The $6 billion assumption

As Ken suggests below the budget update is dodgy. All the action is in the so-called parameter variations. The whole document is here. Have a look at Table 5 on page 15.

Policy decisions are active decisions the government have made and parameter variations are things that happen. For example, Treasury might forecast a massive increase in future commodity prices. It seems that is exactly what they have done – they have manufactured a massive increase in the budget by imagining future prices to be high.

So look at the projections for 2012-13. A net $310 million comes out due to policy change and a massive $2.4 billion goes in due to parameter variations. Now look at 2013-14. $5.3 billion comes out due to policy (the RSPT) and $4.7 billion goes in (MRRT) on the assumption of high prices. The government and Treasury have assumed their surplus.

We see the effect of substituting the MRRT for the RSPT without the parameter variation estimates by looking at Table B1 on page 24.

The $7.5 billion that comes out of the Treasury over two years is the substitution. The RSPT was forecast to raise $12 billion over those same two years. Before the parameter variation changes the MRRT is expected to raise $4.5 billion over two years. (That’s assuming it works as Treasury expect). The difference between the $10.5 billion that the government promised two weeks ago and the $4.5 billion we now derive from the Economic Statement is an assumption about future commodity prices.

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69 Responses to The $6 billion assumption

  1. Matt C

    Well it would be nice to know what their assumptions on prices are? You would think that is the sort of information the public deserves.

  2. Ken Nielsen

    I have no experience in mining, but I’d guess that the companies use an algorithm to forecast prices which is based largely on history. Economic forecasts for China would be in there but they would be pretty wobbly so great weight would not be placed on them.
    Looking at history, my guess is that very recent – a few months – history would be given very little weight.
    Does anyone have a different understanding of how it works?
    The Treasury said they talking to the mining companies but I’ll bet they went away and did their own forecasts.

  3. JC

    Ken:

    My guess would be that they use the forward swap rate and then discount back to present value if the forecast is distant.

    It’s in contango (positive yield curve) for coal but there is no transparent forward price for Iron ore other than what they can derive from forward contracts. It would be really interesting to see what they used for iron ore forecasts as I reckon they’re finagling in that one most of all. If I were going to bullshit, I’d do most of it in the iron ore price, as there’s less transparency and would give them enough room to bullshit.

    To sum up they’re taking advantage of the positive yield curve in coal and will no doubt be doing the same in iron ore despite long term contracts being in backwardation (a negative yield curve).

    We don’t know because they won’t tell us and they won’t tell because they know they’ll have less room to finagle for the ALP in the future. You’d have to use a crow bar and acetylene blow torch to pry this out of them.

    That’s why the entire senior echelons of the Treasury have to go when the libs return to government without any remorse.

  4. JC

    oops for forecasting they would also use Black Scholes volatility model.

  5. Ken Nielsen

    Thanks JC. I didn’t think of that.
    There was no futures market for dogfood so we had to do forecasts bottom up.

  6. .

    Wouldn’t you want data on disposable income? I’m seriously interested.

  7. Ken Nielsen

    For mineral prices?

  8. The troll formerly known as Tom N.

    they have manufactured a massive increase in the budget by imagining future prices to be high. … The government and Treasury have assumed their surplus.

    Well, fancy that, budget projections being based on assumptions, including assumptions not only about policy but about other variables, and those assumptions being changed over time – sorry, ‘manufactured’ and ‘imagined’ in Cattallaxy conspiracy theory speak. Pathetic.

  9. entropy

    if there is no basis, or credible methodology used to arrive at a forecast assumption of continued high ore prices, then of course they are imagined.

  10. C.L.

    Tom, was it a conspiracy theory when Catallaxians ridiculed the projections inhering in FuelWatch (dumped), GroceryWatch (dumped), the ETS (dumped), the RSPT (dumped)?

  11. Alan Moran

    Nice work Sinclair. All this largesse based on high prices and the terms of trade. Funny that the analysts don’t seem to share the insights that treasury has.

    Deutsche Bank has iron ore back to 2009 levels by 2016 with coal also trending back. They also see little long term movement in the $US-A.

  12. JC

    You gotta love Tommy from the government bureau.

    Well, fancy that, budget projections being based on assumptions, including assumptions not only about policy but about other variables, and those assumptions being changed over time – sorry, ‘manufactured’ and ‘imagined’ in Cattallaxy conspiracy theory speak.

    Tommy, you tax-eating goose, it’s not about the assumptions, variables that change over time. It’s wanting to know how they can manage to create all these forecasts that swing around faster than the speed of light but not tell us the taxpayers how it’s worked out.

    Commodity prices haven’t really swung around much since the budget, the first attempt at the tax grab, then the second attempt at the grab and the recent change to justify all these dollar movements you gullible twit.

    Show a little humility, will ya and be nice to those that help pay to maintain you in the manner you were never accustomed.

