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August 15th 2013 print

Peter Smith

Confessions of a recovering prophet

Economic prognosticators infest a vast acreage of Canberra real estate, tirelessly churning out projections whose irregular accuracy owes more to luck than acumen.  I know this because, long ago, I was one of them


Forecasting is a fraught business. The weather, global warming, the end of the world, the eventual cost of the NBN, the economy; the budget deficit; all, and many more, are resistant to following a predictable path.

I was once a forecaster. But I suffered from knowing that no-one could really predict the future. I was a charlatan and my heart wasn’t in it. I was chief economist of the State Bank Victoria. I once said that interest rates were going up and they did. I recall the chairman of the bank catching me in the lift and acknowledging my wisdom. I responded in a modest fashion calculated to enhance my reputation.


Who knows, if the bank had not gone bust, that lucky call might have carried me to heady corporate heights. Alas it was not to be. That aside, in the end I couldn’t do it with any appearance of conviction and brought an economist in from federal Treasury who could give our traders forecasts with a straight face. And, coincidence or not, he has gone on to heady corporate heights, but that is by-the-way; no names no pack drill.

Treasury economists in general are fond of forecasting. And most people are suckers for a good forecast or two. Hence thousands of Treasury economists are employed at taxpayers’ expense to do just that, and what a pig’s ear they make of it; proving I was right all along. In this special sense, I defied my own scepticism by correctly predicting that no-one could predict.

In the PEFO produced before the 2010 election, Treasury (with Finance along for the ride) forecast a budget deficit of $10 billion for 2011/12 and small surpluses for 2012/13 and 2013/14. As we now know, the actual deficit for 2011/12 turned out to be $43 billion, not $10 billion; and another $19 billion deficit, even with the benefit of fiddling, for 2012/13.

In the latest PEFO — an indefatigable triumph of optimism over experience — the former forecast of a small surplus for 2013/14 has been altered to deficit of $30 billion. We are meant to believe that by 2016/17 that elusive surplus ($4.2 billion no less; not $4.1 billion for example) will re-emerge, all Howard- and Costello-like. It is beyond a joke.

The forecast deficit itself is the culmination of so many assumptions and subsidiary forecasts that it is ‘a riddle, wrapped in a mystery, inside an enigma’. And, quite seriously, the clamour is for the Coalition to have its policies subjected to the same voodoo process.

Now suppose you present a package of significant cuts to business taxes allied with cuts to red tape and green. Who can possibly say how the business sector will respond and whether it will increase or reduce the budget deficit and when? No-one can say; not one Treasury economist; not a thousand of them plus a complex model combined.

Conservative governments should eschew macroeconomic forecasting for the purely pragmatic reason that it is useless; and to boot because it is bound to be orchestrated by Keynesians who will systematically understate the response of the business sector to lower taxation and freedom from regulation.

Conservative governments should concentrate on keeping government expenditure down and reducing regulation. This will obviate the need to talk about increasing taxes, including the GST. Taxes are high enough already. They need to be reduced; none of them need increasing. You don’t have to be a thoroughgoing supply-sider to understand the futility of crushing taxes crushing business, and thereby reducing revenue for which the prescription is higher taxes.

Getting government expenditure down will initially show itself in lower deficits or in surpluses and then experience will allow adjustment to be made to taxation to produce proximate balance over time.

Buying into the Treasury forecasting business is buying into mysticism and also, and more critically, into a Keynesian mindset which simply doesn’t understand the way free-market economies work. Perversely enough, Keynes did, even though his legatees don’t. He understood the driving role of entrepreneurs.

Conservative governments have to strike out from this straitjacket of Keynesian models and the associated economic mediocrity which plagues most of the economics profession. Their guiding principle is clear. Reduce the claim of government on resources, including by sacking tens of thousands of public servants, particularly federal ones duplicating state services, and most Treasury economists, who aptly fall into Adam Smith’s category of ‘unproductive labour’.

Free the private sector. And watch the economy and revenue grow. Maybe then we could actually afford disability care instead of raising false hopes.

Peter Smith, a frequent Quadrant Online contributor, is the author of Bad Economics

Peter Smith, a frequent Quadrant Online contributor, is the author of Bad Economics