The Dim-Post

January 27, 2012

Nobody could have predicted . . .

Filed under: economics,finance,Politics — danylmc @ 8:54 am

Stuff reports:

Revenue Minister Peter Dunne says the Government will be forced to look at how it can tighten the tax system if the global economy deteriorates further.

For the first time yesterday, Prime Minister John Key conceded he might have to drop plans to return the Government’s books to the black by 2014-15.

In his first major speech for the year, he said the slowing global economy and the European debt crisis had forced Treasury to cut the expected surplus to less than $500 million from the $1.5 billion tipped before the election.

If the outlook worsened before the May Budget, more may have to be done to return the books to surplus or the target dropped altogether.

Dunne this morning said a global recession would force the Government to look at plugging tax loopholes, clamp down on tax avoidance and ensure the system was coherent and consistent.

How things change. Just a month before the election Treasury openly scoffed at the naysayers doubting their insanely optimistic growth projections. And when Labour insisted they could raise revenue by cracking down on tax avoidance, the National government just laughed.

The [Labour] party believes it can raise $300 million a year in additional tax with new anti-avoidance measures, a forecast greeted sceptically in a number of quarters, including the Beehive.

Finance Minister Bill English said that figure was very optimistic. National had already pursued “the low-hanging fruit”, he said, by giving the Inland Revenue Department money to enforce tax rules on property investment which were expected to return $800 million a year.

With that done, “there isn’t a whole lot of easy revenue gains left there”, Mr English said.

Some people have complained that there wasn’t enough emphasis on policy during the election campaign – it was sidelined by the RWC and the teapot tape scandal. Given that the policies of the parties were costed predicated on Treasury’s economic forecasts – which discounted the possibility of a European debt crisis, an event that has been regarded as inevitable for roughly eighteen months prior to the election – it’s a damn good thing we didn’t all focus on ‘the policies’, because with the exception of asset sales, capital gains et al, they were impossible fantasies.

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45 Comments »

  1. Should party policies be based on the worst that is predicted to happen? Serious question – in a quickly evolving international economic situation what should be the benchmark to base policies on? And whose opinions?

    I think most people would have been aware that policies were optimistic snapshots that were unlikley to remain the same, and most voting decisions were made on perceived ability to deal with difficult economic times rather than policy specifics.

    At least National and Labour policies were basd on theoretically feasible scenarios if all went well in the world. Many NZF, Mana and Green policies were pie in the sky even if the economic sun shone brightly.

    Comment by Pete George — January 27, 2012 @ 9:11 am

  2. why are they treating cracking down on tax avoidance as a last-ditch solution, to be used only in an emergency?

    Comment by kahikatea — January 27, 2012 @ 9:30 am

  3. So treasury were over-cautious during a boom and over-optimistic during a bust. How the flip does that work?

    Comment by max — January 27, 2012 @ 9:34 am

  4. “Should party policies be based on the worst that is predicted to happen?”

    They should be based on realistic expectations of what might happen, surely. The point is that before the election the National Party openly scoffed at suggestions that treasury were being overly optimistic (or, more likely, on crack) and less than four months later – time they’ve spent been sunning themselves in Omaha – suddenly it’s all a different ballgame. What’s changed?

    Comment by nommopilot — January 27, 2012 @ 9:35 am

  5. “At least National and Labour policies were basd on theoretically feasible scenarios if all went well in the world. Many NZF, Mana and Green policies were pie in the sky even if the economic sun shone brightly.”

    Maybe in your world. It never sounded very theoretically feasible to me.

    Comment by nommopilot — January 27, 2012 @ 9:37 am

  6. ‘they were impossible fantasies’ do you mean as opposed to ‘possible’ fantasies. . . .?

    The media are in part to blame for this lack of scrutiny, but they were aided and abetted by frothers who were looking for the next ‘exclusive brethren’ ‘dirt on JK’ shock/horror titbit in the hope it would somehow swing the election/pervert our democratic process. And guess what, it’s still going on! Only yesterday even in these here parts as I recall.

    And if we are going to tilt at pie in the sky policies the Labour Party were floating stuff that would only fool someone who thinks that spare chits in their cheque-book ‘proves’ that there is still money in the bank account. They don’t bear repeating here as it was suggested in the herald that they were unbecoming of a mature political party, and to do so would be like mocking the afflicted.

    Comment by Eric Blair — January 27, 2012 @ 9:38 am

  7. “…I think most people would have been aware that policies were optimistic snapshots that were unlikley to remain the same…”

    There is this scene in the movie Drive between Ryan Gosling and this dude in an elevator. Have you seen it Pete?