    Pathetic.

    What’s pathetic is your attitude you prat. Now go back to trop and have good cry about everyone here.

  13. Matt

    JC futures / forward prices do not predict future prices.

  14. Jc

    I’m not suggesting they do, Matt. However if your making a forecast and you need to make it appear that it didn’t come of one’s backside you need to anchor to something and the forward curve is probably as good as anything.

    You can’t use futures prices in those two commodities because they don’t exist.

    What would you use?

  15. Jc

    If I wanna forecast where say the eurdollar rate is is 12 months time I would simply use the futures and be done with it.

    If I wanna guess where it will be I would look at the same price and work around it to fit my own guess.

  16. Myrddin Seren

    JC

    Forward prices for coal are on thermal coal.

    I’m not across the latest stats, but at least half of Australia’s coal exports are metallurgical coals – coking and PCI, for which any sort of indexation and forward curve is just starting to appear.

    Metcoal is probably lagging iron ore in this respect – for reasons of the nature of the product. It is a product and not a commodity.

    Soooo – back to the question of how Ken and his merry munchkins at Treasury choked down their natural antipathy to carbon fuels and steel making raw materials, and formed a view on forward prices that Mr Market hasn’t ?

  17. Labor Outsider

    Sinclair, do you have any evidence that Treasury have changed their commodity price forecasting methodology? As I pointed out in an earlier post, both Treasury and the RBA have quite a simple framwork for forecasting commodity prices that takes today’s spot and contract prices as given and then assumes some slow return to a long-run equilibrium. If the price curve has shifted up over the past few months then of course you will generate more tax for a given policy regime. Budget forecasts always have embedded assumptions – aggregate growth, prices, exchange rates, commodity prices, global demand, etc. In that sense, a given budget forecast is always the product of a particular set of assumptions. Unless you can produce some evidence that the latest projections are biased upwards and the framework for deriving future prices has deviated from past accepted practice, you might want to calm down a bit.

  18. JC

    Thanks Seren..

    look I’m not an expert in these comods although I knew that coal had a spot price. However the little i do know is that I-Banks quote swap prices for thermal coal these days and I would guess since the the two miners walked away from the long term contract market there will also be a liquid spot price in ore and along with that we’ll end up with a swap market.

    As for your question…How did Wombat-Henry come up with a view?

    Creatively and compliant enough to their masters/political allies to come up with a projection that would fit into any scenario needed.

  19. Matt

    But if that is the case Labor outsider, spot prices have fallen over the past 2 months

    JC most forecasts for minerals analyse both potential demand and the likely supply response. You construct a marginal cost curve and try to predict where demand might fall in the future.

    Don’t forecast currency prices from futures markets. Futures prices are simply a reflection of the cost of borrowing in different currencies. If they were not, I could borrow in one or other currencies and sell forward.

    The best forecast of a currency price is the current price.

  20. JC

    Sinclair, do you have any evidence that Treasury have changed their commodity price forecasting methodology?

    Changed?

    1. They had one set of numbers going into the budget.

    2 Another set of numbers going into bat for the my-fair-share-tax.

    3. Another set of numbers after the modification to the My-fair-share-tax.

    4. Another change today to allow the ALP to offer a few goodies into the election and to therefore help their political allies regain government.

    In other words they have more numbers and scenarios than Bernie Madoff did on his computers files.

    In fact Treasury should be renamed Madoff & Co to correctly reflect the fact that numbers just come out of Bernie Wombat-Henry’s arse.

  21. JC

    JC most forecasts for minerals analyse both potential demand and the likely supply response. You construct a marginal cost curve and try to predict where demand might fall in the future.

    Umm yea, or just use the forward curve.

    Don’t forecast currency prices from futures markets.

    I don’t

    Futures prices are simply a reflection of the cost of borrowing in different currencies. If they were not, I could borrow in one or other currencies and sell forward.

    People do, matt, it’s called the carry trade where they buy low interest currencies and shift the proceeds to a high interest rate one.

    The best forecast of a currency price is the current price.

    Ummm okay, but doesn’t that sorta contradict your first response in a way.

    Frankly the idea of using the current price to forecast out is silly especially if the interest rate differential is material leaving aside every other reason why it’s also silly.

  22. Labor Outsider

    JC, saying that the current spot price is the best guess for the future price is another way of saying that commodity prices follow a random walk. There is a reasonable amount of evidence to suggest that over horizons of a couple of years, a random walk delivers superior forecasts to fundamental based forecasts for base metal commodities. Fundamental based forecasts have been junk over the past 5 years. They have systematically underpredicted commodity prices because they expected new supply to come on too quickly and underestimated demand.

  23. Sinclair Davidson

    LO – I’m calling ‘bullshit’ on the Treasury forecasts.

