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It’s time Henry had an umpire

Published in Business Spectator (Melbourne), 22 July 2010
http://www.businessspectator.com.au/bs.nsf/Article/MRRT-RSPR-Treasury-statistics-macroeconomics-pd20100720-7J7PX?OpenDocument

It is widely believed that former British Prime Minister Winston Churchill once warned never to trust any statistics unless you had forged them yourself. It sounds cynical and yet appropriate given recent figures coming out of the Treasury.

When the RSPT morphed into the MRRT, observers were puzzled at how a bundle of concessions to the mining industry could result in only a miniscule reduction in tax revenue. We only found out about the trick when Treasury Secretary Ken Henry later testified to a Senate committee. Changed assumptions about commodity prices had produced this seeming miracle, which helped the government save face.

In a similar fashion, Treasurer Wayne Swan asked us to believe that vital economic data had miraculously improved since he presented the budget just eight weeks ago. Of course, this has nothing to do with the forthcoming election. It is only a service to the new Prime Minister, her deputy assured the incredulous public. Yeah, right.

It is incidents like these that have produced widespread cynicism about official forecasts of the public finances. Where factual information ends and where political posturing begins, is not always easy to discern. This is unfortunate since an informed debate on policy matters requires reliable, impartial information. This is not just an Australian problem.

Opposition politicians are acutely aware of government’s ability to fiddle the figures to their desire. No shadow treasurer would be worth his salt if he did not complain about the dodgy nature of official forecasts. It is standard practice in Australia and elsewhere. But at least in Britain this could change now, and I am happy to say that I played a minor role in it.

When I was working at Policy Exchange, the British centre-right’s leading think tank, I organised regular breakfast meetings with the then Shadow Chancellor of the Exchequer George Osborne and a group of economists and commentators from the City of London.

At one of our very first get-togethers in April 2007, Osborne asked us for a brainstorming session on better policy making. It did not take long for the assembled economists to discuss the reliability of Treasury forecasts, probably to the delight of Mr Osborne. After all, he was still in opposition, so complaints about government statistics would have been music to his ears.

As we were all enjoying the hearty English breakfast, it was easy to agree that there must be a way to remove budget forecasts from the political process. How this should be done was less clear, though.

It was only after the meeting that I suggested to two other participants that we put our thoughts together. One of them was James Barty, then head of macro strategy at DB Omnis, the other was Holger Schmieding, Bank of America’s European chief economist. Together we outlined how fiscal forecasting could learn from the independence of central banks in setting interest rates.

Our basic idea was simple. Treasury’s economic forecasting activities should be delegated to an independent Fiscal Policy Committee, to be modelled on the Monetary Policy Committee of the Bank of England. This new committee should consist of independent experts. We argued that ‘this would allow for a truly independent assessment of the government’s fiscal policy and the macroeconomic environment in which fiscal decisions are made’.

At the time, our idea seemed so outlandish that we could not find any newspaper to publish our proposal. And so it ended on my blog and was mentioned only in a brief note in the London Sunday Telegraph. At least their business editor conceded that we did not lack chutzpah for making such a proposal.

Fortunately, George Osborne and his team were more receptive to our blue-sky thinking than British newspaper editors. Apparently, it was just the kind of idea that they had been looking for.

At the Tories’ conference in Birmingham 2008, it became party policy. The name had changed from our proposed Fiscal Policy Committee to the grander-sounding Office for Budget Responsibility, but the basic principles remained the same. Then opposition leader David Cameron announced that the new watchdog would produce the country’s economic forecasts, instead of the chancellor on Budget Day.

It is a policy pledge the Tories kept when they came to power. The Office for Budget Responsibility was set up just days after the new Conservative-Liberal Democrat coalition took office in May this year.

Sadly, the best intentions suffer when opposition politicians become government ministers. Not even three months after its establishment the new office has already been accused of becoming politicised, after it allegedly supported the new government with a favourable employment forecast.

It turns out that George Osborne, now Chancellor of the Exchequer, had based the supposedly independent Office for Budget Responsibility right where it was never meant to be: inside the Treasury, staffed with public servants on secondment from the Treasury. If Osborne had meant to underline the office’s independence, he clearly failed.

Only time will tell whether the Office for Budget Responsibility will be able to develop a reputation for sound, impartial data in public finance debates. If it does, it may well be a model that Australia should consider. After the recent experiences with the RSPT modelling and the budget forecasts, it can no longer be denied that there is need for improvement.

In the meantime, you should really only trust the statistics forged by yourself. And you should not trust all attributions of quotations, either. A few years ago, it was revealed that the alleged Churchill quote was a piece of misinformation straight out of the Nazis’ propaganda ministry. They certainly knew a bit about lying and fiddling with data.

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