Treasury review can't be revenue witch hunt: economists

By David Donaldson

January 8, 2015

The Abbott government must avoid the temptation to use its upcoming review of the Treasury as a witch hunt over falling revenue, economists warn.

UBS banker John Fraser gets his feet under the desk as Treasury secretary next week. Announcing the appointment last month, Treasurer Joe Hockey tasked him with a “thorough review of the Treasury’s resources and capabilities”.

The accuracy of Treasury forecasting is likely to be a focus — there have long been concerns inaccurate modelling of government revenue over several years has exacerbated the gap between revenue and spending. But AMP Capital chief economist Shane Oliver believes the department shouldn’t shoulder the blame.

“There’s no doubt there has been an issue with budget forecasts, mostly relating to revenue,” he told The Mandarin this week.

“It started last decade, but back then it was the other way around — we ended up with bigger than expected surpluses. Since 2011 it’s switched, and there’s been an overestimation of revenue. It seems to be no end in sight for that, whichever party is in power.”

The problem is that commodity prices, which have a significant impact on the budget bottom line, are difficult to predict. Every $1 fall in the price of iron ore knocks around $300 million off revenue, and it’s fallen by about $60 in the past year.

“Demand and supply responses [for commodities] are very long and variable, and it’s my inclination to think that’s the main problem,” Oliver asserted.

“There seems to be a constant hope on the part of governments that revenue will bounce back.”

“I don’t think we should be blaming Treasury for this. As a country, government spending has gone up to match the revenue from the mining boom. Both government and Treasury should have realised that wouldn’t be permanent. There seems to be a constant hope on the part of governments that revenue will bounce back.

“Is there government pressure on Treasury to be optimistic, or is Treasury giving the wrong advice to government? It’s hard to figure out — but the government could have put more money aside during the good times,” he argued, citing the example of the Norwegian North Sea oil fund.

Bank of America Merrill Lynch Australia chief economist Saul Eslake is also unsure what Treasury could have done to avoid the shortfall. “There aren’t a lot of people who could say Treasury have done much worse than private forecasters or other treasuries around the world,” Eslake said.

A review of macroeconomic and revenue forecasting at Treasury overseen by David Chessel and published in 2013 found the department’s revenue forecasting methods were “comparable to those of official agencies overseas”, that Treasury’s forecasting performance “has been comparable with, or better than, the performance of official agencies overseas over the past decade” and that it had “robust governance arrangements in place to quality assure its forecasts through a process of peer review”.

Eslake is worried the review may be used by the government to scapegoat parties within Treasury. “I hope there isn’t any element of vindictiveness in this review, after the treatment of [former Treasury secretary] Martin Parkinson by [Prime Minister Tony] Abbott’s office and so on. I hope this isn’t an extension of that.

“To blame Treasury for every adverse policy outcome in the past 10 years would be to ignore the role of their political masters. The mistakes made have as often been as a result of governments ignoring Treasury’s advice as of following it.”

Does Treasury need more people power?

Eslake thinks it’s possible that putting more resources towards policy analysis and advice, rather than forecasting, might have helped tackle some of the fiscal challenges faced by the government.

Many of the unpopular policies thrown up by the budget and the Commission of Audit had been floating around Canberra for a long time, he says, and different resourcing priorities within Treasury may have helped throw up “better options”.

Eslake does believe, however, that the resourcing of Treasury portfolio agencies the Australian Tax Office and Australian Bureau of Statistics, which have endured significant cuts in recent times, should be revisited.

“Both of them in different ways seem to be having problems,” he told The Mandarin. “Forecasting and revenue at the ATO is one, and [former ABS head] Brian Pink said the ABS was struggling to keep the lights on.”

In addition, some of the computer systems in the stats office were built in the 1980s, hampering productivity.

Eslake also wonders if the ABS is suffering from mission creep, undertaking some research that “almost amounts to opinion polls”.

“It is well-known that tax reform is a slow process and one governments dread.”

Melbourne-based economist and former Treasury employee Jason Murphy suggests one idea for reform of Treasury “could be to give the Revenue Group a more public role in promoting the thinking that could inspire tax reform”.

“It is well-known that tax reform is a slow process and one governments dread. Having a public sector body pushing evidence into the public domain may help an otherwise fraught process go more smoothly, so long as their public work is seen as independent,” he told The Mandarin.

“I’m sure a review can do some good. Even though Treasury is one of the most dynamic and intellectual organisations I’ve worked in, every organisation can use a shake-up to prevent institutional inertia.”

Shane Oliver thinks that, despite the forecasting shortfalls, Treasury has done a good job in recent years. “Since the floating of the dollar, the Reserve Bank has gotten the edge on Treasury as the pre-eminent policy body, since interest rates are now a bigger lever than fiscal settings,” he said.

“But Martin Parkinson has done a great job alerting Australians to the issues we face in the the tax system — our disproportionate share of income from personal tax rather than indirect taxation; issues around the lack of revenue growth versus spending pressure; demographic and ageing challenges.

“It’s fairly hard to fault Treasury on that front.”

Correction: The original version of this article listed Saul Eslake as chief economist at ANZ Bank, but he now works for Bank of America Merrill Lynch Australia.

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Norman Hanscombe
Norman Hanscombe
7 years ago

Why would Abbott need a witch hunt? The major problem Labor Governments encountered arose not from Treasury inaccuracies but rather our practice of assuming absurdly optimistic income streams would continue indefinitely and then pushing expenditure even higher still.

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