Deficit error ‘average’

Press, 24 April 1986, Page 4

Deficit error ‘average’

By

SIMON LOUISSON

in Wellington The Minister of Finance, Mr Douglas, hit back at commentators who have criticised the quality of Budget forecasts when he presented the final deficit figures yesterday. Mr Douglas said that contrary to the impression given by some commentators, the accuracy or inaccuracy of Budget-night forecasting had not been particularly unusual. He said that four of the last five years showed variations of that size or larger. There was an upward variation of expenditure of 1.7 per cent and a downward revision on revenue of 1.8 per cent compared with the Budget forecast. “The quality of forecasting last year, which has attracted so much

adverse comment, was therefore strictly average, and one must ask why it did not look that way to commentators,” said Mr Douglas. However, the critics say that Mr Douglas has created a new economic environment which is not comparable with previous years and that the final deficit figure represents a setback.

One of the critics, Dr Gareth Morgan, of the private forecasting firm, Infometrics, says that Mr Douglas is comparing apples with pears. Dr Morgan says that in the new climate there is a far greater requirement to have accurate forecasting. He says that the Government has made a point of stating it is fully funding the deficit and that if the fiscal projections are inaccurate it throws the

monetary policy way off beam.

“In the past, the objectives were much more loose. It is now a completely different environment. This Government is saying to the market that with its policy you can plan with certainty so it puts the onus on the Government to behave in a certain way,” said Dr Morgan.

The Government’s theory is that with more information private sector decisions will be economically more efficient and so bring interest rates down.

Dr Morgan argued strongly in February when the Government made its first revised deficit estimate that $1.7 billion was a major deviation from the announced target for the deficit, and not surprisingly this has

“put the wind up” financial markets.

Mr Douglas also said that the figures on Government revenue and expenditure had grown 250 to 300 per cent in the last eight years and as the deficit diminished as a proportion of revenue variations acquired a new ability to jerk deficit forecasts about by very large percentages. This was why the forecast error of 45 per cent “looks terrible.” “But the reality is quite minor. It represents 1.3 per cent of G.D.P.,” says Mr Douglas. However, Dr Morgan believes the absolute numbers are important. The change causes uncertainty and the taxpayer pays for uncertainty in higher interest rates on Government stock.