Australia’s federal Treasury’s forecasting has been under the spotlight in recent months, with critics saying it has been too optimistic in the figures it has been using to project economic growth and as a result, revenue which flows through to the bottom line, leading to repeated larger-than-anticipated deficits.
Treasury has muscled up on this in the Pre-Election Economic and Fiscal Outlook this morning, going to some length to describe the uncertainty surrounding GDP projections.
This chart shows the potential GDP outcomes surrounded by a target band that represents potential GDP outcomes when two different confidence intervals are applied.
Per the PEFO:
Chart A presents PEFO forecasts and confidence intervals for average annualised real GDP growth. For example, average annualised real GDP growth over the two years 2011-12 to 2013-14 is expected to be 2¾ per cent, with the 70 per cent confidence interval over the two years from 2 to 3½ per cent. In other words, if forecast errors are similar to those in the past, there is a 70 per cent probability that the average annualised growth rate will lie in this range.
What’s inescapable though, is that a miss to the lower end of this CI range would mean it would take longer than forecast to return to surplus. Downside misses have been more commonplace in recent years, which is why Treasury has been taking such heat.
It’s arguable this has become a more complex job in recent years. The complexities surrounding the economy have increased – for example, Australia’s economic fortunes are intricately tied to demand from China, where authorities have been talking lately about intervention to moderate growth rates. There are more variables in play, and Australia, regardless of who is in government, is more at the mercy of outside forces than ever before.
The full PEFO is here.