Wednesday, May 22

GST hyper-optimism

In today's charts we can see repeated overly optimistic Treasury forecasts for GST revenues compared with the less dramatic actual revenues. While the estimates in the Budget papers for 2008, 2009 and 2010 may have been plausible at the time, I have real doubts about the plausibility of the 2012 and 2013 estimates. I think we can have a reasonable conviction that nominal economic growth will not return to its pre-GFC, debt-fueled exuberance anytime soon.

In the legend B stands for the Budget papers, and M for the Mid-Year Economic and Fiscal Outlook (MYEFO) documents. The numerals are the year of publication; for example, B13 is the most recent 2013-14 Budget.

Another way to think about these forecasts is too look at the successive estimates for a particular financial year.

For the 2013-14 financial year, the last GST revenue estimate is almost $7 billion less than the first estimate. The last estimate for 2012-13 is lower than the estimate made in the 2009-10 Budget at the height of GFC awareness. No wonder the states and territories are a little grumpy and calling for a GST rate increase.

For some reason, these charts remind me of the quote attributed to Einstein, "Insanity: doing the same thing over and over again and expecting different results". When will Treasury learn?

Saturday, May 18

Budget charts

Some quick charts from the 2013-14 Budget papers. First, the revenue forward estimates and projections look far more plausible than they have in a long time. The last time the Budget revenue estimates have looked this plausible was MYEFO in 2009.

While there has been quite a bit said about the size of revenue write-downs since the GFC, these observations should be contextualised with an assessment of the plausibility of past estimates and projections.

On the expenditure side, I am less convinced by the forward estimates and projections. Actual expenses in 2011-12 were $377.7b. The Budget last year projected $376.3b for 2012-13 (you may recall a whole heap of 2012-13 payments were prepaid from 2011-12 to achieve this "no growth" result). This week's Budget papers have the estimate for expenses at $381.4b for 2012-13, up $5.1b. Notwithstanding the $5.1b growth in expenses this year, the out-year estimates and projections in this year's Budget papers are the same or less than they were in last year's Budget papers.

So let's look at the balance statements.

Much is made of Treasury independence and expertise in framing Budget estimates and projections. Do not be fooled by these statements. Budget papers are profoundly political documents: they frame an important narrative for any government in respect of its economic competence. For this reason, they are not left to bureaucrats alone to write. The estimates and projections in the Budget papers are based on hundreds of parameters that are the subject of intense, iterative discussions between senior officials in the Treasury and the Department of Finance and the government of the day (regardless of its hue).

These negotiations are a fine balance. The government wants to maximise its narrative without over-reaching on its immediate and longer-term credibility. This process follows the rules of repeated games under game theory. The need for a government to retain the public's confidence from one year to the next means that Budget parameters and estimates typically lie within a reasonable (market expected) range, with an occasional upside or downside bias. Cumulatively these biases are designed to benefit the narrative of the government of the day.

Earlier in the week, we saw Peter Costello admit that when he was the Treasurer framing his Budget papers, he opted for the conservative estimates for revenue growth from a range presented to him by Treasury. I am unaware of any public statements on Wayne Swan's biases, but my guess is that up until now they have been on the upside for revenue growth.

It will be interesting to see how these estimates and projections are reported when the Pre-election Economic and Fiscal Outlook (PEFO) comes out on or before 23 August 2013. Unlike the Budget papers, the PEFO estimates and projections are not based on parameters negotiated between the Treasury and Finance officials and the government of the day. Indeed, it may have been the possibility of a significant PEFO contradiction that prompted the more conservative estimates of revenue growth over the out years in this year's Budget papers compared with previous years.

Having said that, I do not expect a significant contradiction between the Budget and PEFO. But I will be looking for the odd 25 basis point movement in parameters here and there that cumulatively contribute to a headline movement in the expenses and balance charts above.