Peter Costello will tomorrow announce his mid-year budget update and based on his last ten efforts, he’s going to finish up with a 2006-07 budget surplus $4.33 billion more than expected.

However, the Treasurer was busily hosing down expectations in a weekend interview with The AFR and the drought will no doubt have an impact so he might actually end up downgrading his forecast of a $10.8 billion surplus.

Former NSW auditor general Tony Harris had a strong opinion piece in The AFR today alleging that John Howard encourages Treasury to deliberately underestimate revenue. He also claimed, quite rightly, that releasing the figures on the Wednesday before Christmas is a deliberately strategy to downplay the government’s embarrassment of riches.

It certainly doesn’t make a lot of sense that Treasury’s good record at predicting economic growth hasn’t translated into a good record in predicting revenue, given that they are so inextricably linked. A drunk with a dart board could have done better than Treasury’s ten year effort of underestimating revenue by $40 billion.

The following table pulls together the entire budget forecasting record over the Howard and Costello years, including the original forecast in May before a financial year commences, the mid-year update shortly before Christmas, the next year’s forecast when there are only seven weeks of a financial year to go, and then the final outcome:

Year Budget Mid-year update Next Budget Outcome Forecasting error
1996-97 -5.65bn not done -6.89bn -$5.28bn +$370m
1997-98 -3.85bn -2.75bn -$1.1bn $1.17bn +$5.02bn
1998-99 $2.69bn $3.27bn $2.88bn $4.34bn +$1.65bn
1999-00 $5.21bn $2.69bn $7.79bn $13.06bn +$7.85bn
2000-01 $2.84bn $4.33bn $2.25bn $5.97bn +$3.13bn
2001-02 $1.52bn $0.5bn -1.19bn -$1.06bn -$2.58bn
2002-03 $2.09bn $2.14bn $3.92bn $7.48bn +$5.39bn
2003-04 $3.66bn $4.64bn $4.59bn $8.04bn +$4.38bn
2004-05 $2.39bn $6.21bn $9.23bn $13.62bn +$11.23bn
2005-06 $8.92bn $11.5bn $14.8bn $15.8bn +$6.88bn
2006-07 $10.8bn to come to come to come to come
Average $2.78bn $3.61bn $3.63bn $5.36bn +$4.33bn

Amazingly, the government has only managed to keep its forecasting error below $1 billion once – the first effort way back in 1996-97. The record, which has been deteriorating in recent years, peaked at $11.23 billion in 2004-05 when the commodities boom first started to kick in.

Given the average surplus has been $7 billion more than forecast over the past four years, does this mean we’ll finish with a record 2006-07 surplus of $17.8 billion? With an election due next year, it’s safe to assume any trend in this direction would be quickly redistributed in the traditional pre-poll spending spree.

Peter Fray

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