Shooting Messenger on Budget Accuracy

08 February 2006

The Australian Financial Review

Letter to the Editor from Michael Chaney
President, Business Council of Australia

Michael Baume’s criticism (“Chaney’s tough talk just bluster”, Opinion, February 6) of the Business Council of Australia’s efforts to highlight the need for greater budget accuracy misses the point.

The core contention in the BCA’s budget submission is that the consistent underestimation of the budget surplus, and inconsistent use of “second round” effects in policy analysis and costing reforms, creates a far tighter fiscal environment than is actually the case.

It stands to reason this will have a major impact on the decision-making processes required for strategic taxation and fiscal reform. In turn, this can discourage decision makers from adopting sensible reforms.

Baume and others have overlooked this central point by focusing on the minutiae of case studies the BCA used to illustrate the overall issue.

Our point is that, if armed with better forecasts of budget surpluses, government and opposition members would have been more enthusiastic about such reforms.

Baume’s article also seeks to excuse Treasury’s inability to accurately forecast budget balances by drawing a parallel with companies that “underpromise and overdeliver”, and points out that Treasury’s “revenue” forecasts are rarely more than a few per cent wide of the mark.

In doing so he demonstrates a surprising ignorance of corporate practice and the difference between revenue and profit.

What we are talking about here is the surplus or deficit (or profit and loss as they are called in the corporate sector), not revenue. Despite all the uncertainties they are faced with, well-run companies are expected to be able to develop accurate budgets for the following year’s profit.

It is uncommon in my experience for the eventual outcome to vary by more than 10 to 20 per cent from the budget, unless exceptional external events have occurred. Greater variations would cause a board to question the budgeting process.

In comparison, Treasury’s projections of the government’s surplus have varied vastly from actual outcomes in four of the last five years – by up to 460 per cent. That would be totally unacceptable in the corporate world.

No one is suggesting that forecasting national economic outcomes is an easy task; what the BCA is suggesting is that the job can be done better, with less conservatism, to the benefit of politicians considering tax reform.

Instead of shooting the messenger for what may be an unpopular but necessary message to those responsible for managing Australia’s finances, let’s focus on debating the real issues – a reform agenda for Australia to lock in its present prosperity.



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