Yin and Yang and Federal Budgets

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Sometimes it seems that the Federal Budget could be improved through a strong dose of Taoist thinking.

Here is my logic…

The budget is supposedly one of those things that involves balance. That is, Government receipts are balanced with Government expenditure. The Budget updates in May are a time where past income/expenses are published and proposed future income/expenses are announced. At the same time, forecasts from Treasury are used to model the expected impact of any changes, and to try to paint a picture of what Australia’s balance sheet will look like in the future.

This would all be well and good, if the future were as well-behaved as most forecasters would have us believe.

The difficulty lies in trying to plan a future using straight-line thinking in a world that is anything but straight lines.

Your task, should you choose to accept it, is to track down recent changes in announced levels of budget surplus/deficit. One year is enough. From this, you will see that there is no way of predicting future outcomes. There is every chance that the huge resources and talent available in a department such as Treasury will come up with better forecasts than most other organisations in Australia but the key point is that there is absolutely no absolute in the system.

For some reason (a cynic would say that it is a tilt at populism), politicians talk about such issues as though forecasts are enough to work on. Well, in some ways maybe they are. But in others, they definitely are not.

Here is my thinking… At any given point in time there will be a range of expected outcomes for any given component of the economy or the economy as a whole. Some will be of the opinion that restrictions on the availability of credit will lead to increases in bankruptcies, company failures and unemployment. Some will be of the opinion that actions to stimulate China’s economy will boost terms of trade for Australia and help keep any such impact to a minimum. If we grouped the range of expectations they would probably “bunch” at some level that most people agree on, with a few radical thinkers further away from this range.

Wouldn’t it be rather more useful to all and sundry for the Budget figures to show a range of outcomes, along with Treasury’s actual forecast?

This would be far more in line with real world economics. It would also help to lessen the expectation of genius from our politicians and leaders. The truth is that they simply do not know the future. They cannot control receipts as the income received by the Government will be generally based on percentages, which in turn will be based on variable figures. – for example, on company tax receipts which will depend upon how much profit companies make. Maybe the Budget could make a better effort at showing the areas that are (relatively) fixed versus those that are variable?

This won’t have any real impact on what actually DOES happen – but that is true of the current situation as well. However, it should help to make the Budget process just a little bit more understandable to all we of the Great Unwashed, who are not overly familiar with the country’s accounts.

While i am on the rant-and-rave, how about a few less rubbery figures? The one that keeps sticking in my mind is reading about billions of dollars of expenditure in such-and-such an area, only to find that none of it is going to happen this year. Or next year. Or the other furphy of adding up the next 5 years total expenditure in an area and loudly displaying this as a huge largesse towards that issue. As we all know, future Budgets may change those figures so let’s keep such grandstanding to a minimum!

One last rock-in-my-shoe… Would someone please ask politicians to refrain from announcing grand expenditure plans that are actually just small updates on plans already on the table? For example, a “normal” expenditure of say $80m on some water project gets increased to $90m but the announcement is made that there will be $450m spent on this water project over the next 5 years.

Truly, we could all use a little less of the oratory and a little more plain speaking.

And maybe a bit of acceptance that the world of economics is NOT straight lines but a series of variable outcomes… It would certainly make me a happier bunny.

As a footnote to rather strange maths, how about his one from the Australian Financial Review’s Budget ’09 Liftoff “Checks and Balances pay off in the long term” (pB4) by Political Editor Laura Tingle. Near the end of the article is this comment, “This is a deterioration equivalent to 6.6 per cent of gross domestic product and the forecast budget deficit will amount to 4.9 per cent of GDP, the largest on current estimates since World War II. (Revisions to offiicial data last year now show the Whitlam government as recording no deficits)”.

Excuse me… “Revisions to official data last year now show the Whitlam government as recording no deficits”???? Do you find that one as interesting as i do? What had previously been deficits are no longer going to be deficits? Nice deal if you can get it.

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