Monday 28 November 2016

Predictions and forecasts

The Prime Minister rubbished Treasury's long-term fiscal forecast:
Key: "When we came in in 2008, the predictions from the Treasury were much more short term than that, so they were saying by about, I think, 2022, 2023 — we were back —they were predicting debt-to-GDP to be 60%, right? The sort of numbers that you’re talking about now. Okay, so what really happened was under a National-led Government, we got on top of the expenditure that the country was facing. We had years of zero budgets and being cautious with our expenditure and all of those things. We also grew the economy much faster than they thought."

Q. So you’re basically telling me you’re betting your legacy on Treasury being wrong?

Key: Let me just finish this point, because it’s a really important point. They said that within 15 years debt-to-GDP would be 60%. What it really is is 24.5%. So what those things are worked on is a static model that says if the government doesn’t make all sorts of changes.

Q. You’re telling me that you’re doing— You’re not going to do any of those—

Key: I’m telling you it’s a load of nonsense, because they can’t get predictions in 44 days right, let alone in 44 years.

Q. So, you know that— You know that Super is going to be a huge draw on us, and you’ve said that you’re not going to do anything about that. So I’m just wondering what you know that Treasury doesn’t, if you know better.

Key: Well, I mean, okay, go back and ask the Treasury, then, and say — when they gave us those predictions in 2008, when I became Prime Minister and Bill became Minister of Finance, what did the Government do? And in the course of the last eight years; it grew the economy faster; it was far more cautious on its expenditure; it took careful steps in a number of different areas. The overall mix of the economy changed in terms of what was happening. The population changed in New Zealand. My point is these are very static models. 44 days before putting together Budget 2015 and Budget 2016, the Treasury were a mile out in terms of predicting what the budgets would be. These guys are saying, on a totally static basis, we do absolutely nothing; everything carries on. So you said Super — it’s 4.9% of GDP today. In theory, if nothing ever happens and the population doesn’t change, it tops out at about 7.5%, maybe
As reminder:
  1. The long-term projections are "if nothing changes in policy, this is what is going to happen." If you change policy and cut the rate of growth of government expenditure, you'll avoid getting the projected debt-to-GDP ratios. That isn't Treasury being wrong, it's the government having done what it should have in response to the projections.
  2. Long term projections can be in some ways easier than forecasting things 44 days out. I don't know what the weather will be tomorrow, but I can expect that June will be colder than December in New Zealand, and that temperature in a century will likely be a degree or two higher than it is now. 
  3. Key's right that they're static models. But avoiding the big debt-to-GDP numbers requires something to change those projections. Like faster economic growth, or increasing migration by working-aged folks to outweigh the superannuation hit that will come, or pushing out the age of pension eligibility. It is odd to say that Treasury can't forecast because you changed policy so that things wouldn't look like that, then to simultaneously say you don't need to do anything about the other longer-term forecast.
I have plenty of issue with Treasury's quality of analysis on a few fronts. I don't have any particular reason to doubt their long term fiscal projections. 

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