By Bernard Hickey
Prime Minister John Key has rubbished the long-term fiscal forecasts of the Government's senior economic adviser, saying Treasury couldn't accurately forecast the Budget 44 days out, let alone 44 years out.
He was commenting after Treasury last week forecast net debt would blow out to over 200% of GDP by 2060 from 25% now without changes to the current settings for New Zealand Superannuation. See our article here.
Talking to Lisa Owen on TV3's The Nation, Key referred to how Treasury's forecasts 44 days before the Budgets in 2015 and 2016 the Treasury's forecasts for the Budget were "a mile out".
Key was asked about the Treasury's forecast for a surge in net debt to over 200% of GDP by 2060 without reforms to New Zealand Superannuation.
"The cool thing is Treasury can’t get their predictions right in 44 days, let alone 44 years. They constantly get it wrong," Key said.
He referred to the Treasury's forecasts in 2008 for a rise in net debt to 60% of GDP by 2022/23, whereas instead it would be around 24.5%.
"Okay, so what really happened was under a National-led Government, we got on top of the expenditure that the country was facing. We had years of zero budgets and being cautious with our expenditure and all of those things. We also grew the economy much faster than they thought," he said.
Asked if he was betting his legacy on Treasury being wrong, he said: "I’m telling you it’s a load of nonsense, because they can’t get predictions in 44 days right, let alone in 44 years."
"My point is these are very static models. 44 days before putting together Budget 2015 and Budget 2016, the Treasury were a mile out in terms of predicting what the budgets would be."
See this interview interest.co.nz did with Treasury head Gabriel Makhlouf in September on the issue of the Government ignoring Treasury's advice. Makhlouf saw the Government as 'very attuned' to Treasury and was 'relaxed' about Ministers disregarding Treasury's advice to make 'political decisions'.
Sidestepping flat productivity too
Elsewhere, Key was also dismissive on the issue of productivity, where real output per hour worked has been flat for four years.
"Productivity’s an immensely difficult thing to measure," he said.
"I can show on the shop floor of so many companies in New Zealand where productivity is rising. It can be as a result of lots of different things, for instance, greater emphasis on one particular sector which might be deemed to be lower productivity being a bigger share of the economy," he said.
"So, I mean, all I can tell you is if you look at New Zealand on a relative basis compared to other countries in the world, because you never do an apples for apples comparison, you would say by any definition we’re doing well. We’re increasing the number of jobs, we’re increasing wages, and we’re back in surplus."
NZ 4th worst in the world
Key's comments on productivity turned out to be topical because this morning the Productivity Commission's Paul Conway published a landmark 86-page paper on New Zealand's productivity performance. It looks at why New Zealand's productivity performance has been the fourth worst in the OECD since 1996.
The report uses the Longitudinal Business Database (a type of 'Dunedin study for businesses') to measure productivity performance at the firm level.
Conway said the report showed New Zealand needed to shift from working more hours per person to focusing on generating more value from time spent at work.
“With labour force participation forecast to decline with population ageing, the focus now needs to go on lifting productivity,” Conway said in releasing the report.
"Our report gives the Government further insight into why our productivity performance is not as good as it could be and informs possible changes to the Business Growth Agenda that could make a difference," he said.
The report suggested further work could be done on housing market reform so more people could work in Auckland and on improving the skills composition of migrants. It also pointed to the need for improved competition in the services sector and better connections to international markets.
(Updated with video of exchange above)
54 Comments
Typical of national government - Deny any data that does not suit them and do selective cherry picking of data that suits them even if it is not full truth like the overseas buyer data.
Politicians should realize that now in the age of internet, social media new and views travel fast so hard to manipulate and suppress. More the denial of the fact and manipulation - bigger the expose
Whatever way you look at it, why does this fill me with a sense of unease? So if Key is correct, and Treasury can't get it right, what's to stop the debt forecasts being wrong---and being on the high side? And why is he undermining Treasury's work in such a public way?
Ah, I forgot. Elections are coming up soon. Can't scare the basket of deplorables.
Wow , he should be careful on rubbishing his own advisors, before checking the data and rationale behind these forecasts.
I tend to agree with him in principle , however, 44 years is nearly half a century, how could anyone make such long-term forecasts ?
