A Poke In The Eyes For Treasury’s Panglossian View

Here is the excellent Leith van Onselen, chief economist at the equally excellent macrobusiness.com.au, giving the Treasury department’s panglossian view a most excellent poke in the eyes.

His affirming the substance of my slightly error-prone critique of last night only makes it the more enjoyable reading for your humble blogger (emphasis added):

To say that I am sceptical of the Budget forecasts is an understatement. Despite the Kouk’s bizarro reading, I see a number of potential problems with the Treasury’s forecasts, which appear to be based on unrealistic underlying assumptions and mis-reading of the stiff headwinds facing the economy.

First of all, consider the Treasury’s assumed growth in nominal GDP, which is forecast to expand from 3.25% in 2012-13 to 5.0% in both 2013-14 and 2014-15…

For the uninitiated, nominal GDP is the dollar value of what’s produced and earned across the economy. It’s also the measure that drives taxation revenue. Nominal GDP grew by just 2.0% in the year to December, far below real GDP growth of 3.1%, which is the quantity of goods and services produced. While the fall in nominal GDP below real GDP is unusual, having happened only a handful of times since the late-1950s, it has happened twice under the current Labor Government’s watch – during the GFC and currently – on both occasions driven by sharp falls in commodity prices (reducing the dollar value of Australia’s exports) and the terms-of-trade…

The terms of trade forecasts are very aggressive. they assume significant uplift for the March and June quarters for this year. An almost non-existent fall next year and 2% in 2014/15. These figures do not come terms with a China adjustment at all.

…

In light of the ongoing slump in the terms-of-trade, the Treasury’s nominal GDP forecasts appear highly optimistic. According to the Budget papers, a 1% change in the value of goods and services generates a $2.8 billion shift in the budget bottom line in the first year and a $7 billion shift in the second. Therefore, by assuming stronger growth in nominal GDP, the Treasury has likely overestimated Budget revenues and the path back to surplus.

…

The other area of concern with the Treasury’s outlook relates to the upcoming peak and then decline of mining capital expenditures (capex). Treasury remains of the view that mining capex will unwind in an orderly manner and that overall jobs growth will improve as the non-mining economy picks-up steam…

Given that around 10% of the Australian economy are employed in mining-related activities, mostly in areas unrelated to actual extraction (e.g. construction workers, engineers, and mining services), and that mining capex will soon go into an as yet ill-defined but likely sharp decline, Treasury’s steady-as-she-goes employment projections also appear overly optimistic.

Read the entire article here.

Tags: budget 2013-14, government revenues, Leith van Onselen, mining capex, nominal gdp, terms of trade