    Comment by Sanctuary — January 27, 2012 @ 9:38 am

  8. I really don’t think everyone knows that election statements are “optimistic snapshots”. People wanted a return to surplus, National promised it. Straight away they’re back-tracking.

    Comment by nw — January 27, 2012 @ 9:40 am

  9. realistic expectations

    I suspect that Treasury gets it right half the time and wrong the rest. Just like everyone else, except for those in the finance sector who have made a lot of money by gettting it right and that’s mostly by chance.

    The orginal forecast was – things aren’t great but we can scrape by

    The updated one is – things aren’t great and we’ll scrape by but by less

    There’s not really much earth-shattering change.

    Comment by NeilM — January 27, 2012 @ 9:48 am

  10. People wanted a return to surplus, National promised it.

    So did Labour. Voters trusted National to deliver more than they trusted Labour (some may look on it as the least untrustworthy).

    I agree it doesn’t look good revising down now, but Labour would have had to do the same. It’s hardly an unprecedented political shock.

    Comment by Pete George — January 27, 2012 @ 9:51 am

  11. Since both Labour and National base their economic ideas on advice from Treasury, it really wouldn’t fiscally matter much who we got – they’d both be wildly out and both be singularly unable to work out why, because the very institution they get their ideas from is constrained against thinking of any alternatives. The concept that some kinds of economic changes could be made for reasons like justice or self determination, rather than fantasy book-balancing, never even comes up in our de-facto grand coalition.

    Wild inaccuracies like what Danyl is noting here don’t even raise a ripple in our public discourse. Who remembers or even cares what was said leading into the election? The guy saying it for Labour isn’t even the boss 2 weeks later, and the other guy is already backtracking on all claims, except for the one that really mattered to him, the right to sell off something that I’ve been paying off my whole life, one of the few things we have that make NZ self-sufficient.

    What amazes me is how National managed to sell how fiscally responsible it had been in direct opposition to the facts, which were a disastrous collapse in our economy right through their first term, during which they put taxes *down*, adding a whole heap to our debt plate, and how the Christchurch catastrophe wasn’t seized upon as the perfect time to stimulate internal growth with levied rebuild while we weather the international financial shitstorm. Which would have been a solution both effective and so obviously righteous that even a huge swathe of right wingers were for it.

    Comment by Ben Wilson — January 27, 2012 @ 9:57 am

  12. during which they put taxes *down*,

    they shifted tax from income to consumption. Ask anyone who had an LAQC if taxes went down.

    Comment by NeilM — January 27, 2012 @ 10:03 am

  13. a disastrous collapse in our economy right through their first term

    What country are you in?

    and how the Christchurch catastrophe wasn’t seized upon as the perfect time to stimulate internal growth

    Not while the city was still falling down and oozing up. I haven’t seen a huge swath of anyone proposing an immediate rebuild. Not even opportunist political parties in a campaign.

    Comment by Pete George — January 27, 2012 @ 10:09 am

  14. well if they got it wrong last year they could have it wrong now. Things might actually turn out better. Or worse.

    Comment by NeilM — January 27, 2012 @ 10:21 am

  15. I predict that if it doesn’t turn out better, then it will either be worse or the same.

    Comment by Sam — January 27, 2012 @ 10:26 am

  16. either way Key is either being too pessimistic or not pessemistic enough.

    Comment by NeilM — January 27, 2012 @ 10:31 am

  17. …forced Treasury to cut the expected surplus to less than $500 million from the $1.5 billion tipped before the election

    If Treasury and National could have forseen the degree of deteriorating outlook and campaigned on half a billion instead of 1.5 billion would it have made any difference to how most people voted? I doubt it.

    Should National continue with their full asset sale program regardless of any further deterioration? Or should there be room to adjust that plan down as well?

    Comment by Pete George — January 27, 2012 @ 10:40 am

  18. Should National continue with their full asset sale program regardless of any further deterioration? Or should there be room to adjust that plan down as well?

    Absolutely, given that any partial sale will not realise a decent price in a skittish market.

    But then again, that would fly in the face of ideology and we can’t have that now can we.

    Comment by Gregor W — January 27, 2012 @ 10:53 am

  19. >Not while the city was still falling down and oozing up. I haven’t seen a huge swath of anyone proposing an immediate rebuild. Not even opportunist political parties in a campaign.

