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Joe Hockey wants an external auditor – I volunteer for the job Joe Hockey wants an external auditor – I volunteer for the job
(6 days later)
It’s a good thing Joe Hockey is so against waste because I have a proposal that will help him save a bit of money.It’s a good thing Joe Hockey is so against waste because I have a proposal that will help him save a bit of money.
On Sunday morning, the incoming Coalition treasurer announced to Channel Nine that he was going to audit the Treasury’s forecasts. He said: “Well, I’ll sit down with the Treasury and go through their methodology; I’ll test that methodology and even use external people to help me to test it to see how robust it is.”On Sunday morning, the incoming Coalition treasurer announced to Channel Nine that he was going to audit the Treasury’s forecasts. He said: “Well, I’ll sit down with the Treasury and go through their methodology; I’ll test that methodology and even use external people to help me to test it to see how robust it is.”
I hereby volunteer to do the job of external auditor. I propose to do it for half the cost anyone else will, and I promise to deliver him a 128-page report by the end of the week – heck, by close of business today.I hereby volunteer to do the job of external auditor. I propose to do it for half the cost anyone else will, and I promise to deliver him a 128-page report by the end of the week – heck, by close of business today.
What I’ll do is get some senior people in the economic and financial worlds to oversee the entire process. For a start, I’ll get the chair of Access Capital Advisers,  Dr David Chessell, to head the review. I’ll also bring on board Peter Crone, the chief economist and director of policy for the Business Council of Australia; Malcolm Edey, the RBA’s assistant governor (financial systems); and Dr Lynne Williams, who is on the Business and Economics Board of the University of Melbourne.What I’ll do is get some senior people in the economic and financial worlds to oversee the entire process. For a start, I’ll get the chair of Access Capital Advisers,  Dr David Chessell, to head the review. I’ll also bring on board Peter Crone, the chief economist and director of policy for the Business Council of Australia; Malcolm Edey, the RBA’s assistant governor (financial systems); and Dr Lynne Williams, who is on the Business and Economics Board of the University of Melbourne.
I can promise Hockey that the report will come up with 11 recommendations and conclude that “over the past two decades, Treasury’s macroeconomic forecasting performance is comparable with that of other domestic forecasters”.I can promise Hockey that the report will come up with 11 recommendations and conclude that “over the past two decades, Treasury’s macroeconomic forecasting performance is comparable with that of other domestic forecasters”.
And that, “Treasury approaches the forecasting task in a very professional manner and the forecasts it generates are broadly as accurate as those generated by comparable agencies in countries with similar institutional arrangements as Australia.”And that, “Treasury approaches the forecasting task in a very professional manner and the forecasts it generates are broadly as accurate as those generated by comparable agencies in countries with similar institutional arrangements as Australia.”
I can also promise Hockey that the secretary of the Treasury, Dr Martin Parkinson, will not be satisfied with that result. Indeed, I will get him to say in a speech: “While this sounds like a pass mark for us, we don't see it that way – our objective is to do better than this benchmark and, historically, we have.”I can also promise Hockey that the secretary of the Treasury, Dr Martin Parkinson, will not be satisfied with that result. Indeed, I will get him to say in a speech: “While this sounds like a pass mark for us, we don't see it that way – our objective is to do better than this benchmark and, historically, we have.”
How can I promise all this? Because a major review of Treasury’s forecasts with external people to test the robustness of their methodology was done just 10 months ago, in December 2012, and released publicly in February this year.How can I promise all this? Because a major review of Treasury’s forecasts with external people to test the robustness of their methodology was done just 10 months ago, in December 2012, and released publicly in February this year.
And this was no small thing. The “Review of Treasury Macroeconomic and Revenue Forecasting” was only the third such review in the past 20 years (the others were done in 1995 and 2005). It’s bizarre that it slipped his mind.And this was no small thing. The “Review of Treasury Macroeconomic and Revenue Forecasting” was only the third such review in the past 20 years (the others were done in 1995 and 2005). It’s bizarre that it slipped his mind.
I guess he was too busy 10 months ago ranting on about budget emergencies.I guess he was too busy 10 months ago ranting on about budget emergencies.
The review found that, while Treasury’s forecasts were as accurate as anyone else’s, as a rule they took an overly conservative line – underestimating growth during economic upswings and overestimating growth during economic downturns.The review found that, while Treasury’s forecasts were as accurate as anyone else’s, as a rule they took an overly conservative line – underestimating growth during economic upswings and overestimating growth during economic downturns.