For example my first job in the 1970's was at $290 per month, and today my practice charge-out rate is more than that per HOUR . I never imagined this
Who , 50 years ago , could predicted the world population of nearly 7 billion , the personal computer , modern technology that sees a New Zealand cow produce 27 litres of milk a day, the I-Phone , or even Skype , our very very high standards of living , the cost of money at close to zero , a 500% improvement in productivity in industry , modern medicine for almost everything except cancer , the fall of Communism , ISIS taking us backwards by centuries , doing things to people last seen in the 16th century , the EU the Euro , inflation over 10% , inflation at zero ?
True, forecasts 44 years out are going to be notoriously unreliable given limited data.
However, we cannot rubbish their underlying foundations that are almost exclusively based on current observable events.
Your example of pay in the 70's isn't really that relevant - did you expect it to be this high now, or higher is the real question. If you never imagined this, that is by your own fault of not understanding time values of money; it is not indicative of someone else's forecasting ability..If anything, going by inflation in the 70's and knowledge then, your rates would be significantly higher than they are now..
As for your other examples, see;
Malthusian dynamics
Moore's law
Friedman on monetary policy. Friedman on most things, actually.
Any non marxist writings.
Solow and Verdoon growth models. Followed with endogenous growth models.
Again just because you didn't foresee certain eventualities, it doesn't mean that others with a lot more specialised knowledge didn't also.
I love this line:
"He referred to the Treasury's forecasts in 2008 for a rise in net debt to 60% of GDP by 2022/23, whereas instead it would be around 24.5%."
The "whereas instead it would be around 24.5%." bit sounds a lot like a forecast to me, John.
So, essentially; forecasts are okay, so long as they are on JK's terms.
the real worry is the lack of MSM to take any government minister to task. watched JK this morning about safety of state employees in wellington buildings. did not answer the question instead talked for a minute off topic, got asked again same result, then reporter just gave up and moved on.
the other worry is 50% of NZ see no alternative to the direction we are heading or are happy to keep going as we are.
Two basic and common misunderstandings are on display here.
One is the difference between a projection and a forecast. What Treasury has produced here are projections, ie what is likely to happen if nothing changes and everything continues along the same direction and at the same rate it is now. They demonstrate the need for change, they do not predict what changes there will be.
The other is that forecasting is easier in the short term than in the long term. That's actually a##e-about-t#t. The short term is influenced by minor random noises and variables, whereas the long term follows a more easily readable overall trend.
For example: Would you rather place a large bet on "heads" for one single coin toss turning out heads, or on about 5000 "heads" out of about 10,000 coin tosses?
Would you rather bet on a prediction of what the temperature will be tomorrow, or on the prediction that in 2026 the temperature will on average be lower in the winter than it is in the summer?
Are you sure about your understanding of statistical theory?
"The other is that forecasting is easier in the short term than in the long term. That's actually a##e-about-t#t. The short term is influenced by minor random noises and variables, whereas the long term follows a more easily readable overall trend."
In most reliable time series forecasting models trends are actually not that desirable..And, error measurements are definitely minimised in the short term.
And..
"For example: Would you rather place a large bet on "heads" for one single coin toss turning out heads, or on about 5000 "heads" out of about 10,000 coin tosses?"
EV in each circumstance is equal, so you should be indifferent to each scenario..
EV in each circumstance is equal, so you should be indifferent to each scenario
No, it isn't. The probability of one coin toss turning out heads is 50%, whereas it is close to certain that if you toss a fair coin a large number of times, about half of those times you will get heads.
"The probability of one coin toss turning out heads is 50%, whereas it is close to certain that if you toss a fair coin a large number of times, about half of those times you will get heads."
Hmmm..
So, by your own admission my expected probability of getting heads on one coin toss is 50%.
And this is different to my expected probability of getting 5,000 heads out of 10,000 coin tosses? Or, as you say, "toss a fair coin a large number of times, about half of those times you will get heads"
Interesting logic..
If you were trying to hint at the expected variance/distribution changing, I apologise as this does change with respect to sample size and number of different coins tossed. However, that isn't what you said or even vaguely hinted at.
Perhaps I could contribute to this debate on coin tossing. We are dealing here with Bernoulli's Law of Large Numbers.This is well described in Mlodinow's book; "The Drunkard's Walk,"How randomness Rules our Lives.
