Tag Archives: terms of trade

A Poke In The Eyes For Treasury’s Panglossian View

15 May


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.

Wayne’s Budget Is Already Shot To Hell

5 Nov

Fairfax journalist Peter Martin crunches the numbers and glimpses the reality, but still can’t quite admit what barnabyisright.com readers have long known.

That no sane person should believe Treasury’s budget forecasting:

It’s just as well the banks are cutting rates. The budget is getting hammered. In May the budget forecast an massive jump in company tax revenue of 28.9 per cent.

That’s right — around 30 per cent. The company tax take was to jump from $57.9 billion to $74.6 billion in the space of a financial year, an increase of $16.7 billion.

The reasonable-sounding argument was that profits had been bludgeoned by the global financial crisis, the high dollar and the January natural disasters and that these effects would “unwind gradually” during 2011-12.


No Peter. It was only “reasonable-sounding” if one were blithely ignorant of what was happening in the USA, Europe, and China.

To wit, the fact that the GFC never went away; rather, that governments worldwide had merely kicked the can down the road, by borrowing and/or printing trillions (a la Zimbabwe) to spend on “stimulus”. Thus achieving nothing, other than temporarily papering over the root problem (too much private debt) with an even bigger problem (even more debt, now sheeted home to government balance sheets).

But I digress …

But 28.9 per cent was more than an unwinding – it would have driven company tax to a new record high, even after adjustment for inflation.

And it wasn’t gradual. The budget papers partly explain the forecast acceleration by saying very low company tax instalment payments in 2010-11 meant that more than usual of any boost to tax would turn up in 2011-12 rather than 2010-11.

Also several tax breaks would end in 2011-12 and the budget would book “gains associated with increased Australian Tax Office compliance activities”, which would be helpful if it happened.

Superannuation tax revenue would jump as well, roaring back 29.3 per cent or $2.1 billion as the share market recovered.

Combined, these two revenue forecasts – each largely dependent on an improved economy – promised $18.8 billion in extra revenue… enough to pave the way for the paper-thin $3.5 billion surplus forecast for 2012-13.

In addition income tax revenue was expected climb 10 per cent, reflecting “anticipated growth in employment and wages”, contributing another $14.6 billion.

Only a brave or foolish person would call the Treasury over-optimistic. Its tax analysis division has 50 staff. The Finance Department’s budget group has 250 staff. They know far more about the budget position than any of their critics.

Well, I guess that means your humble blogger is “brave”. As must be the folks at Macquarie Economic Research, who called the budget forecasts “truly extraordinary”.

After all, how could we be “foolish” Peter? By your own tacit admission here in your own article, I was right:

But on this occasion the economy was crumbling underneath them as the budget was published. Released in May at a time when all but three of the employment outcomes for 2010-11 were already known the budget went for jobs growth that year of 2.75 per cent. It got 2.2 per cent. For 2011-12 it went for jobs growth of 1.75 per cent. Three months in to that year jobs growth is running at an annualised 0.2 per cent.

Without an economic boost we will have 177,000 fewer Australians working and paying tax by mid next year than the budget was counting on.

Funny that.

Your humble blogger pointed out several times, before and after the Budget was released, that Swan was already lying about past jobs creation. Why?  To distract attention from the upcoming record budget deficit announcement. Thus it stood to reason that his (ie, Treasury’s) “promise” of future jobs “creation” was also a lie.

Company tax has been going the same way. At budget time the government expected to collect $57.1 billion in 2010-11. It collected $56.3 billion, almost a billion less; hardly an encouraging beginning to an upward trend that was going boost company takings 28.9 per cent.

Superannuation tax earnings missed the mark by 8 per cent, also an unimpressive start to an upward trend that was going boost takings 29.3 per cent.

Since the budget the Australian share market has collapsed a further 12 per cent. The forecast upturn may be underway. The market has been improving since the start of October, but it’s too early to have much confidence.

We urgently need a financial update. The May budget was out of date within days of its release. We’ll get that update with the release of the Mid-Year Economic and Fiscal Outlook (MYEFO), an event often scheduled for Melbourne Cup Day. This year it will be later. Treasury and Finance need more time to put the forecasts together.

Well of course they need more time.

Cooking the books to show that Green-Labor’s financial management is wonderful … without it being dog’s-balls obvious … is becoming ever more difficult. Especially when the facts to the contrary out here in the real world are so clear to every normal person slaving away beneath the politicians’ and Canberra press gallery’s ivory towers.

The only “financial update” we will get from this government, will be as completely fiddled and wholly untrustworthy as the previous ones.

Not only has Labor’s cooking the books been proven time and time again here on barnabyisright.com.

Former Finance Minister Lindsay Tanner openly admitted it in his book “Sideshow – Dumbing Down Democracy”, to the applause of “senior” political editors:

As the budget approaches, his insights into the conjuring that goes on are valuable. He became adept at “the dark arts”, he confesses, “using some of what are now the standard tricks employed to maximise political appearances”.

These included switching between different forms of accounting, choosing different indicators of spending “according to which . . . suited the argument better”, classifying annual spending as capital, and making commitments beyond the years of the budget period.

Treasury “forecasts” are nonsense.

The economists who concoct “forecasts” are practicing pseudo-science. Tea-leaf reading at best. Gross intellectual (self) deception at worst.

As we saw earlier this week, Australia’s all-time record high terms of trade are set to cop a battering, with the 33% collapse in the price of our biggest export (iron ore) since early September:

Steel China Iron Ore Fines cfr main China port USD/dry metric tonne (MBFOFO01:IND)

Not only that, the price of our second biggest export (coal) is down around 24%.

And the reason why, is because China’s manufacturing and construction industries are continuing to slow:

Just as predicted by many for months now.

Even Wayne knows it’s true.

Which is why the loudly shouted “promise” that Green-Labor would spend $3.5 billion less than they expected to earn in 2012-13 … is no longer on the table.

Brace yourself.

Not for a “return to surplus” (ie, a balanced budget, in one year only).

But for new record deficits.

In just 5 months, the Green-Labor 2011-12 budget is already shot to hell.

Quelle surprise.

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