Gareth Morgan, Director of Gareth Morgan Investments
The Economic Strategy document accompanying last week’s Budget papers records The Treasury’s estimate of GDP growth for the 1989/90 year as +1%, and for this year Treasury has based its fiscal forecasts upon an assumed growth rate of 2.5%. The associated fiscal forecasts have been quickly and publicly dismissed as too conservative by two commentators over the weekend so it is worth examining whether the particular critics have any grounds to suggest to the public that Treasury’s view should be rescinded.
The NZIER maintains the underlying fiscal deficit will not be so glum because it expects a stronger recovery in domestic demand over 90/91. But the NZIER is starting its analysis from a markedly different position than The Treasury, with their estimate of growth over the past 1989/90 year being +2.9%! -three times as fast as The Treasury has estimated, and quite at odds with the Department of Statistics estimate (+1.4%), lnfometrics (+0.9%), The RBNZ (-0.1%), or BERL (-0.3%), or any other published estimates for that matter.
It is questionable whether the NZIER should be confident enough to enlighten the public to their more ‘credible picture on the fiscal position for next year when they have such a unique economic basis upon which last year’s fiscal numbers arose. Only with a substantial justification of why the variance of their view of the economy last year is correct, should the NZIER expect the public to accept their fiscal expertise.
The other swift critique of Treasury numbers was John Gallacher of Garlick and Co. Unlike the NZIER, Gallacher offers no rationale for his “stronger than Treasury” growth picture for 1990/91, apart from a comment that he believes that higher growth will emerge. So what ? Belief is more a religious than analytical attribute. If, minus a rationale, Gallacher is as far from the actual on this occasion as his last year’s prediction of zero for one of the quarterly CPI figures was, then public knowledge will have been similarly diminished.
Economic forecasting is little different to any other analytical endeavour. For credibility it is vital the author have analysis behind the conclusion. In the case of the NZIER’s critique they should first bother to explain why they and nobody else has estimated a boom occurred over the last year; and the contribution from Garlick and Company must be seen simply as plucking figures from the ether, without a modicum of justification, and then having the audacity to accuse the market of “overdramatising”.
And what of the Budget?
Labour has bequeathed National a financial deficit which until budget night it professed National’s policies would cause. If that’s not the pot calling the kettle black, then they’ve had a violent and sudden reappraisal of the importance of reducing the financial deficit. The market’s bearish reaction reflects the reality that New Zealand economic management has turned back towards the past. Why shouldn’t the risk premium rise?
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