Kouk and Budget fraud

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Former Labor-insider, The Kouk, is out again today leveling wild accusations about Budget fraud:

Today’s the day the snake oil assumptions that created the budget ’emergency’ should be washed away and the true position of the long run fiscal settings will be revealed.

A vital element of the bottom line of the 2014-15 budget and the forward estimates will be the extent to which changes in the economic parameters are the driver of the return to budget surplus.

Most people seem to have forgotten that in the independently prepared PEFO document released during the election campaign in August 2013, the budget was on track to return to surplus in 2016-17. The PEFO used a range of conservative and near consensus forecasts. No serious economist took issue with the numbers underpinning the PEFO estimates.

This changed with the MYEFO in December 2013 when the Treasurer’s office forced a range of unduly pessimistic forecasts onto a meek Treasury and as a result, the budget was smashed to the point where never again would Australia record a budget surplus.

Given the flow of economic news in the past six months on GDP growth, inflation and employment, it appears the parameters underpinning PEFO were pretty close to the mark and the MYEFO numbers were fudges.

The Budget today is likely to revert to the more realistic PEFO numbers which will no doubt provide a windfall for the bottom line and will lock in the return to surplus in about 2016-17 (depending on the spending plans of the government).

Perhaps the biggest fudge when the budget emergency was concocted in the MYEFO documents and carried through in the Year 10 economics work done by the Commission of Audit was an assumption that the unemployment rate would remain at 6 per cent from now through to the mid 2020s.

This change smashed revenue and created the deficits and broke with the assumption used by Peter Costello when he was Treasurer and used by Wayne Swan that the unemployment rate would revert to 5 per cent in the long run.

I observed earlier this week that the Budget deficit is currently running roughly $1 billion ahead of MYEFO forecasts after five months. A little better than forecast but hardly a ringing failure of bearishness. And looking forward, one can only ask, is it wise to assume a slightly higher unemployment for the period ahead given:

  1. heavy falls ahead in the terms trade;
  2. China’s structural adjustment to slower and less commodity intensive growth;
  3. the unprecedented capex cliff that runs through 2017;
  4. the ongoing over-valued dollar and structural decline in non-mining tradables (including cars);
  5. historically low levels of national competitiveness and struggling productivity, and
  6. the headwind of aging population and a rising dependency ratio?

Does a 1% increase in forecast unemployment in this context really warrant the phrase “year 10 economics”? I would have thought “prudent” a better term.

Comments

  1. “The Budget today is likely to revert to the more realistic PEFO numbers which will no doubt provide a windfall for the bottom line and will lock in the return to surplus in about 2016-17 (depending on the spending plans of the government).”

    I guess we’ll see if he is right this evening.

    I would have thought, though, that the political strategy would be to show in this Budget that all of the painful spending cuts and tax increases are necessary to achieve a surplus by about 2016-17, with the shift to more benign forecasts to come in the next couple of budgets to help fund some giveaways ahead of the next election.

  2. “Does a 1% increase in forecast unemployment in this context really warrant the phrase “year 10 economics”? I would have thought “prudent” a better term.”

    To be fair, I think it’s pretty clear that the “year 10 economics” refers to the COA report, not the forecast unemployment level carried through in to it.

    I make no comment on what level of high school economics is used in the report. Suffice to say that Shepherd’s interpretation of health statistics would have failed year 7 at my school.

  3. The Patrician

    “..unemployment would remain at 6 per cent from now through to the mid 2020s”

    Well it didn’t take long to fail that one. It’s already fallen to 5.8%.

  4. I don’t recall economics being offered in year 10. It was an upper high school subject.

    I do recall it was a subject chosen for being slack and easy by the majority of students.

    I always enjoyed the pretty pretty graphs we got to make, with all those nice curves that went up and down so nice and smooth.

  5. I do like a bit of bias
    So given the year 10 economics was more economics than many of our elected have recieved … (made up unproven but probably true), I would think that revenue and expenses with some smoothing of stuff should equal out over the longer term. Therefore if revenue is not covering expenses ask why and look at the projections if you make these and consistently fail at the result then adjust your calcs to suit. In my Biz if I come in over budget then I go hungry or bankrupt therefore I put in consevative estimates which means any cost blow outs are absorbed. But some pollies / economists state think its easy to blame market issues … budget a buffer !! not that hard

    • “So given the year 10 economics was more economics than many of our elected have recieved … ”

      Would you believe that Abbott has an economics degree?

      • Sub-Senior Economics, as it was then, was a better basis for Economics than anything now taught in Universities. These days Economics seems to be about how to rig the Maths so that the Magic Money Tree, that most modern economists and ALL academic economists seem to believe in, produces the most ‘money’ There seems to be no concept whatsoever of the use of ‘Land’ ‘Labour’ and Capital to achieve desirable outcomes.
        The common belief in negative RAT interest rates as a solution is a belief that the world has unlimited resources with a zero,or negative, value. NUTS!!!!!

  6. “Does a 1% increase in forecast unemployment in this context really warrant the phrase “year 10 economics”? I would have thought “prudent” a better term.”

    Both these value judgements depend on the intention of the government for the assumptions. If the forecasts maintain the use of these assumptions, then one must assume it was prudence guiding them. If however, as I assume, that the assumptions will be revised more favourably, it was not for prudence that the assumptions were made, but dirty politics.