Goldman Sachs has issued an extensive research note on the Australian federal Budget, observing there is little impact on the investment outlook but expressing doubt on the path to surplus.
The note by Tim Toohey and the GS economic team also looks in detail at the Treasury’s economic forecasting and concludes its run of projection errors have “damaged the credibility of Treasury and the government”.
Here’s an excerpt explaining the chart above, with emphasis added:
There is of course an issue of credibility and relevance with this Budget. If the government is widely assumed that it will not be returned at the election then the political traction generated by the Budget will be minimal. Business and households may choose to look to the policies of the Opposition and view the policy initiatives in this Budget as largely irrelevant.
However, it is the credibility of the forecast revenue numbers that matter most. The Budget papers go to great length to explain the rationale as to why revenue has disappointed, however, it is the realization that a sharp fall in revenue has only occurred since MYEFO that is working against the government’s credibility.
In Exhibit 11, we show the cash balance forecast error by the Treasury since 1997. There are three key observations;
1. The forecast error from 2008 to 2013 is 80% higher (scaled by the share government outlays) compared to the 1997 to 2007.
2. The forecast error from 1997-2007 systematically was to be too conservative. While this can be seen to be desirable outcome, the downside was that it resulted in a number or piecemeal policy decisions which squandered the opportunity to deliver transformative tax and spending initiatives. Since 2008 the mistake has been to be systematically too optimistic. The obvious downside is that it has prevented fiscal policy from operating in a counter cyclical nature during the cycle. However, it has also damaged the credibility of the Treasury and the government.
While a severity of the revenue shortfall and the size of the government discretionary fiscal stimulus during the financial crisis was the main source of the forecast error, the errors continued to compound in 2011, 2012 and 2013 at a far higher rate to the historical experience…
After forecasting in May 2012 the largest fiscal contraction in the post war period for 2012- 13 of 3% of GDP, the actual fiscal contraction was 1.6% and the much promised surplus proved elusive. Financial markets could well feel skeptical that the government will meet its new target surplus in 2016-17 based purely on the record of the past 6 years.
As we highlighted in our Economics Analyst publication on Friday, May 10, the government has blamed the latest forecast error on weak nominal GDP and a high exchange rate for the revenue short fall. However, neither explanation is reasonable in the context of what was already known at the time of the MYEFO. The $A/$US was assumed to average 1.02 and the TWI 75 cents. This compares with A$/$US currently at 0.99 and the TWI of 76 cents. Moreover, the Treasury’s estimate for the terms of trade look to be close to what has transpired in commodity prices over the past 6 months.
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