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An engineer, a scientist and economist are playing darts. The engineer throws a dart and hits the far left of the dart board. The scientist throws another and hits the far right. The economist screams 'bullseye'! I want to let you in on a little secret. Economists have absolutely no idea what is going to happen to the global economy in the next 12 months, and our guesses about the world economy over the next ten years have more in common with fantasy than forecasting. The fact that many if our errors 'balance out over time' doesn't make us 'accurate in the long run', it's just proof that we are guessing. We are pretty good at projecting the near future on the basis of past trends but we are terrible at predicting what we call 'turning points'. In fact, the only recession Treasury ever forecasted was the 2009 one we didn't have. The trouble is that what we call 'turning points', most people call the GFC, the Asian economic crisis, the 1991 recession or the end of the mining boom. Predicting from trend but missing the 'turning points' is like driving with your eyes closed in the hope that there won't be any bends in the road. Economists do a pretty good job of predicting the link between things like population growth and demand for housing, but we are terrible at predicting the rate of population growth. Bizarrely, our fundamental inability to predict the future has done nothing to dampen non-economists enthusiasm for our predictions. Governments and businesses spend a big chunk of their allegedly tight budgets paying for predictions that can usually be summarised as 'if things keep going the way they have been going then the future will look pretty much like the past'. The media lap them up and the commentariat can easily spend a day discussing what the latest forecasts do, or don't, mean for the government. It's the news equivalent of easy listening. Each year the Commonwealth budget details, to the decimal place, Treasury's best guess about what will happen to GDP, inflation commodity prices and a wide range of other economic variables. And they are usually way off. Of course the economists at Treasury, like the economists everywhere, know that they have no chance of predicting any 'turning points' and that the decimal places in their forecasts are more gut feel than science. Indeed, Treasury are so confident that their annual budget forecasts will be wrong that they actually publish the Mid-Year Economic and Fiscal Outlook (MYEFO to most Canberrans) six months later. But even making accurate forecasts six months out is beyond us. The last MYEFO was released around six weeks ago and the forecasts for the price of coal, iron ore, oil and other commodities already seem excessively optimistic. Lower commodity prices mean lower profits for the mining industry and lower levels of corporate tax. Less than two months since MYEFO and we are again talking about revising the budget 'forecast'. The honesty of Treasury in admitting that it doesn't really expect its annual forecasts to last a year is, however, entirely contradicted by their willingness to publish economically meaningless, but politically potent, documents like the Intergenerational Report, which purport to tell us what will happen in 2050 if policies remain unchanged, technology remains unchanged, and there are no 'turning points' in any of the domestic or international indicators. The purpose of the predictions like those in the Intergenerational Report is not to inform us about the future, but to scare us about the future. Rather than put the effort into persuading voters that their reform proposals are good ideas that will make our country a better place, modern politicians rely instead on ghost stories to scare us into believing that if we don't accept their reform proposals the sky will fall. The purpose of predictions is to create the pressure we need to 'take our medicine'. The modern political reliance on economic forecasts to generate scary stories about the future provides a structural advantage to conservative politicians. Imagine if, for example, conservative politicians had to explain the need to spend less money on educating our kids without reference to the deficit in 10 or 20 years' time. Imagine if they instead had to make the policy and political case for why investing less in the next generation was the best way to help future generations. Human psychology is such that most of us are hardwired to be more sceptical of people promising that the future will be rosy than we are of those predicting doom and gloom. This tendency is so strong that even though every economic forecast in Australia anticipates rising productivity and rising living standards and virtually every economist believes that investment in education pays big dividends in the future the current government is planning to cut education spending to stave off an imagined budget crisis in the distant future. Well played conservatives, well played. Of course it's not all one-way traffic. One of the main reasons that Tony Abbott could not make it through a single term of government is that from opposition he promised the kind of certainty that no one who actually understands the economy, or the budget process, would ever commit to. Wayne Swan fell into the same trap when he promised that he would return the budget to surplus 'come hell or high water' just before the Queensland floods knocked (one of many) holes in his revenue and spending forecasts. Like so many of the budgetary problems we now have, I blame Peter Costello. Thanks to his obsession with making the budget surplus a symbol of economic achievement, Treasurers and Prime Ministers now feel obliged to say silly things about the budget based on forecasts that all economists know are largely guesswork. Further, Treasury and Finance now waste enormous amounts of time and taxpayers money devising accounting tricks to deliver symbolic surpluses in symbolic, usually pre-election, years. For Peter Costello the budget surplus was not a tool of economic management but a weapon of political destruction. On his watch, when revenue was flooding in far faster than Treasury forecast it would, surpluses were easy to generate. As Treasurer he worked tirelessly to both take credit for the windfall gains and to convince the public that delivering a surplus was the 'one true test' of economic management. Like his unsustainable tax cuts, they were fun at the time but haunt us to this day. Indeed, despite the surpluses he delivered, the IMF described him as the most profligate Australian Treasurer in modern history. There are storms on the horizon and Australia does need to plan for the future. The decisions our representatives make on behalf do matter, and if we ignore problems we will make them worse. But the idea that the only thing we need to do to prepare for the future is to invest less money in education and health and lower the safety nets that those who become sick or unemployed fall into has no basis in economics. Just how conservative politicians can manage to feign such fear about future budget forecasts that not even Treasury take seriously while ignoring the entire scientific community's warnings about the dire consequences of continuing to increase our greenhouse gas emissions is a question which will no doubt occupy future historians for centuries to come. I certainly can't explain it. Richard Denniss is chief economist at The Australia Institute. @RDNS_TAI

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