    Nor was I proposing an immediate in-place rebuild. I was talking about the readiness of NZ generally to pay for rectifying (to the best of our ability) this disaster directly, so long as the money taken is actually used for that. It would be nearly 100% spent on jobs for NZers, and growth for NZ businesses.

    Comment by Ben Wilson — January 27, 2012 @ 10:57 am

  20. Well if people bothered to actually read the Treasury forecasts you would have spotted the Risks and Scenarios section http://www.treasury.govt.nz/budget/forecasts/prefu2011/18.htm#_tocEconomic_Risks in particular the downside scenarios that Tsy considered probable http://www.treasury.govt.nz/budget/forecasts/prefu2011/19.htm You could also read the assumptions to scenarios and the specific fiscal risks section but that is not as much fun as hindsight bias. How different people (politicians, media and bloggers) spin this is not something a government agency has much control over. Forecasts do change, in fact they will be out of date on their day of publication, the question is at their time of development where they developed on the best available information on an accepted forecasting methodology. If someone else has a better methodology that has greater predictive accuracy i’m sure economic forecasting agencies both public and private sector throughout the world would like to hear from you.

    Comment by WH — January 27, 2012 @ 11:01 am

  21. So treasury were over-cautious during a boom and over-optimistic during a bust. How the flip does that work?

    A cynic would say its due to Treasury’s view of who is in government at the time.

    Comment by Idiot/Savant — January 27, 2012 @ 11:09 am

  22. It seems to be a truism that this government, in particular, has an excellent record of ignoring anyone who knows what they are talking about if what they are saying conflicts with what they prefer to believe…and all the evidence in the world won’t change this approach.

    New Zealand: Welcome to your own, home-grown “Bush Era”.

    Comment by Steve (@nza1) — January 27, 2012 @ 11:48 am

  23. “A cynic would say its due to Treasury’s view of who is in government at the time.”

    Luckily there are no cynics in either the government or treasury, then, eh? It’s all optimism. The good stuff…

    Comment by nommopilot — January 27, 2012 @ 12:11 pm

  24. * (until after the election of course)

    Comment by nommopilot — January 27, 2012 @ 12:36 pm

  25. I seem to remember Goff being pilloried for not knowing which year the Labour plan got back into surplus, and making the excuse that, well, circumstances can change things so much that for him getting that precise about that level of detail wasn’t important as long as the track was certain etc etc etc and getting cleaned up on it.
    Perhaps he had a point?

    Comment by bka — January 27, 2012 @ 1:00 pm

  26. In defence of Treasury, they invest a great deal of time and effort in generating a suite of forecasts, present them to the world for critique and, hopefully, learn from mistakes and historical forecast error

    This is a much more robust process than that undertaken by a bunch of bloggers-with-vendetta’s and commentators on said blogs.

    So treasury were over-cautious during a boom and over-optimistic during a bust. How the flip does that work?

    Their projections probably include the impact of a counter-cyclical fiscal stance that assists a more rapid reversion to trend growth-rates.

    Comment by Phil — January 27, 2012 @ 1:01 pm

  27. @ phil “a much more robust process than that undertaken by a bunch of bloggers-with-vendetta’s ”

    Quite.

    The author will offered a job on the National radio editorial team soon if he keeps up the continuous anti National stance.

    Comment by merv — January 27, 2012 @ 1:21 pm

  28. “I seem to remember Goff being pilloried for not knowing which year the Labour plan got back into surplus,”

    On this blog, among other places

    Comment by Hugh — January 27, 2012 @ 1:29 pm

  29. Their projections probably include the impact of a counter-cyclical fiscal stance that assists a more rapid reversion to trend growth-rates.

    In your fucking face, non economists!

    Booya!

    Comment by Gregor W — January 27, 2012 @ 1:53 pm

  30. “This is a much more robust process than that undertaken by a bunch of bloggers-with-vendetta’s and commentators on said blogs”

    And yet now treasury are coming around to say that perhaps those same bloggers and commenters were actually right, eh? maybe their processes are just too robust…

    Comment by nommopilot — January 27, 2012 @ 3:03 pm

  31. Perhaps the fundamentals have changed and therefore the analysis has produced different output.

    Comment by merv — January 27, 2012 @ 3:12 pm

  32. “Perhaps the fundamentals have changed”

    perhaps they realised we’re probably not going to win Lotto

    Comment by nommopilot — January 27, 2012 @ 3:15 pm

  33. “clamp down on tax avoidance and ensure the system was coherent and consistent.”

    Astounding. Only chumps pay 33% on the dollar. If you have been paying the correct amount of tax for the last 10 yrs this makes you a loser. Govt gonna do something about now. Fucking useless.

