Are Treasury’s numbers wrong? > Check the facts

Who: “The government is trying to bully the public service into a set of the numbers that clearly do not properly represent the state of the budget,”  Joe Hockey.

The claim: The government has pressed the public service into publishing budget figures that are wrong and misrepresent the state of the budget.

The facts: Treasury and Finance make detailed forecasts of the economy and the methods used are subject to frequent self-evaluation and external review. The most recent budget papers give an account of the review into the methodology used to forecast tax revenues. The forecasting methods are also potentially subject to external audit on the part of the Auditor General’s office which is accountable to Parliament rather than the executive. In addition Treasury and Finance officials appear before Parliamentary committees for specific inquiries as well as the estimates committees.

The budget papers, mid-year updates and during election campaigns, the pre-election economic and fiscal outlook all include a full discussion of the previous forecasts and any difference between them and any new forecasts. In addition to identifying the differences, the impacts of policy changes and changing economic conditions are separately identified. Finally at the end of the budget cycle the government publishes the final budget outcome.

Discussion of evidence: Changing economic conditions can play havoc with the budget. Small percentage fluctuations in outlays and revenues can give dramatic swings in the difference between the two—the budget balance itself. Surpluses can be turned into deficits and vice versa.

Obviously forecasts are subject to error. During the periods of strong economic growth prior to the global financial crisis revenue estimates were often underestimated by one per cent of GDP or more. For example the starting point for the 2008-09 budget had revenue forecasts $18 billion higher than expected for that year when the 2007-08 budget was framed. That error was 1.4 per cent of GDP. If anything history suggests that on average the budget estimates are biased towards underestimating revenue.

Sometimes Treasurers admit the human frailty in making forecasts. For example in the 1970s the then Treasurer Phil Lynch described the budget forecasts as “rubbery”. That was met with such derision that no Treasurer since has dared admit estimates are fallible.  Nevertheless the budget papers present the best estimates available and it has to be said that criticism is more muted when the errors result in a better balance than forecast.

The budget papers also contain a discussion of the sensitivity of the estimates to changes in economic conditions. That means anyone who, for example, thinks the economic forecasts are too rosy can make alternative assumptions and work out the budgetary implications over the forward estimates.