Sunday, 6 November 2011

A surplus of bluster - a deficit of understanding

My friends at Deloitte Access Economics have made a splash with their update of the economy and Budget. It should be no surprise that with the economy growing at a slower pace than Treasury, the RBA or Access itself thought likely in May, Access is now estimating a $5 billion or so deterioration in the Budget bottom line in 2012-13. This revision by Access turns a $3.5 billion surplus into a $2 billion deficit.

This is unspectacular, in the extreme. Any budget model known to humanity shows that if you plug in weaker GDP, inflation and jobs numbers and press the “calc” button, there will be a deterioration in the budget balance. This is how the automatic stabilisers in the Budget and the economy actually work. By the way, it should also be noted that if you plug in stronger economic data, the budget bottom line improves as the Howard government can attest over its last 5 years.

In the update released today, Access have simply plugged in weaker economic parameters into its model.

This is fine and entirely reasonable but it's something that is often overlooked in the reporting of this information. The estimate of the change in the Budget is due to a change in economic parameters... nothing else. It's not due to bad policy, silly spending or anything like that. It just is.

But there are a couple of critical issues in the presentation and reporting of the results from Access. Importantly, Access very honestly and openly acknowledge that the results assume no change in policy. Again – fair enough – they don’t have any knowledge of policy changes the government is planning to implement that will impact on the Budget bottom line in 2012-13. For this alone, it is certain that the Access forecasts for the Budget will be wrong because it’s as certain as day follows night that there will be some policy changes announced by the government at the time of the Mid-Year Economic and Fiscal Outlook. It is also certain that these policy changes will work to help and not hinder the budget bottom line.

The other issue about the Access numbers is that they, like all mere mortals, can get their forecasts wrong. We all do. While I happen to think the broad forecasts from Access are about right, if it turns out the economy grows a bit faster than Access predict, with jobs growth a smidge faster, asset price growth a little strong or the terms of trade a touch higher, well there a few billion for the government and all of a sudden, the surplus is easily achieved.

While tough to achieve, it seems more likely than not there still will be a budget surplus in 2012-13 regardless of what Access or any other forecaster suggests.

I will post something later why a return to surplus in 2012-13 is so important economically and politically - stay tuned.

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