Budget forecast failures

You’ve known it for over 6 months if you’ve been reading MB for that long, but here you go.

The wafer-thin $1.1 billion budget surplus Swan had promised to deliver was shattered today when company tax payments came in almost $4 billion under expectations, reflecting commodity price falls and weakness in the global economy.

“Tax receipts are well below our forecast,” Mr Swan said. “It was a substantial hit to profits that Australian companies have experienced in the first half of this year.”

Mr Swan said the impact on tax reserves in six months was already at the level the Labor government had predicted for the entire year.

“It’s a really big hit to revenue. It’s a huge whack,” he said.

“Given what we’ve seen it’s unlikely that there will be a surplus in 2012/13.”

So the government has finally admitted that once again it’s projections for revenue were incorrect and it’s “bye bye” surplus.

Does it matter ? Not at this stage, which makes you wonder why Labor insisted on making it such a spectacle. What’s more important in my opinion is it shows, once again, that Treasury is having serious trouble interpreting the local and global economic dynamics that are at work on, and in , Australia and I do wonder if  anyone at the Treasury is working to fix their revenue modelling ?

The flow-on effects of this poor forecasting have been obvious over the last week as the Federal and State governments have argued openly about how taxation should be structured and divided under the pressure of falling revenues, but it must be noted that is isn’t just the Federal Treasurer delivering the message of over-optimistic estimates. Queensland is at it as well.

Queensland will take a $2.62 billion hit to revenue over the next four years, led by a drop in mining royalties and federal health and education funding.

State Treasurer Tim Nicholls has released his Mid-Year Fiscal and Economic Review, three months after the budget.

It shows mining royalties will be down $1.36 billion to 2015/16, due to lower coking coal prices and softer demand from Asia.

Mr Nicholls said the budget had also suffered from the federal government’s health and education funding cuts, with overall federal funding down by $756 million over the forward estimates.

As is South Australia

There has been a further blowout of $300 million in the South Australian budget, to $1.169 billion deficit.

Treasurer Jack Snelling has released his mid-year budget review, which demands government departments achieve a further 1 per cent in budget savings.

Another 1,750 public sector jobs are earmarked to go and the Government plans to achieve additional savings of $464 million over four years.

and also New South Wales

The finances of NSW will be in deficit a year longer than forecast, with the government blaming a drop in federal revenue and mining royalties.

NSW Treasurer Mike Baird today released the midyear budget review, which found the June budget’s surplus of $289 million for 2013-14 was now predicted to be a $423m deficit.

The update confirmed the auditor-general’s October finding that the state was in surplus to the tune of $680m in 2011-12, after a forecast deficit of $337m in the June budget.

The 2012-13 deficit improved slightly from earlier in the year, down from $824m to $776m.

All up, it’s a fairly woeful day for economic forecasters. The big question now is how will governments at all levels respond the renewed budget pressure. South Australia has already announce a raft of new spending cuts, let’s see if the others follow.

 

48 Responses to “ “Budget forecast failures”

  1. AnonNL says:

    I think you’ll find that (some) Treasury staff probably have no probs identifying the issues we discuss here on MB daily. In fact, they probably ready MB daily as well.

    However, organisations are not homogeneous entities and in a political environment the “truth” is often based on what is acceptable. If part of Treasury staff is bull, and being a bull is more convenient for the politics of the day than the bullish thinking is what will become “Treasury’s” analysis.

    Pretty sure there are many very smart yet frustrated people in Treasury at the moment.

    • reusachtige says:

      Agreed. It’s like people who commission BS Crapnel research reports – they already know what the answer will be.

    • The Bear Jew says:

      The Treasury Use of Systems agreement states that “Treasury ICT equipment shall not be used to talk down the Australian economy”

    • 3d1k says:

      Related?

      “It’s hardly a secret to anyone who’s worked in an economics department: some students enrol in economics because they want to study something that seems vaguely useful, but they don’t have the grades, or the mathematics and language skills, to make it in business or engineering.

      Economics programs typically have relatively few essay requirements, and require little by way of verbal skills. Relative to traditional arts and humanities subjects, the reading lists are short and manageable. The math gets challenging at more advanced levels, but most of undergraduate economics requires nothing more than high school level calculus. My third year course (open to non-majors) requires about grade 10 or 11 level algebra.

