TransTasman Political Pulse

Budget 2017 – Forecasts Make Astrology Look Good

INSIGHTS ABOUT THE NEWS - The esteemed John Kenneth Galbraith once said the only function of economic forecasting is to make astrology look respectable.

Prakash Loungani, at the IMF, reinforced this with a study based on a sample of 63 industrial and developing countries. He found private sector forecasters predicted only two of the 60 recessions over his sample period while the majority remained undetected.

Govt officials trying to peer into the future in an uncertain world have a poor strike rate too. Bank of England chief economist Andrew Haldane in January described the economic community’s lack of foresight to prepare for the financial meltdown in 2008 and the Brexit vote as a “Michael Fish moment.”

The hapless Fish, a UK weather forecaster, during a live broadcast dismissed chances of a hurricane hitting the south of England in 1987. The hurricane struck within hours.

Dr John McDermott, the RBNZ’s assistant governor and head of economics, recently went into bat for the much-maligned forecasters. McDermott said forecasting is a valuable part of the monetary policy process- it helps the RBNZ plan, communicate its intentions and react to unexpected events.

Most important, he says “forecasting is not supposed to be prophecy.” Rather, “it is about being precise about our thinking.” Forecasts also help people form expectations of the future and guide their actions.

This defence of the art of the forecaster – or is it a craft? – will have been welcomed by officials at the Treasury, just across the road from the RBNZ. Their latest forecasts are now enshrined in print in this year’s Budget.

To underline just how difficult forecasting is surpluses are predicted to rise to $7.2bn by 2020/21. However, Treasury’s surplus forecast for this year (made just months ago) has already been well and truly smashed: $1.6bn against $700m. And this figure may change again - Finance Minister Steven Joyce has indicated National is keeping some shots in the locker for the election campaign.

Forecasting is a murky art, but it beats, as one former RBNZ Governor said, “driving only looking in the rear-view mirror.”

For analysis and further updates see this week’s edition of the Trans Tasman Political Alert

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