Is the Treasury gilding the lily?

When you go through the door of the dreaded Budget lock-up, you are presented with a show bag (made in China, but 100 per cent cotton) that includes all the budget papers. There are the important white covered ones and the colourful pamphlets clearly put together by some PR/ad agency.

The latter are a sort of Budget for Dummies.  You know the sort of thing – lots of meaningless charts and pictures, photos of smiling people, little personal stories (Bronwyn, 72, has lost her job …. )and lots of razzmatazz, generally.

These pamphlets remind me of the glossy newsletters put out by private schools, although some of the material has more of a feel of sermons from a Pentacostal Church minister. My strong advice is to ignore.

But because so many of the teenagers (they might be older but have all the sense of younger people) in the lockup find the lengthy white covered papers difficult to digest, they miss some of the important material contained therein.

But in Budget Paper No. 1, Statement 7 there is an important exposition of the Forecasting Performance and Scenario Analysis underpinning the budget.

Herein are contained the three most important charts in the entire thousands of pages of the budget papers.  They are Charts 8, 9 and 10, if anyone wants to take a look. All of them bear a resemblance to an umbrella made inside-out by the wind.

 Take the first on the uncertainty on receipts forecasts.  This is the summary:

The chart shows that there is always considerable uncertainty around receipts forecasts and that this uncertainty increases as the forecast horizon lengthens. It suggests that in 2016-17, the width of the 70 per cent confidence interval for the 2016-17 Budget receipts forecast is approximately 1.8 per cent of GDP ($30 billion) and the 90 per cent confidence interval is approximately 2.9 per cent of GDP ($50 billion).

Not surprisingly, the uncertainty on expenditure forecasts is much less; the government knows to a reasonable degree what will be spent.

But putting the two charts together and we have this statement about the confidence intervals attached to the underlying cash balance forecasts:

In 2016-17, the width of the 70 per cent confidence interval for the 2016-17 Budget underlying cash balance forecast is approximately 2.1 per cent of GDP ($35 billion) and the 90 per cent confidence interval is approximately 3.4 per cent of GDP ($60 billion).  In line with receipts forecasts, uncertainty increases over the estimates period.

What this means is that is that there a massive degree of uncertainty attached to the point forecasts contained in the forward estimates, particularly in respect of receipts and the cash balance.

The real question is whether Treasury is gilding the lily when it comes to these point estimates.  After all, nominal GDP is expected to pick up from the current rate of 2.5 per cent to 4 1/4 per cent next financial year and 5 per cent in subsequent years, as outlined in Statement 2.  It is only because of these optimistic assumptions that the cash balance falls, although there is still a deficit in the last year of the forward estimates (2019-20).

Just as the Reserve Bank offers bands within which its forecasts are expected to fall, there is a case for the Treasury also to give bands on their key estimates.  Otherwise, there is a false sense of comfort generated by the methodology which turns out to be extremely inaccurate as the years actually roll on.  (Just check against previous budgets.)

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29 Responses to Is the Treasury gilding the lily?

  1. C.L.

    Is the Treasury gilding the lily?

    Is the pope a communist?

  2. Perth Trader

    Economics & economic outlooks are akin to the beauty of a woman..’its all in the eye of the beholder’.

  3. Fisky

    Nearly all economic forecasting is rubbish, along with much of the modelling. Take it out with the trash.

  4. Paul

    “Gilding the lily” or “Trying to make a silk purse out of a sow’s ear”?

  5. Rabz

    Nearly all economic forecasting is rubbish

    Along with most so called “economic theory”.

  6. Nelson Kidd-Players

    Essentially, all models are wrong, but some are useful.

    Attributed to George Box, statistician.

  7. Joe

    This could all be fixed by changing the constitution to say that ALL governments in Australia, Federal, State and Local CAN ONLY SPEND THE RECEIPTS FROM THE PREVIOUS YEAR.

    All “forecasts” become moot.

  8. JohnA

    Is the pope a communist?