      As a result, at most Canadian universities, economics attracts some students who are not strong academic performers (if they were, they were be in their first choice, business), and who don’t have much intrinsic interest in economics. They just want a qualification that will help them to get a job. ”

      http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/12/the-dirty-secret-of-economics-education.html

      • DrBob127 says:

        This is generally true of the school of neo-classical economics.

        The true economic pioneers like Prof Steve Keen (disclosure: I am a fan) use advanced models (high order multivariate differential equations and non-linear relationships) http://www.debtdeflation.com/blogs/wp-content/uploads/papers/KeenPhDFinancialInstability.pdf

        These models are literally at the bleeding edge of our (humanity’s) understanding of economics of how markets, the aggregated spending behaviour of people, and economies actually function rather than how the are supposed to operate to either;

        *give most ‘economists’ the ability to ‘understand’ the models.
        *Help baffle the general population into believing that becoming a debt slave and giving lots of your hard-earned money to the bank is the way to ‘get ahead’ in life and ‘secure you own financial independence’ by ‘building wealth’

      • jerry says:

        Very interesting indeed .

        The table on page 7 seems to have left out the real ” bitch” . Yes, non linear DE’s are a pain but with the random nature of the variables an animal called the ” stochastic differential equation” will be invoked .

      • dumb_non_economist says:

        2d,

        Language skills for engineering, you have to be fcuking kidding me!! Sorry, but that is absolute bollocks. Hard degree, yes, language skills laughable.

      • 3d1k says:

        Dr Bob, thanks for that – not a ‘go’ at the discipline rather a reminder of the reliance on various ‘experts’.

        dne, :( I do my best but lanwich is trikki.

      • dumb_non_economist says:

        2d, that wasn’t a shot at you, just that most eng. I’ve met haven’t shown themselves to be anything but normal there, you however are an exception in every regard, so smile!!

        Merry xmas.

      • TSpencer says:

        as a current economics masters student id agree with this in part… I find most of the people including myself are interested in economics-finance route rather than the govt, think tank, policy route..

        in saying that though the purely economic subjects are much harder than the finance ones, although there’s some cross over.. though I may be at odds with the consensus

  2. Labrynth says:

    Swanny pulled the trigger too early. Should have waited for unemployment to tick over 6% next year before dumping the pledge to surplus to help with the fall out over rising unemployment.

  3. BotRot says:

    I wish someone would have enough bad taste to say, DERRR…! in Swan’s face.

    The big question now is how will governments at all levels respond the renewed budget pressure.

    Austerity by other names perhaps?

  4. Christiaan says:

    House prices to the moon!!!

    My #ss

  5. AF says:

    Well they can still post a surplus if they drop NG right now!

  6. stacks says:

    They were never in a million years going to deliver a surplus, I don’t understand why they made such a song and dance about it. And did so repeatedly.

    I can see the tv ads during the coalition election campaign already. Replays of swan like a stuck record committing to a surplus, again and again

    • darklydrawl says:

      Yes, this was my thought as well. They are scared of being seen as “poor economic managers”, but I think they would look a lot better if they stop banging on about getting surplus and started being accurate and honest about the situation. Like that will ever happen…

    • Rusty Penny says:

      They were never in a million years going to deliver a surplus, I don’t understand why they made such a song and dance about it. And did so repeatedly.

      Because the bogan was told during the boom that surpluses are the bellweather of good economic management.

      I mean, looking back to the 2004 election when the Libs themed ‘Interest rates will always be lower under a liberal government’ as if they too were a virtue.

      The correct interest rates, not low intrest rates, are in the best interests.

    • MattR says:

      Exactly right, DE says it’s been predicted for 6 months? I say, it was predicted since 2007. This government were never going to deliver a budget surplus under any circumstances. The entire claim was laughable and should never have been made because let’s face it, the ALP are completely incapable of fiscal prudence. Bad times, good times, it doesn’t matter.

      The fact that they haven’t produced one is irrelevant, they never should have made the claim in the first place. Give me one person that believed they would achieve one, and I will give you one fool.

      • dumb_non_economist says:

        MattR, go home FFS! I look forward to watching Dumb & Dumber (for you, that’s Abbott & Costello, sorry…Hockeye) dealing with the economy and watching Hockey supply the surplus he stated he can and won’t no what.

