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The Budget's Forecasts: How Plausible?Email Marketing Business Opportunity - Helen BairstowIs it time to abolish compulsory retirement?The Easiest way to do a Client NewsletterUsing Email Marketing to Beat the Economic DownturnWhy Warren Buffett won't buy a NewspaperAre Average Returns Now Yesterday's Scraps?
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The Budget's Forecasts: How Plausible?

Click here to buy - A How To Book of SMSF's by Tony Negline
John Robertson

The Government's budget has been accompanied by a plausible set of economic assumptions. By effectively disowning the economic forecasts behind his budget as a ploy to outflank the Opposition, Prime Minister Kevin Rudd is preventing a quality debate on the budget outlook.

The government's budget analysis is underpinned by a set of economic growth forecasts which include:

The growth forecasts are the foundation on which a return to surplus budgeting is based. The slower the anticipated growth rates, the weaker the growth in government revenues and the tougher the task of reining in the prospective build-up in government debt.

The tax base will be more important for debt repayment in the current cycle because the Commonwealth Bank, Telstra and Qantas, among other previously government-owned enterprises, have already been disposed of leaving the government without asset sales as a debt reduction option. In this, Australia will be in a different position to governments in the UK and the USA which have been buying assets which can be sold when more buoyant economic conditions return.

The forecasts are also more controversial than usual because of a change in the approach to framing them. In past years, forecasts beyond the twelve months immediately ahead were essentially working assumptions rather than an analytically based view of what was going to happen. An assumption that historically average rates of growth would prevail over the projection period was most frequently used.

In looking at the short term recovery phase on this occasion, three possible growth trajectories could be contemplated:

The timing of the initial recovery is probably the biggest guess because of the unprecedented nature of the currently prevailing global recession. Right now, when everyone is concerned about the downside risks, an assumption of recession-like conditions in the year immediately ahead does not appear controversial but the confidence interval around the base case must be regarded as especially wide.

We probably understand more about the trajectory and composition of growth once a recovery is underway. The Government has presented an arguable case in its budget documents but the Opposition is also on sound ground in questioning the likelihood of a prolonged period with growth rates well above the long term average.

Failure to reach above average growth rates after 2011 will jeopardise the government's strategic budget reduction objectives. If the Government's political opposition can create doubts about the growth forecasts, it will be able to undermine the Government's political standing.

The Opposition homed in on this point during parliamentary questions in the past week. Prime Minister Rudd's immediate response was that the Opposition was attacking the integrity of the Treasury (whose officials prepared the detailed economic analysis included in the budget documents).

According to the Rudd doctrine of ministerial responsibility, these are Treasury forecasts not government forecasts and, therefore, not to be second guessed. It follows that the government cannot be held accountable for them.

Rudd has used this ploy before to blunt the thrust of opposition attacks. On this occasion, he joined the Treasury with the Reserve Bank and the Australian Bureau of Statistics as "independent" organizations that should be quarantined from political debate.

In this, he is fundamentally mistaken notwithstanding the reserves of moral outrage he manages to summon in defending the doctrine. Both the central bank and the national statistical agency have clear statutory responsibilities allowing them to bypass ministerial control. Treasury, on the other hand, is a policy department for which a minister is responsible in the same way that the defence or health ministers are responsible for policies and views emanating from the departments they head.

The attempt to stifle debate on these economic matters is in marked contrast to how economic policy is conducted in the USA, for example. The U.S. Congress can undertake independent analyses. Senate and House committee members can question government officials and others with relevant expertise to enhance their understanding of economic events and potentially improve the quality of their decisions.

While none of these activities necessarily lead to more accurate economic forecasts,
they clarify considerably the extent to which policy positions are sensitive to changes in conditions. They also encourage a higher quality discussion of the issues which is less frequently mired in rhetoric about whether the debate should be occurring at all.

The Prime Minister has an arguable case to present in favour of his forecasts. Instinctively using the Treasury as a shield against criticism, does not necessarily do the organization any favours. If the forecasts are off-track to any significant extent, the Treasury will have been identified well ahead of time by its bosses as being at fault and will have to take the brunt of any criticism. Perhaps this is precisely what the government is trying to achieve.


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