The paragraph that deals with this is The Dueling laws of Large and Small Numbers. I quote;"In particular,Bernoulli investigated what happens in the limit of an arbitrarily large numbers of repeated observations.Toss a (balanced) coin 10 times and you might observe 7 heads,but toss it a zillion times and you will most likely get very near 50%". he goes on to describe an experiment by a S African mathematician John Kerrich,in which he tossed a coin 10,000,recording each toss. The result? Heads came up 50.67% of the time. As an aside,he had the time to do this as he was a German prisoner of war at the time.
Bernoulli worked on this for 20 years and caled it his 'Golden Theorem'. We know it as Bernoulli's Law of Large Numbers. A series of trials in which each trial has two possible outcomes,with the outcomes being random and the trials are independent of each other are called today called Bernoulli trials.
I can recommend the book.
John Kerrich wasn't strictly a POW but a civilian internee as he was detained in Copenhagen while visiting family in 1940 during which time there was an abrupt change of government.
Just wondering if comments can be deleted by a bot if they contain key words like my now disappeared previous comment.
An interesting contrast in John Keys economic values.
In the weekend we saw him claim on Sunday morning TV that continued high immigration was very important for NZ, while in this report he claims that productivity is not!!!!!!! What does that tell us about his plan for the NZ economy. This short term and unwise planning is leading to most of the problems that we see on an almost daily basis. Much of the good economic news is shallow and based on the one off sugar hit of providing for the new people in the country. Long term, it is going to take a lot more than that to support them.
When looking at the whole economy; if we put a lot more effort into raising the productivity of our existing workforce, we would need a lot less immigrants to achieve the same output. We would also be able to pay ourselves more, contribute more tax and most likely roll back the costs of a lot of welfare support such as working for families and the housing supplement. Further, we would not have to borrow and direct so much capital into providing the housing, infrastructure and everything else that the extra people need. And off course we would have far more affordable homes. Sadly Key's plan seems to be an increasing population based ponzie scheme that takes us down the path of a low wage low productivity economy.
Correct - the whole world is on the population bonanza Ponzi scheme. Population is the only growth industry.
The one big flaw in the plan is that the world is fast running out of actual viable resources (not subdivision space).
As resources start to fail, the less people on your island, the better, As people will start to get voted off the island.
he is only confirming what we feared,they are useless.along with dept of stats,geonet.give them all 3months holiday and if nobody misses them,just employ peter williams in a range of disguises to go on TV,with a beard and checked shirt for geonet.reporting on earthquakes.yes our plates are rubbing together and we could get an aftershock,or maybe not,.as dept of stats with horn-rimmed glasses and bowtie,yes rates and insurance went above inflation but horseradish prices retreated.
Obviously, we should discard all Treasury Officials as they are not worth having.
Mr Key is such a treasure to have, he has changed New Zealand for the better.
We have no debt, we have no issues, we do not have any xenophobic need to adjust our thinking. We are almost free to say what we like. (Within limits??).
Free Stats,
The interest rates are there for the picking, there is no need to work for everyone, no need to restrict our growth, free money, free love, free prison cells, free trade for all, free P labs, (Govt subsidised)..free Corporate higher, Free Facebook pages, free access to Apartment blocks, but free building restrictions, due to cost, free EQC repairs, free tourist attractions, free roading, free trucking, free railways, free bridges, free shipping, freedom of access to Awkland parking on motorways, free water supplies, free Capital Gains, Free Banking, free rates, free thinking, free coal, free electricity, free aluminium, the skys the limit...free, free as a bird.
Free home care, but not for those in need, free welfare, free teething problems, free doctors, nurses, police, army, navy, airforce, travel, free housing giveaways, free thinking, free of persecution, free of all speech defects.
I think the free debt is almost unbelievable, it deserves a rate rise, ask any free thinking ratepayer and taxpayer and saver and business free loader.
I do believe it is one, free for all. Treasury must be wrong. I believe in Mr Key, as I am free to do..today.
But what about tomorrow..I hear you say. Who will pay the piper. Treasury, or Mr Key?. or you.
Precisely CM. It takes advice only from the polls, both internal and external. As others have alluded here, the country does not need half the gov't employees it has. If I was a Treasury employee and my boss said " Treasury couldn't accurately forecast the Budget 44 days out, let alone 44 years out" I'd be calling the 'anti-bullying dept'; I'm sure there is one!