      • stacks says:

        So hockey will do a swan nice then…

      • The Lorax says:

        MattR: If we wanted to read a paid political ad for the Liberal Party we can go to the Australian. We don’t need your partisan drivel here.

        FWIW, I’m really looking forward to Tony and Joe trying to deliver a surplus in a post mining boom environment.

      • TSpencer says:

        Matt is a LibDem… calling a spade a spade isnt partisan drivel as much as it upsets your antiquated views

      • russellsmith55 says:

        It’s good to skeptical about the skill and true intentions of any political party, and the ALP has surely done enough to demand that skepticism.

        I just hope everyone applies that same skepticism to all political parties – especially the ones that happen to ideologically align with you at the time.

        Its easy to point out flaws of past and sitting governments, especially ones you don’t agree with. But it’s the future ones we probably should be focusing on.

        When debating, most ‘wing’ voters I talk to have a nasty habit of spouting rules of thumb, emotionally obsessing on one sides problems, and defending/downplaying any arguments against their side before even considering the evidence. And with the swing voter demographic being no greater than ~23% (stat suggested in some random crikey article) it’s no wonder things are the way they are.

      • TSpencer says:

        nice summing up of what the poster above you is all about.

    • Ronin8317 says:

      The ALP was hoping that iron ore prices will go back up and save them.

      In terms of politics, this is a really, really stupid. It will lead to a total wipeout in Sydney’s inner west. The Daily Telegraphs will run a story like this: “Your deficit pays Boat People to live like Kings”, and it’s all over. The decision will also allow the Coalition to run a deficit by blaming the ALP, thus guaranteeing the ALP to be in the wilderness for at least 2 terms, if not more.

      In terms of policy, we need to raise taxes and cut entitlement. It is definitely not ‘economically responsible’ to kick the can down the road.

      • Rusty Penny says:

        Yes, the electorate will believe it.

        Yes, we will vote the coalition in again.

        Yes, the Robb/Reith inspired austerity will plunge Australia into a depression worse than the 1930′s, it will be more like the 1890′s, but longer.

        Yes, we deserve what we get.

        Defined benefit pensions from the future fund will go even further.

      • Pfh007 says:

        “Robb/Reith inspired austerity”

        There is no particular reason to associate conservative governments with fiscal restraint / small government.

        Remember that the Hawke Keating government spent a lot of the time reining in the pork fest of the Fraser government.

        The ALP economic reformers were chased away in 1996 and Howard lost interest in economic reform after the GST.

        For the last 10-15 years, slogans aside, it has been a bi-partisan pork fest.

        Abbott is pure DLP combined with the electoral instincts one would expect of a former journo and student pollie.

        I wouldn’t be expecting a lot of fiscal prudence from a change in government.

        Certainly, their spending priorities will be different and some will cop cuts but overall there will plenty of government pork going on forks.

      • Rusty Penny says:

        Oh I’m not aligning austerity with conservative governments.

        I’m taling about the methodology that will be applied to implement austerity.

        For example, a Steven keen austerity will differ from say a Judith Sloan austerity.

        Noe Abbott, yes he won’t care too much for austerity, but he won’t backstop any prevention of suffering either. He will say yes to ensure he has enough LNP members voting for him as leader.

        The amount of suffering Robb and Reith not only will apply, but will enjoy applying, to disadvantaged, will crush aggregate demand.

      • Pfh007 says:

        I guess I meant that the pursuit of a ‘surplus’ may not be high on Mr Abbott’s priority list (though he may talk a big game until the election).

        My impression is that Mr Abbott sees a large role for government and it will be of the high taxing and high spending variety.

        It will be as socially conservative as he thinks he can get away with.

        I don’t think he subscribes to the idea of ‘smaller’ government or has much affection for economic analysis in general.

        He may be much closer to the current ALP government than to Howard or Hawke/Keating.

      • Rusty Penny says:

        He may be much closer to the current ALP government than to Howard or Hawke/Keating.

        Howard didn’t differ much from the current ALP government either.

      • Pfh007 says:

        good point! :)

      • stacks says:

        Get a room you two…

  7. Yorrick says:

    Swan is such a pessimistic doomsayer to talk down the economy in such a manner. Obviously he is not anointed in new economics.

