Wednesday, May 20, 2009

Henry adds up the numbers

Since the Budget, the big attack from the opposition has been on the projections of the Budget forecasts. Here’s an example from Joe Hockey:

Mr Hockey says the Government's projections for a return to budget surpluses are misleading.
"They are based on above-trend growth, not only for the next two years, but they are based on it well into the future," he said.
"It is an absurd proposition.
"It is casino economics to assume that this Budget will get back into surplus any time in the foreseeable future."

Ken Henry came out in his annual post-Budget address to defend the Treasury’s work and explain the numbers.

The response was as if the critics hadn’t even listened.

Here’s Hockey again last night on the 7:30 Report:

Well, Kerry, it's interesting, because Ken Henry agrees with what we stated, and that is that there is no recent period were there has been six consecutive years of growth of more than four per cent per annum, which is the underlying assumption for Kevin Rudd's plan to have, in his words, $300 billion of debt. The debt will be far greater, Kerry, far greater, if on one of those years, it doesn't reach the assumption that Ken Henry suggests.

Here’s Terry McCrann in the Herald Sun:

Henry & Co are 'projecting' growth zooming up to 4.5 per cent in that year, staying up there for the following year, then dipping a bit but staying 'above trend' - implicitly around 4 per cent - for the next four years out to 2016-17.

That's to say, six successive years of 4 per cent-plus growth.

This is a huge ask, almost unprecedented in the past 30-35 years. Indeed, yesterday Henry reached back - had to reach back? - all the way to the 1960s to justify its reasonableness.

If Henry really believes we face economic conditions like the golden 1960s, I suggest he has a problem and we do as well.

Well let’s do something odd, and actually look at what Henry said in his speech. McCrann suggests Henry had to go all the way back to the 1960s and suggests he’s off his nut if he thinks that’s the period of growth we’re about to experience.

Turns out Henry is not suggesting anything of the sort.

Here’s the graph that sets out what Treasury is suggesting will happen.

Figure Six: Real GDP growth. Source: ABS Catalogue Number 5206.0 and Treasury


Here’s Henry’s explanation of the growth figures (his own words):

The growth projections in Figure Six cover the four year forward estimates period. In this budget, we have integrated that four year story with a medium-term set of growth projections – out to 2019-20. The work is described in Budget Statements 3 and 4.

This is not straight-forward work. And it necessarily involves considerable judgement. Because we don't often position the budget in such a long multi-year timeframe, we expected that some of our readers would have some difficulty with the concepts.

Even so, I have to say that I have been a little surprised by some of the quite peculiar things that have been said and written about our medium-term growth projections. And just in case there is any doubt – and there has been some commentary that may have seeded such doubt – let me make it quite clear that these are the Treasury's numbers. They are also the Government's numbers, of course.

We have forecast zero growth in 2008-09, negative growth of ½ per cent in 2009-10 and growth of 2¼ per cent in 2010-11. We have then projected two years of growth of 4½ per cent, followed by four years of growth of just under 4 per cent, falling to 2¾ per cent in the next year, 2017-18.

Other commentators have given the impression that our projections would, if realised, produce a period of unprecedented growth. One of our leading private sector economists – a person for whom I have a great deal of respect – has been quoted as saying that he couldn't recall any previous six years of above 4 per cent growth since the 1960s.

The 1960s produced seven years of growth above 5 per cent. For the eight years 1962-63 to 1969-70, growth averaged 5.9 per cent. But it didn't actually produce six consecutive years of above 4 per cent growth; in 1965-66 growth was only 2.4 per cent.

In the seven years 1983-84 to 1989-90, there were four years of growth above 4 per cent, and an average growth rate of 4.23 per cent. And in the seven years from 1993-94 to 1999-00 there actually were six years of above 4 per cent growth. These years were not consecutive, however; 1996-97 spoiled the party by recording 3.9 per cent. The seven year average was 4.3 per cent.

Some commentators have argued that, even if history would support a six year period of growth averaging in excess of 4 per cent, this cycle will be much weaker because of the special character of this particular recession. What is most interesting about these arguments is that they are often accompanied by extensive quoting of our own material published in Budget Statement 4. It's as if we failed to take account of our own analysis.

OK, let’s just look at what he has said here.

Henry doesn’t, like McCrann and Hockey suggest, reach back to the 1960s in a vain attempt to prove his analysis. What he does is address criticism by journalists (and the Liberal Party no doubt) that such growth hadn’t occurred since the 1960s. He points out that yes, such growth did occur in the 1960s, BUT that also similar length of growth happened in the 1980s after a recession (a recession by the way that also included high inflation), and in the 1990s.

In fact look at the 1990s, you can see 6 years in a row over 4% growth.

Now look at the actual prediction of the recession. In the 1990s, there were 2 years under the 30 year average growth. In the 1980s only one year below the average. In this recession, they’re predicting 3 years of below average growth – hardly reflecting an overly optimistic view that the Liberals would have you think they are taking.

And now let’s look at what Hockey said last night (after Henry’s speech). He said

there is no recent period were there has been six consecutive years of growth of more than four per cent per annum, which is the underlying assumption for Kevin Rudd's plan to have, in his words, $300 billion of debt.

Well now Joe. For a start they are not predicting 6 years of more the 4% growth. They’re saying “two years of growth of 4½ per cent, followed by four years of growth of just under 4 per cent, falling to 2¾ per cent in the next year, 2017-18”

Which is a big difference between predicting 6 years in a row over 4% and if Joe doesn’t understand that then he needs some lessons in maths.

Now people say this is a worse recession than the 1990s so why should growth be similar to that? Well one reason is that the stimulus measures brought in by the Keating Government in the 1990s came in too late and were targeted at more long term infrastructure. This time round, the Government has got in early, and has a balance between short, mid and long term stimulus. Plus unlike the 1990s we don’t have high interest rates, and a bloated workforce – the skills shortage that we had during the mining boom will be there still when we get out of this recession. In the 1990s lots of manufacturing jobs went never to return; this time round, yes there will be some jobs that are gone for good, but no where near the same amount. China still needs iron and ore, and so will India.

But don’t expect either the Liberal Party or conservative commentators to acknowledge that.

They will just keep beating their drum, ignoring the data, and pretending the Australian Budget can be equated to that of a struggling family, where going into debt means the danger of getting chucked out onto the street. If they really think that is the case, then I have to say it is they who have a problem and if they get back in power so do we.

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