Treasury has blunted the Opposition’s attack on the validity of the Government’s Budget forecasts with a strong defence of its forecasting methodology at an Estimates hearing this morning.

Dr David Gruen’s opening statement directly addressed criticisms that the Budget forecasts for the strength of the recovery were overly optimistic and formed a flawed basis for the Government’s claim to return to surplus by 2015-16.

According to Treasury, its forecasts and projections in the Budget papers for the recovery represent “a slower recovery than those from either the early 1980s or early 1990s recessions … indeed, it would represent the longest period of sub-trend growth since the Second World War.”

The argument was virtually a direct refutation of shadow Treasurer Joe Hockey’s Press Club address where he criticised the forecasts and claimed, “this would be the longest continuous period of real growth above 4% anyone can remember and certainly since ABS data was recorded in 1959”.

Treasury has based its forecasts on stronger employment growth and increased productivity observed in previous recoveries, which will take recovery growth levels beyond trend levels to 4.5% in 2011-12 and 2012-13. However, Treasury said, on average over the first three years of the recovery from 2010-11, average growth of 3.75% was still well below either of the recoveries from the 1980s or 1990s, as was average forecast growth over seven years. Average forecast growth over the next 12 years, Treasury noted, was also below average

Today’s strong growth number in fact now suggests that, if anything, Treasury’s forecasts may be too pessimistic, although there’s no formal opportunity for new forecasts until MYEFO in November.

Treasury’s strong opening statement left Opposition senators visibly searching for points of attack on the issue, although the Coalition avoided a repeat of its en masse assault on Ken Henry at previous hearings by paring back the number of senators attending and adopting a noticeably politer tone of questioning. Eric Abetz switched tack to ask about the Government’s claims about the employment effects of the first stimulus package, where Treasury was noticeably less forthcoming.

The statement also appeared to take a sideswipe at Malcolm Turnbull’s proposal for the Australian equivalent of the Congressional Budget Office, noting that Treasury’s altered approach in the 2009 Budget was “almost identical” to that adopted by the CBO.

Ken Henry also provided a strong endorsement of proceeding with an emissions trading scheme despite the recession, comparing it directly to the Hawke Government’s winding back of protectionism that was simultaneous with, and compounded, the recession of the early 1990s. The economy and jobs growth eventually recovered more strongly because of the reforms rather than in spite of them, Henry argued.

Pity the Government doesn’t accept that.