  8. Tassie Tom says:

    I’m glad we’re going to have a deficit.

    It hopefully means Australia will be stripped of its AAA rating. Man up S&P and strip us!

    Hopefully this will push Aussie bond yields up, which will give us somewhere a bit more decent to put money that we don’t want in shares. 3.35% for 10 year bonds is woeful.

    If our bond yield goes up, so should our interest rates, which should reduce house prices. It’s depressing how much you have to pay to live in a dog-box in suburb where you’re not going to get shot at.

    Hopefully it will also drive the dollar down, as investors (central banks or commercial banks) who are buying our AAA dollar might decide to sell our AA dollar.

    We will see.

    • Wing Nut says:

      Canada has delayed their return to surplus until 14/15 from memory and the ratings agencies responded with “meh, all good.” Same for our credit rating. It’s no biggie assuming the deficit doesn’t blow out and we return to surplus over the “cycle”. The return to surplus was nothing more than a political objective.

      • Tassie Tom says:

        Bugger.

        Still AAA rated, pathetic reward for investing bonds or cash, gazillions to buy a house, and stuff-all for our exports because of a stupidly high dollar.

      • flawse says:

        Canada has delayed their return to surplus until 14/15

        How are they going to achieve it? (Question not having a shot!)

        Then what’s the plan here? Eternal deficits? At least that’s the only plan I’ve seen espoused here so far.

        Note a major difference in Canada and Aus…Canada doesn’t run a chronic CAD. It makes us far more vulnerable.

  9. Explorer says:

    ALP is getting plenty of cover from economists and OECD. S&P have indicated no immediate rating revision. Seems Labor have taken the view that letting unemployment run up would likely be too hard to get back before elections. I expected they would wait for the business chorus to be deafening and everywhere in populist media before giving up.

    • Wing Nut says:

      Not that that’s stopped Abbot (from The Australian): “Tony Abbott said the government had walked away from yet another fundamental commitment, ranking the move alongside Julia Gillard’s breach of her no-carbon tax pledge.” Sad really.

      • V says:

        Yes Labors unrestrained spending and continual promises of a surplus is somehow Tony Abbotts fault?!

      • flawse says:

        Alan Kohler’s graph, showing the great diversion between revenues and expenditure since the onset of the GFC, on the ABC last might was telling. The profligate wasteful spending, like sending everyone free money, is now coming home to roost.

        Now in MB the usual suspects are now calling for Govt deficits. Sure increased debt will ease the pain in the short term. However what is normally proposed is Govt deficits that expand the sectors that are the very problem we have to deal with.

        Short term thinking has to stop.

      • russellsmith55 says:

        Victoria is a prime example of this. The absolute madness of wasteful over-spending in the de-sal plant, myki etc, all paid for with stamp duties from an unsustainable property bubble on the way up. And now the bubble is deflating we’re pretty much f###ed with little in the way of new industry or efficiency to show for it.

        We need a system that holds politicians accountable for more than just their term.

  10. Jake Gittes says:

    Had a long chat with a Qld bureaucrat today – very worried. Cutting is the obvious choice and hoping real crisis doesn’t occur. Really afraid of telling electorate that what they expected is not possible

    But the odd thing too, is hoping technology will fulfil the service gap i.e. cut use of fixed infrastructure and use the NBN – if that ever happens – for remote monitoring of health and other services.

    That’s the plan.

    • V says:

      The politician faces the following choices at the margin:
      a) tell the truth now.
      b) be hung from lamp posts later.

      Invariably b) will be the path chosen.

      • flawse says:

        V I think they are planning to slink off into the shadows with their super and benefits and let whoever is in charge later, when the inevitable happens, be hung from the lamp posts.

        WE are the problem not the politicians. We get the politicians we want.

  11. Rupert says:

    Does this mean that the government has given the Ok for the media to print the truth on the current state of the economy? Will it be business as usual? Or is it just the perfect time of year to turn down the volume?

  12. flawse says:

    Rupert I reckon turn down the volume!

    From Hockey et al we are going to get a lot of nonsense and from Labor there will be a lot of noonecoodanode revenues would not increase exponentially forever.