Macro Analysis

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Analysis of the 2019/20 Federal Budget
5 April 2019, updated 5 May 2019

Questions

This analysis of the 2019/20 Federal Budget poses three questions.

  • The Economic Outlook: Is the Budget too optimistic?
  • The Budget Outlook: Will the surpluses be achieved?
  • The Budget and Taxation: Are the tax cuts real?

Modelling Approach

This exercise uses two Vector Autoregression (VAR) models, one for the world economy and one for the Australian economy. The idea of VAR models is to avoid theoretical assumptions and instead just "let the data speak". This gives VARs the benefit of transparency. VARs are best at providing short-term forecasts for a small number of variables. These attributes suit the purposes of this Budget analysis.

For other purposes, large-scale macro-econometric models, such as my macro model, are more suitable. More economic assumptions are inevitably made in developing a larger structure. However, this makes macro-econometric models more suited than VARs for providing more detailed forecasts, longer-term forecasts, and scenario analysis.

The VAR modelling approach used here emphasises linkages from the world Australian to the Australian economy and from the financial sector to the real economy. In that broad sense, it follows the VAR approach of Dungey and Pagan (2000, 2009).

Answers

On the first question, this analysis finds that the Budget is too optimistic on the economic outlook. While the Budget forecasts real GDP growth of 2.75% for both 2019/20 and 2020/21, the VARs forecast growth of 2.3% and 2.4% respectively. This lower growth forecast is more consistent with the weak GDP growth already recorded in the final two quarters of 2018, and the lower rate of trend GDP growth post-GFC.

On the second question, our lower economic growth forecasts lead to forecasts of lower Budget surpluses than those made in the Budget. Nevertheless, the Budget is forecast to be in the black from 2019/20.

On the third question, this analysis finds that the budgetted tax cuts are not "real". Rather, in broad terms the budgetted tax cuts only return the proceeds of bracket creep. Thus, the Budget projects in its Statement No. 4 that personal income tax as a share of GDP will be broadly unchanged at 11.9% in 2022/23 compared to 11.8% in 2018/19.

Download the Analysis of the 2019/20 Federal Budget

Download "CEO Institute: Federal Budget Analysis".

For more information, email my office.

Economic Impacts of Selected Macro Shocks:
report to the Parliamentary Budget Office
Nov 2017

The Parliamentary Budget Office (PBO) commissioned me to analyse the impact of specific macroeconomic shocks on key economic parameters that influence the Budget. The outputs of the analysis were then used by PBO to adjust forecasts for those economic parameters. PBO then used its modelling of the relationship between the economic parameters and the Budget to assess the effects on the Budget of the macroeconomic shocks. This follows a similar exercise that I undertook with PBO in 2014.

The economic shocks were in the following areas.

  • productivity
  • business investment

Access the reports

Download my report "Economic impacts of selected macroeconomic shocks" (PBO web-site).

Download the full PBO study "2017–18 Budget medium-term projections: economic scenario analysis" (PBO web-site).

Economic Impacts of Selected Macro Shocks:
Sep 2014 report to Parliamentary Budget Office

The Parliamentary Budget Office (PBO) commissioned Independent Economics to analyse the impact of several macroeconomic shocks on key economic parameters that influence the Budget. The outputs of the analysis were then used by PBO to adjust forecasts for those economic parameters. PBO then used its modelling of the relationship between the economic parameters and the Budget to assess the effects on the Budget of the macroeconomic shocks.

The economic shocks were in the following areas.

  • productivity
  • terms-of-trade
  • labour forcer participation

Access the Independent Economics report

Access "Economic impacts of selected macroeconomic shocks".

Macro policy:
insights from our new macro model
20 September 2013

  • these are the first publicly-available results from the all-new Independent Macro-econometric model
  • we assess the current stances of monetary and fiscal policy against an "optimal" model-based benchmark

Current versus Optimal Macro Policy

  • Under the standard policy approach, monetary and fiscal policy follow simple rules, based on inflation and deficit targeting respectively.
  • Under the optimal approach, macro policy is optimised to minimise the social losses from inflation and unemployment departing from their targets.
  • The standard and optimal projections for monetary and fiscal policy are broadly similar.
  • This indicates that the current expansionary stances for monetary and fiscal policy are broadly appropriate.
  • This is unsurprising as inflation is below the RBA target of 2.5% p.a. and unemployment is above its sustainable rate or NAIRU, estimated at 5.2 per cent.
  • However, the results show that it would be optimal to slightly vary the current policy mix, to make fiscal policy less loose and monetary policy more loose.
  • November 2017 update: it is interesting to note that this variation in the macro policy mix was subsequently adopted.

Download the Macro Forecast and Policy Update

Download "Economic Outlook and Current Policy Issues".

For more information, email my office.

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