercy of violent jibes in the world economy.
But Treasury’s forecasts in the Budget papers compared to other institutions – the RBA’s, for example – are for stronger growth overall. These assumptions have large flow-on effects on revenue, as stronger growth means healthier profits and more tax receipts.
In its statement of monetary policy just last week the Reserve Bank adjusted its growth projections and sees the economy slowing – with growth to June this year being just 2.5%.
Treasury plumps for 3% in the year to June. It sees a slight reduction in output to 2.75% next financial year but then a rebound to a rudely healthy 3% in 2014-15.
The RBA doesn’t give detailed forecasts out that far. But Goldman Sachs, which correctly picked an interest rate cut against the consensus view this month, does.
Goldman Sachs is forecasting growth at 2.8% this year, the same next year – and then a FALL to 2.4% in 2014-15.
It may seem like only a matter of 0.25% points here and there but over the course of the budget’s forecasting periods the rate of growth translate into billions of dollars in accompanying tax receipts.
Against the RBA and the world’s biggest investment bank, the Treasury forecasts are looking as chipper as a Tasmanian pulp mill.
Forecasting in the volatile global economy is a difficult game. Treasury claims in the budget papers that its results are consistent with peers around the world (a statement that’s worth testing outside the lockup).
But two things here. First, apart from the weirdness around the GFC, Treasury has missed the GDP figure on the high side three times out of the last four.
And second, Treasury’s forecasting has a pattern of being overly optimistic – most spectacularly with the MRRT and the carbon tax, the models for both of which wildly overestimated the amount of money they would haul in to the government’s coffers.
The increase in the Medicare levy which will collect over $3 billion annually in revenue to fund the NDIS is one that Treasury can be relatively sure about – there’s a great degree of certainty on the number of eligible taxpayers and the amount that they would contribute.
But other measures – particularly the promised revenue from cracking down on corporate tax loopholes – should be treated with some caution in terms of what they’ll contribute to the Budget bottom line.
The Budget papers say this package will round up some $4 billion in tax between now and 2016-17. Combined with some other savings and tax crackdowns this will go fund the government’s other big-ticket item – the Gonski education reforms.
There are other measures that mean – basically – that rich people will hate this Budget. From 7.30pm tonight it introduces new measures targeting capital gains earned by foreign nationals. It also targets trusts – the favourite hiding place for wealthy people’s assets – and gives extra resources to the ATO to pursue third-party data matching to track transactions and ensure correct levels of taxes are being paid.
Treasury can be ambitious about the revenue it wants to collect from corporates and individuals with this crackdown.
But equally Treasury should also be under no illusions about the ambition of the companies and people it’s targeting to hold on to their money.
The strength of these revenue measures, like the budget-fixing mining and carbon taxes before it, and the Treasury’s growth projections, is by no means guaranteed.
The suite of measures is targeting sectors of society that aren’t paying their fair share and this is commendable and have widespread community support.
But on Treasury’s recent record there’s plenty of reason to be suspicious about the ability of these measures to fix the budget.
And the same goes for the growth numbers that underpin the whole house of cards.
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