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.)