Kai Swoboda
Treasury’s
analysis of its own forecasting processes and performance, undertaken in 2011–12, generally found that budget
forecasts were ‘broadly as accurate as those of both domestic forecasters and
those generated by comparable agencies in countries with similar institutional
arrangements as Australia’.[1]
While this provides some reassurance about the quality of
the budget estimates, what if international and domestic economic conditions
don’t turn out as expected? What are the potential impacts on the economy and
the budget?
There are several areas within the budget papers that
provide a range of information to assist users to interpret the extent of some
of the risks. Alternative sources on these issues are the views of various
economic commentators and the Parliamentary Budget Office, which has recently
published an
analysis of the sensitivity of budget projections to changes in economic
parameters.[2]
Forecasting performance and
scenario analysis
Budget Paper No. 1 (Statement
7: Forecasting performance and scenario analysis) includes some qualitative and quantitative
analysis of the budget estimates. This covers a summary of previous forecasting
errors and includes some figures on the range of ‘confidence’ for certain
current forecasts.[3]
Also included in this statement is a sensitivity analysis of
the impact of two scenarios on headline economic indicators and the budget
position for the budget year and the year following. These scenarios have been
unchanged since the 2011–12 Budget. The modelled impact of each of these
scenarios suggests that changes in economic indicators can have large impacts
on the Budget outcome (Table 1).
Table: 1 Illustrative sensitivity of the budget balance
to specified scenarios, 2015–16 and 2016–17[4]
|
Scenario 1—reduction in nominal GDP
|
Scenario 2—increase in real GDP
|
|
2015–16
|
2016–17
|
2015–16
|
2016–17
|
Receipts
($b)
|
-2.8
|
-5.8
|
4.1
|
4.7
|
Payments
($b)
|
-0.1
|
0.1
|
-0.4
|
-0.3
|
Underlying
cash balance ($b)
|
-2.9
|
-5.8
|
3.7
|
4.5
|
Change
in underlying cash balance as proportion of budgeted underlying cash balance
(%)
|
8.2
|
22.5
|
-10.5
|
-17.4
|
Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2015–16, pp. 1–5, 7–16 and 7–18.
Note: Scenario 1 is a 1%
reduction in nominal GDP due to a fall in the terms of trade. Scenario 2 is a
1% increase in real GDP driven by an equal increase in labour productivity and
labour force participation.
Relative size of policy and parameter
variations
Budget Paper No. 1 (Statement
3: Fiscal strategy and outlook) includes a reconciliation between the
estimates of the previous budget and any intervening budget statement (such as
a Mid-Year Economic and Fiscal Outlook (MYEFO)) and those presented in the
current budget in terms of the extent to which changes in the underlying cash
balance and fiscal balance have been due to policy change or to ‘parameter and
other variations’.[5] This reconciliation
provides information about how important the factors that the government can
control (policy decisions) are, relative to those that it can’t (the parameter
and other variations). It could be used to assess the potential impact of
unanticipated changes over the next few years.
The 2015–16 Budget notes that the net change in the fiscal
balance of over $61 billion for 2014–15 to 2017–18 was as a result of
policy decisions of over $15 million and parameter and other variations of
over $46 billion.[6] The extent of parameter
variations is smaller than in recent budgets and around one-quarter of that
associated with the 2009–10 Budget, which reflected the effects of the global
financial crisis (Graph 1). The graph also illustrates the pattern of
underestimating revenue before the crisis and overestimating it since the
crisis.
Graph 1: Impact of policy and parameter changes on the fiscal balance,
2004–05 Budget to 2015–16 Budget ($ billion)[7]
Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2015–16, p. 3–24 (and previous issues).
Statement of risks
Budget Paper No. 1 (Statement
8: Statement of Risks) provides a high level summary of the various events
that could affect fiscal outcomes. These include economic developments and
certain events that have been recognised as potentially occurring coming to
fruition (such as a legal outcome).
Ad hoc commentary within the budget
Also usually within Budget Paper No. 1 (Statement
1: Budget Overview and Statement 2: Economic Outlook) can be found remarks
and assessment about economic conditions and factors affecting the Australian
economy. These may provide a guide to the upside and downside risks that have
been considered in formulating key assumptions.
On occasion, specific factors are considered. For example, while
all budget papers since 2011–12 have included a discussion of the decline in
the iron ore price, the 2014–15 MYEFO and the 2015–16 Budget included some specific
discussion and sensitivity analysis relating to changes in forecasts for iron
ore.[8]
This commentary reveals the extent of the changes in forecasts for iron ore
prices over recent years, with assumptions about the price revised down for
2014–15 from US$95 per tonne at the 2014–15 Budget, to US$60 in the 2014–15
MYEFO and now down to US$48 in the 2015–16 Budget.[9]
The inclusion of sensitivity analysis in the 2015–16 Budget
of a further US$10 per tonne revision in the iron ore price (up or down) suggests
that tax receipts would change by $2.1 billion in response.[10]
This analysis allows for more transparency on the state of the budget with
future movements in iron ore prices.
[1].
The Treasury, Review
of Treasury macroeconomic and revenue forecasting, December 2012,
p. xxii.
[2].
Parliamentary Budget Office, The
sensitivity of budget projections to changes in economic parameters: Estimates
from 2014–15 to 2024–25, Report no. 03/2014, November 2014.
[3].
Australian Government, Budget
strategy and outlook: budget paper no. 1: 2015–16, pp. 7–3 to 7–14.
[4].
Ibid., pp. 1–5, 7–16 and 7–18.
[5].
Australian Government, Budget
strategy and outlook: budget paper no. 1: 2015–16, pp. 3–17 and 3–24.
[6].
Ibid., p. 3–24.
[7].
Ibid. (and previous issues).
[8].
Budget
strategy and outlook: budget paper no. 1: 2015–16, ibid., p. 2–19; Australian
Government, Mid-Year
Economic and Fiscal Outlook 2014–15, p. 12.
[9].
Ibid.
[10].
Budget
strategy and outlook: budget paper no. 1: 2015–16, ibid., p. 2–19.
All online articles accessed May 2015.
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