Tuesday, October 25, 2011

More heroic assumptions

Treasury released its Pre-election Economic and Fiscal Update today, and its all bad news. The economy has worsened since the Budget, and while they're still projecting a government surplus in 2015, that comes at the cost of self-defeating austerity measures. But what's even scarier is that even that dismal forecast depends on the same sorts of heroic assumptions about wage growth they were making back in May.

According to the PREFU [PDF; table 1.2], Treasury expects 4% wage growth next year, dipping slightly to 3.3% in 2013, then rising again to over 4% every year after that. In reality, the only time in recent memory we've had such sustained high wage growth has been 2006 - 2009, when we had an engineered labour shortage, unemployment below 4%, and more favourable labour laws than at present. So where does Treasury expect unemployment to be while employers are having enormous wage rises screwed out of them in spite of the 90 day law and union-busting? 5.8% next year, dropping slowly to 4.7% in 2015. And if you think those things go together, then I have a Brighter Future to sell you...

This isn't just a minor nitpick; Treasury's promised surplus is built on the higher tax takes produced by these assumptions. Which means they are understating the amount of pain we will have to suffer to balance the books. This suits their current political masters very well indeed. But it raises doubts about whether Treasury really is using its best professional judgments (as required by law and claimed in the PREFU's statement of responsibility [PDF]), or pushing their own agenda again.