    Comment by Simon — January 27, 2012 @ 3:32 pm

  34. And yet now treasury are coming around to say that perhaps those same bloggers and commenters were actually right, eh?

    Do you mean “Bloggers and Commenters in Unison”? It’s cool how they agree so easily isn’t it.

    Comment by Pete George — January 27, 2012 @ 3:42 pm

  35. “Do you mean “Bloggers and Commenters in Unison”?”

    No I only mean the ones that were saying treasury are being unreasonably optimistic in assuming we’ll be back in surplus in a couple of years. The ones mentioned in the comment I was responding to. Those ones.

    Comment by nommopilot — January 27, 2012 @ 4:06 pm

  36. “perhaps they realised we’re probably not going to win Lotto”

    Weak.

    Comment by merv — January 27, 2012 @ 4:58 pm

  37. “Weak.”

    also weak. no you are. no you are. etc.

    alright going home now.

    Comment by nommopilot — January 27, 2012 @ 5:26 pm

  38. In defence of Treasury, they invest a great deal of time and effort in generating a suite of forecasts, present them to the world for critique and, hopefully, learn from mistakes and historical forecast error

    That “hopefully” seems a little hopeful. They were high in 2009, high in 2010, and high in 2011, and have made no substantive changes to their model that I know of. The basic problem is that there isn’t anything like the financial crisis in their data set (figures from the Great Depression would’ve helped), so the model keeps expecting a quick return to equilibrium that hasn’t eventuated. With enough data, the model will eventually learn this, but we might be dead by then. The old Treasury method of consulting experts to produce forecasts by sector probably would’ve worked better than simply putting faith in the model.

    Comment by bradluen — January 27, 2012 @ 6:00 pm

  39. “substantive changes” above prolly should be “fundamental changes”, because they have tinkered with the model, but at heart it’s still a dynamic general equilibrium thing and both here and overseas dynamic general equilibrium things haven’t forecasted well post-crisis

    Comment by bradluen — January 27, 2012 @ 6:18 pm

  40. Already another dismal post?
    PG sounds just as a patronising as The Hair.’I think most people would have been aware that policies were optimistic snapshots…’ Well, the million odd that didn’t vote, mebbe,but I met lots of true believers. Never mind, a fool is a fool, so just a wee bit of collateral damage, eh, Pete?
    Still, it’s nice to see little aridities like Phil and Merv discover new levels of shrill.

    Comment by paritutu — January 27, 2012 @ 9:30 pm

  41. The basic problem is that there isn’t anything like the financial crisis in their data set (figures from the Great Depression would’ve helped)

    Well, yeah… but there isn’t anything like the financial crisis in anyone’s data sets – you could use the various banking defaults of Eastern Europe, Latin America, and S.E. Asia as proxy, but they’re (by and large) developing economies, where the transmission mechanisms of banking sector failure through the rest of the economy are quite different to a developed, industrial, free market.

    For the same reason, I’m not convinced that Depression-era data is that useful either.

    Comment by Phil — January 27, 2012 @ 11:17 pm

  42. Did anyone take Treasury forecasts or anything based on them seriously in the first place? If so, why?

    Comment by antoine — January 28, 2012 @ 7:39 pm

  43. Treasury’s model actually had a pretty good run up until the financial crisis — even their two-year ahead forecasts were pretty accurate. Since then, well, they’re not the only ones who have been way wrong, but they’re the most important.

    Comment by bradluen — January 28, 2012 @ 10:37 pm

  44. The real problem is politicians of all hues presenting policy and costings based on a best-guess scenario only. Given the uncertainty inherent in forcasting, they should talk about what they will do under a range of scenarios.

    National said they have a goal of getting back to surplus, but what they seem to have meant is their policies would bring about a return to surplus under one particular scenario. To have a goal means to continually adjust/adapt in the face of events to achieve the goal, but this doesn’t appear to be what National are doing.

    Actually during the election campaign a journalist asked Bill English what they would do under different scenarios, and he said he didn’t think he should have to say. Of course this is exactly what voters need to know to be able to make an informed decision, but never mind that.

    Comment by Swan — January 29, 2012 @ 8:47 am

  45. It appears Treasury serves up predictions to suit govt policies.

    i suspect a smorgasbord of predictions is presented and govts choose which one they prefer to be presented.

    It is hardly surprising that Treasury never get it right.

    Comment by peterlepaysan — January 29, 2012 @ 8:14 pm


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