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  • Written by The Conversation Contributor
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A completely legitimate criticism of the Rudd-Gillard government was that they spent money before it arrived. The Minerals Resource Rent Tax was supposed to bring in billions of dollars, so they went ahead and spent that “money” on a range of social programs like education and health.

Don’t get me wrong — I like those programs. But as we all know now, the revenue that was supposed to fund them never materialised.

This was a shocking piece of economic mismanagement — one that the current Labor leadership might pay for, electorally, for years.

It turns out, however, that the Coalition government are doing the same thing right now.

One of the centrepieces of this budget is the gradual reduction in the company tax rate from 30% to 25%. That’s good policy and it will benefit the economy, both in terms of economic growth and the returns to workers.

So it’s going to help the economy, but nobody in their right mind would be willing to put a hard number on it. Except for Scott Morrison and the Treasury. Treasury has estimated that the increased GDP growth from the company tax cut will be 1%. As the budget documents put it: “The tax and superannuation plan is expected to permanently lift the level of GDP by just over one percent in the long term. This equates to around $16.5 billion of additional production in the Australian economy.”

I feel bad for the poor folks at Treasury. Having to perform such an exercise is a bit like one of those job interview questions where you have to estimate the total number of golf balls in the world. Sure, under some set of ad hoc assumptions, some basic arithmetic will give you an answer. But you wouldn’t bet on it.

At least, I sure wouldn’t. And I wouldn’t bake those numbers into the budget. Most of all, I wouldn’t make future spending plans on that basis. Yet that is exactly what Scott Swan, I mean, Morrison, just did.

In one sense I understand. GDP growth is anemic because Australia—like many advanced economies—is suffering from secular stagnation. So, even with bracket creep and the heroic assumption of 5% nominal GDP growth from 2017 onward, the forward estimates look just horrible. Why not juice them up a bit with a best guess about something that should happen?

Well, because of what I call the “Diamond Law of Government Finances”. Government revenues may come and go, but spending is forever.

Budgets have become politics, not economics. So here’s a proposal to help get some of the politics out of the budget.

Let’s make governments do what private equity and venture capital firms do when they are considering an investment. Knowing that assumptions drive the final result, private equity and venture capital investors typically consider three cases: a “base case” which is their best guess, and high and low cases that reflect more bullish and bearish assumptions (and outcomes), respectively.

It doesn’t take away discretion, nor does it give directly better insights into the correct assumptions. But it’s a great disciplining device. It forces one to focus on which assumptions are crucial to the result, and to acknowledge directly that things could be worse — perhaps by a fair bit — than what one’s best guess is.

So next year, let’s ask for three budgets. The base case budget just like we get now, and then two additional sets of forward estimates reflecting a low and high case. That’s an additional two pages or so.

Then we could truly see what happens to deficits when we commit to spending but the revenues underpinning that spending don’t materialise.

Speaking of what might materialise, nominal GDP growth in 2014-15 was 1.6%. In 2015-16 it was 2.5%. Yet the budget assumes 4.25% growth in 2016-17 and 5% thereafter. Pardon?

Sitting here in the budget lockup I have been trying to figure out what the deficit would be if nominal growth was more like 3%. I would need a lot more information, a day, and a lot of caffeine to do it. Is it too much to ask that Treasury tell us what would happen if some more realistic assumptions were made?

What is buried—around page 200 of budget paper 1 — is consideration of six specific scenarios and the impact they would have (things like a fall in the terms of trade, or lower labour productivity growth). That’s admirable. But they are way too specific — not the kind of “what if GDP growth was lower” case that is crucial — and they are far from salient. Rather than be specific and buried where few people will read them, they should be straightforward and salient.

Surely Malcolm Turnbull wouldn’t be against the government acting a little bit more like a venture capital firm in its economic thinking? Labor should challenge him to take this “budget sensitivity” pledge. And they should take it, too.

Authors: The Conversation Contributor

Read more http://theconversation.com/scott-morrisons-growth-fantasy-needs-a-dose-of-venture-capital-discipline-57641

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