WEEK TWO

For campaigning politicians, getting the economic 'story' right is vital.

You can see this by the way Tony Abbott's using the 'debt' word whenever he gets the chance.

Kevin Rudd's got an economic story too, but this week it began to look like a bit of a tall tale, as this article for the Canberra times suggests . . .

Economics, Fact & Fiction

Perhaps it was the heat. Or maybe the humidity. Nevertheless, and for whatever reason, this was the week Labor began to ‘go troppo’. Kevin Rudd’s febrile promise to establish Darwin as a tax haven came from somewhere right off the radar. The campaign promise utterly failed to intersect with reality.

For a start, it’s highly dubious that this measure would ever pass the High Court. But more importantly the promise wouldn’t even take effect until 2018 – two elections away. Don’t worry, you won’t be hearing any more about this rubbish. It’s been floated in a desperate attempt to generate momentum as Rudd rushes around the country. But the old magic just isn’t working any more. Things fall apart.

That’s why Tony Abbott won’t be releasing his costings. The pressure is off. He simply needs to avoid unforced errors. Don’t believe anyone who says this will be another hung parliament – they’re talking rubbish. Corporate advisor Pottinger did an analysis of the betting markets. Rudd has only a 16.5 percent chance of leading Labor to victory. We still have another three weeks of colour and movement, but I believe the result is locked-in.

Did you notice my slight hesitation? I’m actually certain the Liberals will win, but prepared to admit there remains a very small, outside chance that things will turn around. The future is another country and predictions are always risky. Not that this worries Treasury, however. Despite absolute and recurrent proof of its inability to accurately hit numbers, the department continues to pretend it has some sort of reputation for accuracy.

In a way it does. You can absolutely guarantee the projected figures will be wrong. Things happen. Nobody can be right four years out – so why not admit that. Admit, “this is a guess” and you don’t look so ridiculous. Nobody is more aware the documents are prone to error than the economists themselves. Indeed, earlier this year the department produced a wonderful 66-page paper (with five detailed appendices) admitting its “experienced mixed success,” forecasting over the past decade. By this Treasury means the projections were actually dramatically and disastrously wrong in four of the past five years. In fact, they were rubbish, if better than those of the US and some other countries.

Treasury emphasises, “the economic environment has become more volatile recently and profound structural changes are occurring . . . making the forecasting task more difficult”.  

Yet hope – or credulity – springs eternal. This week the department again released a Pre-election Economic and Fiscal Outlook, demonstrating the new forecast budget outcome over the next four years will be $209 million better than its previous estimate, released a few days previously. Instead of asking why the guess has changed, or why this one might happen to be more accurate than the last one, everyone simply stood around nodding sagely.

The truth is the projections are rubbish. This is a simple fact. Any real economist would readily admit as much. If you do, however, choose to believe Treasury then I’ve got a bridge across Lake Burleigh Griffin I’d like to sell you. In fact, I’ve got two.

If you want a demonstration of what nonsense the Outlook is, consider the fact that it dismisses the possibility that different policies will provide different results. Are the economists really suggesting, that no matter which party happens to win power and whatever policy settings it might choose to implement, these will have no demonstrable effect whatsoever on the forecast outcome? It’s ludicrous. We may as well not bother voting.

Examine the detail of the predictions and their idiocy becomes apparent. Will we have a carbon tax or not? If so, at what price? The official guess is $38 a tonne in 2019. Why not $48? Why not $12? Insert whichever figure you want. All of these outcomes are equally plausible; equally justifiable.

This alone makes the projections risible. But wait, there’s more! Our exposure to what’s happening overseas means decisions made in Beijing will inevitably have dramatic effects determining exactly what happens to our economy. How much genuine comprehension of the Chinese economy (and, perhaps more relevantly, decisions made within the politburo) does Treasury really possess? Maybe the department might like to run an ANU short-course to let the Beijing watchers know what’s really going on inside Zhongnanhai. Sorry, that’s the leadership compound in Beijing but, as a devoted reader of Treasury documents you already knew that . . .

During an election period the Treasury should confine itself to playing guessing games about the past. This entire forward projection exercise was simply invented by Peter Costello as a method of clubbing Labor oppositions round the head. It’s to the department’s lasting shame that it pretends it is engaged in anything other than a simple political tactic designed to entrench whichever party happens to be in government.

There’s a simple way out. Admit the probability of forecasting error. Define the confidence levels and offer alternate scenarios. Hopefully the next Treasurer might get the department to work for its money. Until then, try and find something useful for the document. Colouring paper.