Monday, May 20, 2013

This budget less dishonest than last year's

When it comes to forecasting the economy - and thereby the budget balance - the econocrats of the Reserve Bank and Treasury are on a hiding to nothing.

When they get it pretty right that's no better than it should be. But when they get it wrong - for whatever reason - they're fools and probably knaves as well.

The obvious truth is no economists are consistently good at forecasting the economy. It's those non-economists who forget this - including Wayne Swan and Julia Gillard - who are the fools, not the economists who cater to humankind's irrational but unquenchable desire to pretend the future can be known.

Budget week is open season for anyone who can find a microphone to claim Treasury's forecasts are wildly optimistic. But though the econocrats' record is pretty bad, I've yet to discover any non-official forecaster whose record is better.

And whereas the budget-time know-alls are rarely held to account, the econocrats are always accountable. Their forecasts are on the record for the whole world to judge after the event.

The proof of their high standard of accountability is that they often conduct systematic reviews of their forecasting accuracy, which they make public so as to keep themselves humble and to warn users of their forecasts' fallibility.

According to my quick squiz, the leading business economists' forecasts for real gross domestic product are only a fraction lower than Treasury's, but their forecasts for nominal GDP are significantly lower, mainly because they expect our terms of trade (export prices, essentially) to fall by a lot more than Treasury does.

If they are right, you'd expect Treasury's revenue forecasts again to prove too high. But to give the business economists their due, they haven't been trumpeting their differences with Treasury, either for cheap publicity or to prove what fools they are in Treasury.

No, this year the vociferous criticism of Treasury's forecasts and assumptions has come from the Opposition (they would say that), partisan economists and shock jocks who wouldn't know the difference between a forecast and a projection if it bit them on the backside.

The irony is, this is a less dishonest budget than the past few that Swan produced as he realised the long-promised return to surplus in 2012-13 would need help from performance-enhancing accounting.

One trick used extensively last year was to take spending planned for the early weeks of 2012-13 and switch it into the later weeks of the old year, thereby overstating spending in the old year and understating the budget year. Every $1 you switch increases the difference by $2.

This year Swan's creative accounting has been limited to bringing forward $1.1 billion in payments to local government - presumably to hide the fact that the budget year's deficit is actually a little higher than the previous year's.

As every accountant knows, the trouble with shifting expenses is that it comes back to bite you the following year. The government's strategy requires it to limit the real growth in its spending to 2 per cent a year, on average.

The games played in last year's budget caused real government spending to grow by 4.8 per cent the previous year, then fall by 3.2 per cent in 2012-13. But that year's fall means, despite this year's restraint, spending is expected to jump by 4.3 per cent. The comparison would be even worse without this year's fiddle.

Another trick last year was to use Swan's fiscal bulldozer to push spending commitments off into the future beyond the forward estimates, where they became invisible.

This year he's done something new, showing how the offsetting savings (including sinful tax increases) are more than sufficient to cover the growing cost of the disability scheme and the Gonski education reforms, not merely over the forward estimates but over the next 10 years.

Those who think politics but never economics saw this move as a cunning attempt to "wedge" Tony Abbott. If so, it didn't work. But I see it as a marked improvement in budget transparency, needed to prove the fiscal bulldozer had been left in its shed.

The transparency has, however, allowed Saul Eslake, of Merrill Lynch - who invariably produces the most penetrating analysis of the budget - to note that, though the disability scheme will cost only $1.9 billion over the four years to 2016-17, the linked increase in the Medicare levy will raise $11.6 billion in that time.

Eslake says about two-thirds of the net improvement in the budget balance attributable to policy decisions over the four years to 2015-16 comes from this discrepancy.

He further notes that, if you switch your focus from the "underlying" to the "headline" cash balance (thus taking account of the off-budget building of the national broadband network), the budget should still be in deficit in the last two years of the forward estimates.