  24. dover_beach

    Sorry, the problem, so far as I’m concerned, is that each recent announcement/ update has involved an improvement in the Budget position even though one would have expected the antecedent change should have made it worse. In such a circumstance, I tend to think they’re playing funny buggers with the numbers.

  25. Peter Brady

    I have now read all of the commentary on the updated budget forecasts from both economists from banks, investment banks and others and no-one says the forecasts are on the ‘optimistic’ side quite the reverse in fact.

    I had a talk to the lads down at Fixed Interest and they believe ,given the commodity prices, the budget will be in balance next financial year.

    From my aging eyes it appears most comment about rubbery figures come from people with little expertise in examining budgets.

    The CBA commentary (one of the best in the business)had changes in the terms of trade for the various years so in fact Treasury do tell us what their forecasts on commodity prices are.

    My talks with those lads and lasses involved in mining stocks tells me they believe commodity prices will be high for some time.
    There are factors holding back supply catching up to demand.
    I also learnt a lot of contracts now are renegotiated quarterly not annually.

  26. JC

    JC, saying that the current spot price is the best guess for the future price is another way of saying that commodity prices follow a random walk.

    Dude, the spot price is NOT a good way of guessing future prices without taking into account contango or backwardation. It’s the same in currencies. As an aside it used to be significant when your party, Labor was in power in the 80 and 90’s because interest rates under their policies were sky high and the forward price mattered a lot.

    There is a reasonable amount of evidence to suggest that over horizons of a couple of years, a random walk delivers superior forecasts to fundamental based forecasts for base metal commodities.

    Okay.

    Fundamental based forecasts have been junk over the past 5 years. They have systematically underpredicted commodity prices because they expected new supply to come on too quickly and underestimated demand

    LO, you’re putting up a straw man. I haven’t argued for one method over another. My argument is that Treasury now known as Madoff & Co. and Bernie Wombat- Henry should make disclosure.

  27. .

    “There is a reasonable amount of evidence to suggest that over horizons of a couple of years, a random walk delivers superior forecasts to fundamental based forecasts for base metal commodities.”

    Really?

    “Fundamental based forecasts have been junk over the past 5 years. They have systematically underpredicted commodity prices because they expected new supply to come on too quickly and underestimated demand.”

    That’s true for virtually all of Australian capital intensive imports. There’s also a fairly obvious reason why commodity demand was difficult to forecast 5 years ago…

  28. JC

    Dot:

    I always thought the best way of forecasting was simply getting a population of forecasts and averaging.

    Better than anything else.

  29. Sinclair Davidson

    I had a talk to the lads down at Fixed Interest and they believe ,given the commodity prices, the budget will be in balance next financial year.

    Would you be so kind as to name names, so I can post a reminder next financial year.

  30. C.L.

    Is DC the worst Treasurer of the post-war era?

  31. JC

    Peter:

    No offense, but what the fuck would the bond jockeys know about commodity prices in terms of demand and supply.

    Shouldn’t you be talking to the stock (anal)systs that watch the two biggest companies which account for about 80% odd of the profits?

    In any event the beef is about the direction of the commod prices. The point of contention is that the ALP’s Treasury ( now known as Madoff & Co) seems to be dragging numbers out of its backside to fit any scenario that helps its party maintain power by looking good.

    We just want Bernie Wombat-Henry to provide the methodology in terms of how it’s come up with 4 different scenarios over the past couple of months with each one supportive of the ALP. That’s all.

    Perhaps ASIC ought to be investigating Madoff & Co.

  32. dover_beach

    I had a talk to the lads down at Fixed Interest and they believe ,given the commodity prices, the budget will be in balance next financial year.

    And this all happened between Swan’s announcement of the RSPT and the MRST? Pee and thimbles.

  33. .

    Let’s say the new forecasts are right. Why were the old ones so wrong then?

  34. JC

    Here’s one firms tax estimate for the same period that Swandive has been talking about.

    I note that the only changes they’ve made from the previous estimate was in reference to the changes of the My-fair-share tax. Top line estimates for revenues haven’t changed.

    Here’s one firms estimates

    $ billion
    2009 7,318
    2010 7,197
    2011 9,736
    2012 11,871
    2013 13,670

    As I said, it seems Bernie Wombat Henry is pulling these numbers out of his arse.

    No kidding if Treasury was watched over by ASIC the entire senior management (and SwnaDive) could be charged with publishing false forecasts.

  35. JC

    Sorry.. those estimates are for BHP.

  36. C.L.

    I’ve never see something so blatant as this. They bungled a revenue raiser, axed a PM because of it and had a serious credibility/fiscal shortfall. In steps the Labor MP for the seat of Treasury, Ken Henry, who invents some money to balance the books.

  37. .

    Notice how Wong and Garret have been gagged?