    Surely, C.L. wins the internet award today?

    May he have a 5th, please?
    🙂

  9. Pickles

    Bronwyn, 72 has lost her job. Heh.

  10. Leo G

    Treasury gilding the Budgie while the economy is tied up in a dudgeon over hot coals?

    Therefore, to be possess’d with double pomp,
    To guard a title that was rich before,
    To gild refined gold, to paint the lily,
    To throw a perfume on the violet,
    To smooth the ice, or add another hue
    Unto the rainbow, or with taper-light
    To seek the beauteous eye of heaven to garnish,
    Is wasteful and ridiculous excess.
    (King John Act 4 scene 2)

    When all the ceremony is over we may better see what remains.

  11. MP

    Bronwyn, 72 has lost her job. Heh.

    Nice one Pickles!

  12. Percy

    After all, nominal GDP is expected to pick up from the current rate of 2.5 per cent to 4 1/4 per cent next financial year and 5 per cent in subsequent years, as outlined in Statement 2

    Fantasising about your growth rate is a perfectly normal, natural thing.

  13. Lloyd Dobler

    We have all heard and seen this crap before.

    Different dog, same leg action.

    BUDGET SPEECH
    2012?13

    DELIVERED ON 8 MAY 2012 ON THE SECOND READING
    OF THE APPROPRIATION BILL (NO. 1) 2012-13
    BY
    THE HONOURABLE WAYNE SWAN MP
    DEPUTY PRIME MINISTER AND TREASURER
    OF THE COMMONWEALTH OF AUSTRALIA
    Madam Deputy Speaker, I move that the Bill now be read a second time.
    Strong Economy and Fair Australia
    The four years of surpluses I announce tonight are a powerful endorsement of the strength of our economy, resilience of our people, and success of our policies.
    In an uncertain and fast?changing world, we walk tall — as a nation confidently living within its means.
    This Budget delivers a surplus this coming year, on time, as promised, and surpluses each year after that, strengthening over time.
    It funds new cost of living relief for Australian families.
    It helps businesses invest, compete and adapt to an economy in transition.

  14. Neil

    Bronwyn, 72 has lost her job. Heh.

    She is retiring on $4,500/week.

  15. Luke

    Has anyone else noticed how they Federal budgets have for years becoming more and more obsessed about 5, 10 and 15 years into the future? And that every saving is always years into the future. But next year every saving is again pushed out into the future.

    I’d like to see a graph of treasury estimates for the last 15 years and actual for that same period.

    I note in this year’s budget they plan to saving 21.8million by shutting down stand alone ATO shopfronts but over the same period they intend to spend an EXTRA 20million on planting native trees and shrubs. Why the F*** are the federal government in the business of planting trees!

  16. The latter are a sort of Budget for Dummies.

    Clearly they need to dumb it down to the Mr Squiggle level since the likes of Jessica Irvine still hasn’t grasped the basics.

    Mr Squiggle: Can you tell what it is yet Jessica?
    Jessica: It’s a subsidy!
    Mr Squiggle: No, you mouse-faced wombat!
    Jessica: Upside down! Upside down!
    Mr Squiggle: That’s not how it works! Repeat after me; ‘Negative gearing is not a subsidy!’

  17. Bruce of Newcastle

    nominal GDP is expected to pick up from the current rate of 2.5 per cent to 4 1/4 per cent next financial year and 5 per cent in subsequent years, as outlined in Statement 2.

    They’re dreaming. Dreaming pure LSD fumes. For a start both major parties have policies to emasculate Australia by sending energy costs into the sky. The only difference between them is how far into orbit they intend them to go.

    Neither plan to remove red and green tape, or cut taxes except in the most ineffectual way. How is the economy going to grow at 5% if businesses have to compete with both feet nailed to the floor? Maybe they are betting on metals prices and oil to boom again.

  18. Jim

    As a consultant that occasionally does work for Treasury departments, I’m always instructed by Treasury to put confidence intervals around estimates. Clearly they have a separate set of rules for themselves.

