Authors: Professor the Hon. Stephen Martin
This paper examines the black art of economic forecasting with particular reference to Australia and the Federal Government’s recent budget forecasting experience. Economic variables are notoriously difficult to forecast – the saying that economic forecasters exist to make weather forecasters look good has some truth to it.
Economic forecasting is at the foundation of monetary and fiscal policy. However, it would be naïve to expect forecasts to be right. In fact, all forecasts have a margin of error, a degree of confidence and represent one of the many possible outcomes given other uncertainties in the numerous variables and assumptions that underpin each forecast.
The one thing that is certain about economic forecasting is that forecasts will almost always be wrong. Minor differences in outcomes may not have any major impact on policy implications and decisions, while larger variations, particularly in the opposite direction (for example, falling rather than rising real wages), can have more dire consequences.
Examples abound in recent economic history.
The Global Financial Crisis (GFC) is the obvious one, with few mainstream economists having predicted what would be the greatest economic bust since the Great Depression. Anecdotally, in Australia, forecasting the exchange rate of the Australian dollar, particularly against the US dollar has also been notoriously difficult, with way too many unpredictable variables affecting its movement from minute to minute.
On a smaller scale, traffic for The Airport Link, Brisbane’s airport toll road, was overestimated with recorded average daily patronage of between a quarter and half of the forecast amount. The operator of the road went into receivership less than a year after the road opened.
Australian Government economic and social policy is underpinned by robust forecasts that emanate from various elements of its bureaucracy. These forecasts, presented annually in the Government’s budget in May and revised each half year with an update called the MYEFO – Mid-year economic and fiscal outlook – in December, seek to justify expected revenues and expenditures in the short and medium term.
Keywords: The good old days, The global financial crisis, Politics and forecasting, Lessons from Australia