John Key is only looking as far as a fourth term prime minister award to hang on his wall. My prediction is, next year, if the polls are against him, he will resign prior to the election. His ego will not allow him to lead a losing party..conversely, if he wins the election, he will resign anyway, not wanting to lead the country through the economic mess that is coming..
To be fair to John Key, he has done a good job essentially for NZ compared to many Other people running countries around the world.
Does Treasurey always do the correct thing for NZ and the answer is no.
Don't always agree with everything that Mr Key does like immigration policy but he'll he has been very successful with his own financial situation hasn't he?
The LVR policy that the Reserve Bank has brought in nationwide is also an error from them!
To be fair to Mr Key he has kept on telling you and anyone who will listen, that he has done well by New Zealand after the GFC onset. Should you and others continue to believe the spin, then we all have a problem.
Where are the surpluses that we had from the previous years. Spent wisely or squandered?
Any nonce could make a country appear to be doing well if you open the floodgates to immigration in what in world terms, is a relatively low populated one. After all, bottom line, growth is growth in numbers of people. Now we have what could be a house building boom on, even though it is not keeping up with population numbers. Something will HAVE to give there.
Any nonce could allow dairying to expand exponentially at the expense of waterways, so that down the track, probably after Key is gone, someone is going to have to stump up with the dough to clean them up again.
Any nonce could turn a few natural disasters into a bit of a cash cow via insurance companies.
At the end of the day, if national GDP rising is not equating to a similar per capita one, isn't someone actually failing?
We are experiencing so much growth and yet the health system is being run down we have people losing their sight waiting for simple operations, homelessness has been rising, education appears to be feeling a pinch and really, earnings are not even blowing smoke up the rear end of the cost of housing. Jeez you'd hate to think what it would all look like if we weren't in seemingly boom times, wouldn't ya?
Oh yes and we owe many billions of dollars as well.
Nobody,including the Treasury,expects their long-term forecasts/projections to be spot on,but for Key to simply rubbish them,does the country a considerable disservice.Consider the following information;
The UK,Germany,France,The Netherlands,Denmark,Australia-all these countries are in the process of moving the state pension retirement age to 67 and the list is not exhaustive.
By 2051, those over 65 will almost double to around 1.14m. Of them,some 250,000 will be over 85.
Currently,there are 4.40 people of working age to support each pensioner,but this will fall to 2.40 withing 20 years. "This has direct implications for health expenditure because there is a significant rise in the incidence of disability with age and an increased need for health treatment,care and social services".(Source: Statistics NZ).
In response to the Retirement Commissioner, Paul Goldsmith the Commerce Minister,said that 'maintenance of the current age of entitlement is affordable,so long as spending is controlled elsewhere'. Where I wonder?
The cost of Superannuation has risen over the past 8 years by some 6%pa,while other spending has risen by 3%pa and Super now represents 16.50% of all government spending.(Source: The Morgan Foundation)
I am in no doubt that there will have to be changes in our Superannuation system,but if the PM is correct,then for the sake of all those yet to reach pension age,he should be prepared to set out clearly all the figures that support his case and tell us just why all these other countries have got it wrong.
When the Retirement Commissioner said that the Government needed to put up the retirement age several years ago, Key said it wasn't necessary as Treasury projections showed that NZ Superannuation would be affordable long-term.
Now that Treasury are saying there will be a debt blow-out without raising the age for Superannuation he says they're talking a load of drivel.
Indeed, few other politicians would have survived ponytail-gate, a wasted and pointless referendum and defeat, a legacy of flip-flopping, inaction, denial and spin etc etc. Still, he's a good bloke to have a drink in the pub with eh? (A comment which strikes me as equally odd as those which claim that Trump represents the common working American)
I think the problem is that journalists don't seem to question anything he says. I am constantly surprised at the thing he gets away with saying, without even been challenged.
In this example , if the reserve banks forecasts are rubbish , where is his forecast ? When the RBNZ were wrong 44 days before the budget, did he say so then , because he surely would have predicted the correct figure at that time?
A very good article on the matter, by ACT leader David Seymour.
There'll be no cup of tea for him next year, but I'm sure Seymour suspects Key's gonesky either way.
http://thespinoff.co.nz/society/28-11-2016/nz-baby-boomers-are-building…
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.