  19. JC

    How is the economy going to grow at 5% if businesses have to compete with both feet nailed to the floor? Maybe they are betting on metals prices and oil to boom again.

    It;s not 5% in real terms, but 5% nominal. You would have to guess at the deflator to figure if it’s achievable. With a 2% deflator 3% real could happen, It’s optimistic though

  20. Lem

    The treasury would be better off ringing up a few people around Australia who actually see what is happening in the real economy and factoring in a large serve of reality to their projections before publishing this garbage.

    Also, to Joe:

    This could all be fixed by changing the constitution to say that ALL governments in Australia, Federal, State and Local CAN ONLY SPEND THE RECEIPTS FROM THE PREVIOUS YEAR.

    +10000000000

    (I could add even more zeroes, let’s face it that’s what these twerps seem to do)

  21. Baldrick

    Garbage in – garbage out, nothing new for Treasury.

  22. Squirrel

    “The real question is whether Treasury is gilding the lily when it comes to these point estimates. After all, nominal GDP is expected to pick up from the current rate of 2.5 per cent to 4 1/4 per cent next financial year and 5 per cent in subsequent years, as outlined in Statement 2. It is only because of these optimistic assumptions that the cash balance falls, although there is still a deficit in the last year of the forward estimates (2019-20). ”

    That, and bracket creep, I believe. With so much of our government revenue derived, one way or another, from the proceeds of digging things out of the ground and flogging it off to foreigners, we should be far more conservative in estimates of future revenue (noting always that they are only estimates, not guarantees) and far, far more cautious in our spending of such, particularly for ongoing commitments and “entitlements”.

  23. Roger

    Pentecostal, not Pentacostal for goodness’ sake, Judith (the other day Sinclair published a sentence without a verb; what is it with economists and a lack of command of the English language?).

    Does the show bag come with a Bertie Beetle to stimulate flagging attention spans?

  24. Paul Farmer

    In just about no field of endeavour do you ever use a 70 % confidence interval. That speaks volumes, it usually is 90 or 95 %. If all our models treasury run are actually worth anything , it should be 95 % and a reasonable degree of accuracy flowing even at that level, not over $ 60 billion dollars. That’s a joke and the whole Treasury should be sacked. If we are that inaccurate at that level of required accuracy, the whole exercise statistically from an out year perspective is a total waste of time……………which it is.

  25. Paul Farmer

    And further to my last point………….it should be locked in stone in the Charter of Budget honesty that the base case scenario for the model , should only assume GDP growth rates at no more then they are currently at………….unless your emerging from the absolute bottom of a recession. In fact they should be forced to publish 3 scenarios, an optimistic a pessimistic and a realistic future forecast…………or a scenario that assumes no GDP growth. Instead we always get an optimistic forecast touted up as a realistic forecast………….and then everyone is surprised when we never meet it.

    None of this hard or difficult if we really had competent people running the place and the liberals are looking more like a bunch of amateur hacks every day.

  26. ella

    Roger
    #2021079, posted on May 5, 2016 at 6:37 pm

    “Woe is me, that I sojourn in Mesech, that I dwell in the tents of Kedar!”

    It is possible to break rules for effect.

  27. Phil

    Uh no, you are only talking about random variation but the big problem is systematic bias. The forecasts are always optimistic. Reality is always worse. It’s not just poor predictability, but an approach diametrically opposed to how business forecasts run in the real world.

  28. Phil

    If there was to be a 5% annual change it would be far more likely to be a decrease than an increase in my opinion. As wealth is hoovered into government’s gaping maw, interest rates head inexorably towards zero and debt becomes unmanageable, is it normal for people to be so oblivious? Is this what it was like in other countries before their economies rapidly declined and the middle classes became poor?

  29. classical_hero

    I wish we could go back to the Costello years when Treasury would be much more conservative in their estimates and as a result there would be more money than forecast. But now they are far too liberal in their estimates and we always have less money to spend but having already spent it thus we get more into debt.

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