Forecasting is difficult and predictions are often wrong (regardless of which side of politics is in power). This isn’t controversial and the Government acknowledges as much explicitly in its own budget documents.
Part of what makes forecasting budget outcomes so difficult is that relatively modest changes in some key economic factors translate to much larger changes across the economy.
While Government rhetoric is all about transitioning away from the commodities like iron ore that drove the mining boom, economist Stephen Anthony says revenue remains particularly sensitive to China’s own growth forecasts.
He says this budget has a “made in China stamp,” and is concerned that the accuracy of forecasts will ultimately rely heavily on external factors.
And this year’s budget documents show that little has changed from 2015, when economist Mr Anthony told ABC News that forecasting errors over the past decade had been almost entirely a result of unanticipated changes in government revenue.
Federal budgets are political documents and it’s instructive to view forecasting error in this context. Governments want to tell a good story about our future, but Nicki Hutley says it’s concerning if that comes at the expense of realistic forecasting.
The budget forecasts “three years of 3 per cent growth in real terms.” Ms Hutley asks, “how realistic is that?” She also notes that while it’s not possible to anticipate all events, “what you can do is base your central case forecasts on sensible parameters.”
With the RBA cutting rates this week (and some economists predicting further cuts) largely due to low inflation, Ms Hutley also questioned budget assumptions around inflation. “We’re saying over 2 per cent in the current year, and that’s just not very realistic,” she says.
Ms Hutley makes the point that erring on the side of caution is a sensible approach most business owners would understand.
“As a business owner I’m going to use conservative forecasts and I’m also going to provide some sensitivity testing around that to understand what those parameters do.”