In recent times, the biggest problem has been estimating company tax revenue. One way to show how tricky it has been of late is to look at corporate profits (which feed into company tax and capital gains tax and the minerals resource rent tax). In the national accounts, company profitability is measured by the “corporations gross operating surplus” (GOS). From the December 2011 quarter through to the December 2012 quarter the GOS fell five quarters in a row. How often has that happened going back to 1959 when the measure was first counted?In recent times, the biggest problem has been estimating company tax revenue. One way to show how tricky it has been of late is to look at corporate profits (which feed into company tax and capital gains tax and the minerals resource rent tax). In the national accounts, company profitability is measured by the “corporations gross operating surplus” (GOS). From the December 2011 quarter through to the December 2012 quarter the GOS fell five quarters in a row. How often has that happened going back to 1959 when the measure was first counted?
Not once.Not once.
Before this, it had never even fallen more than three quarters in a row.Before this, it had never even fallen more than three quarters in a row.
So, even though in the 2012-13 budget the Treasury was pessimistic about the GOS, it not surprisingly didn’t predict a once-in-54-year event:So, even though in the 2012-13 budget the Treasury was pessimistic about the GOS, it not surprisingly didn’t predict a once-in-54-year event:
The other big dilemma has been the disconnection between the terms of trade (what we pay for our exports compared to our imports) and the value of our dollar.The other big dilemma has been the disconnection between the terms of trade (what we pay for our exports compared to our imports) and the value of our dollar.
We can see this when we use the Reserve Bank’s index of the prices of non-rural commodities (i.e. minerals and LNG):We can see this when we use the Reserve Bank’s index of the prices of non-rural commodities (i.e. minerals and LNG):
Since March 2011, the value of non-rural commodities has fallen by about 28%, and yet until May of this year the value of our exchange rate (trade weighted index) did not fall at all. The big correction in May and June saw the value of our dollar fall by 11.5% in 3 months – the biggest such drop in the past 25 years, aside from during the GFC.Since March 2011, the value of non-rural commodities has fallen by about 28%, and yet until May of this year the value of our exchange rate (trade weighted index) did not fall at all. The big correction in May and June saw the value of our dollar fall by 11.5% in 3 months – the biggest such drop in the past 25 years, aside from during the GFC.
Clearly, we live in unusual times. When this results in things turning out better than expected, you never hear too many calls for forecasts to be audited. But during the entire first mining boom, Treasury continually underestimated the increase in export prices. Similarly, the 2009-10 budget forecast a recession that didn’t happen.Clearly, we live in unusual times. When this results in things turning out better than expected, you never hear too many calls for forecasts to be audited. But during the entire first mining boom, Treasury continually underestimated the increase in export prices. Similarly, the 2009-10 budget forecast a recession that didn’t happen.
Hockey has spent the past three years trying his best to undermine voters’ confidence in the economic and financial institutions of this country in order to have people think Labor has lost control of the budget and the economy. As Treasurer, it is time he realised that his words now carry weight. No longer will they be dismissed as the ranting of a man willing to say anything to get into office. Treasurers’ words move markets.Hockey has spent the past three years trying his best to undermine voters’ confidence in the economic and financial institutions of this country in order to have people think Labor has lost control of the budget and the economy. As Treasurer, it is time he realised that his words now carry weight. No longer will they be dismissed as the ranting of a man willing to say anything to get into office. Treasurers’ words move markets.
The Tresasury’s forecasts are also relied upon by many organisations to frame their own budgets – from charities and unions looking at expected levels of unemployment to commercial organisations looking ahead to the economic environment in which they are thinking about investing.The Tresasury’s forecasts are also relied upon by many organisations to frame their own budgets – from charities and unions looking at expected levels of unemployment to commercial organisations looking ahead to the economic environment in which they are thinking about investing.
They are serious things and they are taken very seriously by Treasury. For Hockey to brazenly claim they need to be audited, with seemingly no comprehension that a full review of the forecasts has just been completed, suggests he has yet to make the switch from opposition to government.They are serious things and they are taken very seriously by Treasury. For Hockey to brazenly claim they need to be audited, with seemingly no comprehension that a full review of the forecasts has just been completed, suggests he has yet to make the switch from opposition to government.
Given his responsibility, let’s hope he makes the transition soon.Given his responsibility, let’s hope he makes the transition soon.
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