Treasurer’s faith in theory is touching

Why can’t we believe the budget forecasts? Why were they so wrong over the past decade? Does Wayne Swan decide the forecasts, as the Liberals imply, or does Treasury?

And was the 2012-13 budget surplus sunk by unforeseeable shifts in the dollar and commodity prices, as the Treasurer puts it? Or was it more a case of poor judgment?

If you want partisan black and white answers, stop reading now. This issue is not like that. Both sides are trying to con us.

Start with the Liberals – that issue is simpler. The forecasts come from Treasury, not the Treasurer. Treasury does not submit a range of forecasts; Swan’s office has a say but Treasury makes the call.

Former Treasury forecaster Chris Richardson, who now runs Deloitte Access Economics, explains the process:

”Treasury does the forecasts, to the decimal point, after discussions with the Reserve Bank and others. The Treasurer’s office has the right to argue the toss but it’s rare that it does so.

”Governments of all stripes have been pretty good. That was true of [former treasurer Peter] Costello, it’s true of this government.”

There were hints this time that Swan’s office did ”push back” to urge a higher growth forecast but Treasury rebuffed it. Some of its forecasts seem very optimistic – above all, predicting commodity prices will stay near current levels for the next two years – but that is Treasury’s own view.

So, can we believe the budget estimates? Of course not. We should never trust budget forecasts until humans are genetically modified to foresee the future. These are educated guesses by experts – and experts can get it wrong.

That’s Labor’s problem. Treasury has been getting revenue forecasts wrong for a decade. But before the financial crisis, it kept underestimating revenue. Now, it consistently overestimates it.

Underestimating revenue leads to surpluses, which make the treasurer look like a genius. Overestimating leads to deficits, which leave them looking like a dunce.

Those interested should read the independent Review of Treasury Macroeconomic and Revenue Forecasting on Treasury’s website. It found the key problem since 2010 was that the forecasting model failed to grasp the revenue implications of the two-speed economy, particularly when miners wrote off investment against tax, and the rest of the economy was struggling.

Treasury has changed its model to separate miners and banks from the rest. The risk now is that the economic forecasts prove too rosy.

Was the 2012-13 revenue shortfall unforeseeable? Ex-Treasury forecaster Stephen Anthony, of Macroeconomics, warned of it a year ago, based on the flawed model.

Treasury concedes it overestimated the strength of private demand. Some of us warned of that, too.

Had Swan listened, he would not have staked his credibility on delivering a surplus. It’s too late now.

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