Are the Government's growth forecasts too optimistic?


The Budget has been labelled boring because it was lacking in big surprises -- aside from the announcement of a series of tax increases for smokers.

But if you are Finance Minister Bill English you want a Budget lacking in surprises.

He was keen to promote the good news in the Budget. The Government's forecasting economic growth to average 2.8 percent over the next five years. Unemployment is tipped to fall below five percent in 2018.

The Government's forecasts say it is on track to cut net debt to 20 percent of GDP by 2020. There will be a surplus of $6.7 billion by financial year 2020.

This gives the Government options. Invest more in infrastructure, pay down debt or offer tax cuts.

But some economists believe the forecasts are too optimistic.

Westpac is particularly sceptical: "We expect the economy will be significantly weaker than the Treasury is forecasting for the latter part of the decade, and consequently we doubt that the surpluses will be as large as Treasury is forecasting."

They also point out that the Budget has made no allowances for tax cuts.

Treasury has issued a report on the accuracy of its forecasts.

The report found that over the past three years the accuracy of its growth and tax revenue forecasts has improved. But the accuracy of its CPI inflation forecasts has declined a little.

The analysis found that Treasury's forecast errors for growth and inflation were at the lower end of the error range compared to fifteen other forecasters.

Still, it is a reminder that for anyone making forecasts it is not an exact science.

Even if the projections turn out to be accurate there is going to be a tough choice for the Government.

Mr English would like to pay down debt, but Prime Minister John Key wants to offer tax cuts.

Tax cuts are not likely to be in next year's Budget. Instead John Key will want to offer them as he heads into the election late next year.

The prospect of retaining the Treasury benches will likely outweigh his Finance Minister's desire to lower the Government's debt levels.

Others will argue that with global interest rates at record low levels the Government should not be so focused on lowering the debt to a net 20 percernt of GDP by 2020. Insterad it should look at investing more in areas like infrastructure.