  38. tal

    And they’re just getting starting

  39. JC

    Top line estimates for the same periods haven’t changed for months…

    These are
    $ billion
    Revenue
    2009 44,113
    2010 50,496
    2011 64,282
    2012 75,503
    2013 82,541

    What really pisses me off is that some lying should always be expected in politics. However I don’t really expect our public service to create a set of numbers that supports the party in power at every turn and this is what Bernie is up to it seems to me. The prick.

  40. JC

    Notice how Wong and Garret have been gagged?

    LOl… At least she showed some raw common sense in that respect.

    Lurch was talking about whales the day after a couple of houses burned down recently.

  41. dover_beach

    Notice how Wong and Garret have been gagged?

    They’ve been sent to Corleone, Sicily, until the heat dies down.

  42. JC

    To be honest I don’t have a beef about Penny. She was sent out to sell a dog of a policy and most likely had no hand in its creation because the little turd was all over it.

    She was just screwed over by the Little Turd. Her only failing was that she should have resigned.

  43. C.L.

    I was just driving around and switched on Alan Jones. He made a few points re this budgetary legerdemain that are bang-on, IMO. First, Labor’s marginals polling mustn’t be good because the rush to an election has suddenly been called off. Second, he predicted that the Gillard government will look worse than Rudd’s within a fortnight. Well, some might say that has already been confirmed.

  44. .

    “To be honest I don’t have a beef about Penny.”

    She insulted your intelligence more than Shiny ever did. Get angry.

  45. JC

    Yes Cl… But I got to tell you that the other side- the libs are totally underwhelming at the moment.

    Abbott has failed to to close a deal with the electorate as far as I’m concerned… and the recent comment that was marginally interested in economics is quite worrying.

  46. dover_beach

    Yes, I have the feeling that Ludwig and Co. are in a smoke-filled room somewhere asking themselves: What have we done?

  47. JC

    Yea, I know Dot.. however I feel sorry for the kid. The Little turd just ran all over her and then expected penny to run with the policy he created.

    However suggesting she insulted my intelligence more than nano-shiny is a pretty , pretty big call to make.

  48. JC

    Yes, I have the feeling that Ludwig and Co.

    Get it right, Dove… It’s Prime Minister Ludwig and his able assistant Little Paulie Howes.

  49. dover_beach

    Arise, DC!

    Surely not, not even the “hard men” dare go there.

  50. Infidel Tiger

    The ALP have lesson talent thatn the Washington Generals. What the hell does hapen if the Prime Ranga topples? Bill Shorten addressing parliament on a milk crate?

  51. JC

    Infidel:

    Just saying…. I reckon you’d wanna be at least 6 feet tall if you’re going to carry the name Bill Shorten(ed) with an ounce of confident swagger in your step.

  52. Infidel Tiger

    Crikey. My post had more errors than a Swan Budget.

  53. jtfsoon

    Infidel:

    Have you been drinking from Homer’s cup?

  54. Infidel Tiger

    This usn’t realty son thus is catalaxxy

  55. .

    “I had a talk to the lads down at Fixed Interest and they believe ,given the commodity prices, the budget will be in balance next financial year.”

    No you didn’t.

  56. .

    “The CBA commentary (one of the best in the business)had changes in the terms of trade for the various years so in fact Treasury do tell us what their forecasts on commodity prices are.”

    Craig James also called forecasts guesses. Stop making shit up.

  57. jtfsoon

    Mark

    if he is telling the truth about his employment we can only surmise that one of the major banks is due for meltdown

  58. .

    “I had a talk to the lads down at Fixed Interest and they believe ,given the commodity prices, the budget will be in balance next financial year.

    From my aging eyes it appears most comment about rubbery figures come from people with little expertise in examining budgets.”

    Bond traders have a second job for access economics assessing the budget?

    Wow. Tough times.

  59. Michael Fisk

    Hi Peter. I’ve been reading a bit about Nazi economics lately and I just thought I’d get your opinion on the success of their stimulus programs, particularly before 1938.

  60. .

    It’s a no show Fisk. Nothing of note happened, paticularly to the Jews.

  61. Sinclair Davidson

    Let’s be fair to the new persona. He might not want to debate nazi-economics.

  62. BirdLab

    Yes. The housing shortage didn’t kick in until much later.

  63. Ded Peate

    Firstly Craig James works for comsec not CBA economics.
    I do concur CBA is one of the best teams around for analysis.

    I do agree as well that commodity prices will remain firm for the reasons outlined earlier indeed I think it could well be for at leat 2-3 years.

    Go and try and find a bearish mining analyst!

    I would have talked to the fixed interest team as well.
    They are afterall materially affected by budget outcomes and they are saturated by budget analysis so if there was opinion around to suggest the forecasts are ‘optiminstic’ then they would know.

    I too cannot find many if any people suggesting that.

    Only journalists at present.

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