Monday, July 29, 2013

Hold Treasury to account

Opposition Treasury spokesman Joe Hockey has gone beyond simply criticising government policy and criticised Treasury.  This is unheard of in the Westminster tradition.

If Hockey doesn't trust the Treasury he must outline how public trust can be restored.  This is not a trivial issue — if elected, Hockey must think very carefully about the role Treasury plays in developing and advocating policy.  It is clear that the ''Washminster'' hybrid we've seen over the past six years is unsatisfactory.

The relationship between Treasury and the Coalition has been fraught for some time — even before Treasury apparently found an $11 billion hole in Coalition costings at the last poll.

If the country independents are to be believed, this played some part in their choice to install Labor after the 2010 election.

Over the life of this government there have been incidents, and mistakes, that have seriously tarnished Treasury's reputation.

It was Ken Henry who advocated the ''Go early, go hard, go household'' mantra that the first Rudd government adopted in its response to the GFC.  The cash handout that was mostly saved, instead of being spent, was wasted money.  The perfectly good school halls that were demolished only to be rebuilt made for fine Keynesian economics but poor policy.

Henry should never have been in the kitchen cabinet advocating specific policies as opposed to being a functionary of the Treasurer after the fact.

The 2010 budget papers provided an analysis ''proving'' that those economies that had adopted a ''go early, go hard'' approach to stimulus had performed well during the crisis.  Unfortunately for Treasury I was able to show that the data in that analysis had been cherry-picked and there was no evidence to support the ''go early, go hard'' fiscal stimulus.

During the 2010 mining tax debate Treasury — through the Henry review — advocated a massive tax that it didn't understand.  This left the government arguing that banks would lend mining companies money on the basis of vague government promises.  Treasury also didn't know how much tax the miners paid.  They relied on an unpublished PhD student's paper to argue that miners paid 13 per cent in tax when public ATO data showed they paid close to 28 per cent.

Then there were the ambitious claims as to how much money the tax would raise.  This is an area where Treasury's performance has been particularly poor.

How the original resource super-profits tax was modelled is something of a mystery.  The minerals resource rent tax was expected to raise $2.4bn in 2013-14 but raised only $120 million.  This is a consequence of the design features of the tax — again it appears that Treasury didn't understand how the tax would work.  Yet the revenue forecasts were included in the budget and the money spent.

If Treasury had simply gotten the mining tax wrong, our budget might not be in such difficulty.  But Treasury has been making large systematic errors in forecasting tax revenue — especially corporate tax revenue.  A review into these errors revealed that Treasury hadn't consistently modelled corporate revenues and depreciation expenses, resulting in higher forecasts of corporate income tax revenue.

Then there was the carbon tax modelling — at best an exercise in wishful thinking.  Treasury and its modelling have been at the centre of political disputes over the past six years.  In itself that isn't a bad thing — it is the timing of the errors that is particularly problematic, and earned the Coalition's ire.

The argument is that the government fudged the books in an election year and Treasury let it get away with it.

At the height of the GFC in 2009, Treasury forecast tax revenues of $321bn for the 2012-13 financial year.  The last budget figures reveal tax revenues of $326bn in 2012-13.  So Treasury was pretty accurate.

Yet in 2010 — an election year — expected tax revenues were ramped up, and the money spent.  That happened again in 2011.

We now keep hearing about tax revenues falling — yet all that has happened is revenue has fallen relative to unrealistic expectations.

While politically dishonest, it shouldn't have mattered much that the government fudged the books in an election year.  The Pre-election Economic and Fiscal Outlook should have corrected any government bias in the budget papers.

But rather than provide a better understanding of the budget situation, the PEFO made things worse.

Deficits were revised down and the then expected budget surpluses were revised up.  Some figures were horribly wrong.  The PEFO forecast a deficit of $10.2bn for 2011-12.  The actual figure came in at $43bn.

In other words, it portrayed the government's economic policies in a very good light.  Adding insult to injury, Treasury then found ''errors'' in Coalition costings.

Unsurprisingly, the Coalition is somewhat mistrustful of the process.  Mind you, a process it devised in office.

To be sure, if elected, an incoming Abbott government will need to make changes to the senior management at Treasury.

But that isn't enough.  The Coalition has identified a gap in the Charter of Budget Honesty and should fix it.

The Gillard government clearly gamed the disclosure process at the 2010 election, making it very difficult for Treasury to offer up very different economic forecasts than the government's own choice of forecasts.

To remedy this, serious changes need to be made to the Charter of Budget Honesty.

For example, budgets and budget documents should be audited after the fact and individuals held to account for false or faulty information.  This is standard in the private sector.

Treasury should have to make continuous disclosure, or at least regular disclosure, as its forecasts and economic assumptions are updated.  Again this is standard in the private sector.

There is no good reason why the nation's finances should be held to a lower standard than that of any publicly listed company.

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