High stakes of budget's guessing game

Not for the first time, Treasury has found itself at the centre of political storm over the accuracy and independence of its budget forecasts. Did it reach its forecasts of revenue and spending without political influence from the government? Are the forecasts really Treasury's? Or do they also bear the Treasurer's imprint?

The waters have been muddied by media reports that Treasury offered the previous treasurer, Peter Costello, a range of possible forecasts. Costello, it is claimed, deliberately chose more conservative revenue forecasts as a means of constraining his spendthrift colleagues. By implication, the current Treasurer, Wayne Swan, has opted for more optimistic revenue forecasts in order to bolster his government's hopes of achieving a surplus. Certainly, this story fits the known facts. Under the Howard-Costello Coalition government, Treasury forecasts consistently underestimated the future revenue take. Under the current Labor government, by contrast, revenue has fallen short, with equal regularity.

In his recent post-budget remarks to the Australian Business Economists, the secretary of the Treasury, Dr Martin Parkinson, vigorously rebutted the claim that Treasury offers the government a range of forecasts to choose from. "Let me be very clear: Treasury does not provide the government with a range of numbers; Treasury provides its best professional estimate to the government ... It is up to the government of the day – and this applies back through history – to do what it wishes with those forecasts."

Parkinson also gave a detailed technical explanation of why revenue estimates had erred on the conservative side during the mining boom and why they had under-shot since the global financial crisis. The Costello-based account of persistent political influence is superficially plausible and attractive to Labor's critics. But it appears mistaken, at least when applied to recent budgets.

Budget forecasting, particularly on the revenue side, is notoriously unreliable, as all experts know and admit. That it has become central to political debate and media commentary marks another dumbing-down of policy discourse. By all means, we should expect governments, both current and prospective, to have a general idea of where their immediate fiscal plans are heading. If budgetary surpluses are a matter of concern, we should be assured that current policies can lead to some level of surplus at some point in the future. But to argue about the exact size of a surplus or the precise year in which it will be achieved is irrational folly.

Expert forecasters can construct a scenario to show that the projection is feasible on certain assumptions. But a forecast is only one plausible future among countless others and is not worth relying on, let alone using as a test of a government's economic competence. A system of budgeting that sets out a precise but unknowable fiscal future lends itself to dangerous misunderstanding when simplified in partisan political debate. Economic experts may all agree that the figures are best guesses and nothing more, but a government's opponents and critics will happily treat them as commitments waiting to be broken, as will unthinking journalists.


A more intellectually honest approach would be to differentiate between immediate, short-term forecasts, which can be reasonably reliable, and longer-term forecasts, which are more speculative. One common suggestion has been to publish a range of possible outcomes which would indicate an appropriate degree of uncertainty about the medium and long term. Indeed, Parkinson canvassed such a possibility in his recent address, suggesting that "confidence intervals" could be constructed for each forecast item, based partly on historical evidence of variation between forecasts and actual outcomes. These would indicate ranges within which "different outcomes are reasonably plausible". While the bands of variation might be "quite wide", they could still "aid understanding of the inherent uncertainties" in the estimates.

Spelling out such complexity is hardly needed within the small circle of professional economic forecasters and modellers. They fully understand the rules of the game and appreciate its limitations. But more emphasis on uncertainty might help to bring a greater sense of realism into public debate, where governments are too easily criticised for not meeting estimated targets or for changing their fiscal projections.

In such a highly charged and ill-informed debate and with an election impending, the dual functions of Treasury, and its secretary, need to be clearly understood. One function is to act as the government's key adviser on economic policy, loyally serving the Treasurer, as well as the Department of the Prime Minister and the Cabinet, and helping them develop policies that will aid them in their duel with the opposition. This role calls for partisan commitment to the interests of the government, tempered always by the constraints of legality, due process and public service professionalism.

The other function is as guardian and recorder of the national economy, maintaining records of the country's economic performance and conducting analysis of major economic trends. This role requires intellectual objectivity and political impartiality, and applies to most of the Treasury's publications, including the bulk of the annual budget documents.

The distinction between these two roles is generally clear and accepted by all relevant players, including opposition politicians in their calmer moments. Any suggestion that the lines may be blurred, for instance by partisan influence on impartial analysis, rightly sets alarm bells ringing. It is for this reason that Parkinson, like his predecessor Dr Ken Henry, has reacted so strongly to claims of pro-government bias in the budget estimates. Both have gone to great lengths to justify their department's forecasting methodology to their technical peers within the economics profession.

Nonetheless, talk of the "politicisation" of Treasury and of Parkinson's likely fate at the hands of a future Coalition government will still rumble on. As secretary of the Treasury, Parkinson may have been able to achieve a lower public profile than Henry, who became closely identified with the Rudd government's economic policies, particularly during the GFC. (In fairness to Henry, responsibility for any politicisation of his own position, or that of Treasury generally, lies not with himself but with Labor ministers, who were eager to co-opt Treasury's policy credentials to bolster their own lack of confidence.)

Budget forecasting, particularly on the revenue side, is notoriously unreliable, as all experts know. That it has become central to political and media debate marks another dumbing-down of policy discourse.

But Parkinson does have a history of speaking out on matters of political controversy. As secretary of the Climate Change Department, he publicly criticised approaches to climate change that differed from the government's preferred policies. Most secretaries would have avoided such direct and explicit engagement with their government's opponents.

More recently, since moving to Treasury, he has been a public advocate of further economic reform in order to improve productivity. He has also highlighted general problems of fiscal sustainability over the medium and long terms. He returned to these themes in his post-budget address. Such comments, however, are aimed at both sides of politics (and the media) and do not lay Parkinson open to any charge of taking sides in the partisan political contest. Indeed, his remarks may seem a welcome antidote to the chronic short-termism that dominates political debate and quite appropriate coming from someone in his position.

More secretaries, perhaps, should be prepared to speak publicly on matters of major policy issues in their portfolios. The former secretary of the PM&C, Terry Moran, certainly thinks so. In his recent article in the Australian Journal of Public Administration, he encourages public servants to enter into public debate on long-term strategy, talking "sensibly about the long-term and self-evident truths about the work of their agency or department". He claims that such a role "is now broadly accepted from the leaders of the Reserve Bank and Treasury" and provides a model for other public service leaders.

Bracketing the secretary of the Treasury with the governor of the Reserve Bank is both significant and questionable. The RBA is an arm's-length statutory authority, a status that gives its governor the right, and obligation, to comment publicly on government policy. The Treasury is in a more ambiguous position, arm's length in some reporting and analytical functions, but also subordinate to the government of the day in policy matters. Its secretary must tread much more carefully than the governor.

Even so, Treasury's standing as a repository of economic expertise and its links with the wider economics profession may license its leaders to voice critical comments when they are grounded in the received wisdom of economists, echoed in the business community, and are not obviously partisan. Whether other portfolios can claim the same degree of professional independence and policy credibility is open to doubt. Would politicians accept wider-ranging "state of the policy" speeches from the secretaries of, say, immigration, education or defence?

It is politicians, not public servants, who are the final arbiters of how much outspokenness can be tolerated. Ministers and government members take exception if a public servant's comments give political ammunition to the opposition. Opposition politicians, in turn, object if a public servant's enthusiastic support for government policy compromises his or her capacity to serve them when they return to office. Where these lines are drawn varies over time and with the political context. But professional public servants, who are obliged to maintain the trust of all sides of politics, learn to watch their step.

Richard Mulgan is an emeritus professor with the Crawford School of Public Policy at the Australian National University.