Gittins: outlaw ‘future boom’ Budget projections!

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By Leith van Onselen

Ross Gittins has lashed-out at “pernicious” long-term Budget projections, calling for them to be outlawed “in the interests of responsible economic management”:

It’s supposed to increase transparency and accountability, but in practice does more harm than good, presenting the government of the day with an almost irresistible temptation to portray the future as more assured than it is.

The future is unknowable. We can’t forecast the economy even a year ahead with any accuracy, but what we can be most sure of is that, even with pure motivations, a mechanical projection out 10 years is highly likely to be way off-beam.

We know the economy never moves in straight lines, but each year’s 10-year projection shows it on glide path to where we want to be. Obviously, no account is taken of unexpected shocks to the economy – even though it’s a safe bet there’ll be more than a few in the space of a decade.

Treasurers’ unworthy intention is to leave non-economists with the impression everything’s under control and on the improve. But I think it’s likely to leave even our economists and econocrats with a false sense of comfort…

Sad to say, the medium-term projection has been about deception – both numerical and visual – from the off. In all the budgets since Swan introduced them, never once has the budget balance failed to glide smoothly up to a healthy surplus, nor the net debt failed to glide smoothly down towards zero.

How’s it done? By making assumptions, of course…

Even without the ever-present temptation to fudge, projections are a device for deluding ourselves we know more about the future than we do. By ignoring all the uncertainties, they breed not understanding, but complacency. An honest government would abandon the practice.

These are excellent arguments by Ross Gittins. One only needs to look at the below charts to see how poorly Treasury’s Budget forecasting has been:

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The sad reality is that the Federal Budget has become little more than a marketing document for the government of the day. No matter what, the Budget is assumed to magically glide back to surplus over the medium-term, thanks to rosy assumptions that everything will return to long-run trend. In turn, this give the government of the day headroom to make costly decisions, such as slashing both personal and company taxes, without raising deficits.
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Sadly, ‘future boom’ projections have extended beyond Treasury to the RBA as well, whose idiot algorithm model – MARTIN – also has growth perpetually moving up to trend, inflation returning to target, wages up and unemployment down.
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The forecasting idiocy is institutionalised within the Australian Government.
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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.