The Rudd Government's budget paints an unbelievable picture of a very mild recession (only a 0.5 per cent fall in GDP next year) followed by a recovery of 2.25 per cent in the election year (2010-11) and an above-trend rate of growth of 4.5 per cent in the following year.
Although accepted as plausible by some economists, this has led to widespread questioning regarding the need for easily the largest deficit ever ($53 billion), the believability of the forecasts and whether subject to political influence.
Ministers have defended the forecasts as coming from Treasury, with Kevin Rudd claiming: "These are independently nominated by the Treasury. It would be foolhardy for any government to reject the independent advice of the Treasury on something as fundamental as the forward growth forecasts, whether they are on the upside or the downside. We work within the parameters that were given by the professional and independent economists."
As Rudd must know, this is a load of codswallop. The budget papers are presented to parliament by the Treasurer and Finance Minister and they are responsible for the material within them. While all governments rely extensively on Treasury advice in framing budgets, ministers do not always accept that advice. It is quite possible that this year's budget forecasts were a combination of Treasury modelling and discussions between senior ministers and Treasury officials. Indeed, it would be surprising if no such discussions occurred. That does not necessarily mean Treasury was given firm directions: there is more than one way of skinning a cat.
The BBC's brilliant Yes Minister and Yes Prime Minister series in the 1980s showed most important decisions as emanating from discussions between Sir Humphrey and his colleagues and the relevant minister and staff. Despite Sir Humphrey's warnings about the danger of "courageous" decisions, even then there was some give and take. With ministerial staff playing a much bigger role, public servants are now under much greater pressure to accommodate political views.
All the more so given that the Rudd Government early made it clear that Treasury would play a broader role. In fact, Treasury head Ken Henry, who during the Howard years allowed it to become publicly known that Treasury advice was not always being sought, has expressed publicly views about policy issues which in earlier times would have been regarded as inappropriate for a public servant.
In part this may be because of his strong support for some government policies. But Henry also seems to have become what might be described as a bureaucrat supremo, functioning between a bureaucrat and a minister. There has not yet, however, been any formal move to a US type system where top officials are political appointments.
The worry in any such development is that public servants proper become increasingly inclined to accommodate political policies of the government of the day and to avoid putting forward advice consistent with the national interest. That may be why Malcolm Turnbull suggested establishing an independent budgetary body, such as the US Congressional Budget Office.
There is certainly a very serious question as to whether Treasury forecasts took sufficient account of the deepness of the overseas recession (including whether possible growth in exports to China could be offset by the large contraction in our largest export market, Japan) and the likely adverse effects on domestic investment and consumption, let alone unemployment.
As Treasury has not had a good record in recent years in forecasting budget revenues in a more stable economic environment, it is absurd for Rudd to criticise the Opposition for querying its economic forecasts now that circumstances exist in which normal economic models are much more prone to go astray. In any event is the Prime Minister suggesting that Treasury forecasts are sacrosanct and not open to public examination?
Treasury's estimate that the net measures in the Budget will add 0.75 per cent to GDP next year is also open to serious question. As former NSW treasurer Michael Costa (Labor) pointed out here last Friday, the size of multipliers under new Keynesian models used by Treasury is open to wide dispute, with some arguing it is nil. And if Rudd believes there will be a relatively rapid recovery, wouldn't it be more responsible to have much lower budget deficits in the next two years even for slightly lower growth?
During my time as a Treasury officer (1958-87), Treasury certainly had firm views about what policies should be adopted in the national interest and, regardless of policies enunciated by political parties, was not backward in providing written and oral advice backing up those views.
For example, Treasury's then equivalent to Sir Humphrey (Frederick Wheeler) and other Treasury officers strongly advised against allowing one Whitlam minister to attempt large borrowings from a Pakistani commodities dealer and against allowing another minister to determine de facto the unbelievably irresponsible 1974-75 budget. Equally, the next prime minister was also firmly advised to have a tougher 1976-77 budget and not to have the 1976 devaluation of 17.5 per cent.
And, although the Hawke/Keating government is popularly regarded as reformist, it did not adopt advice for much tougher budgetary policies early on. Indeed, before I resigned in 1987 I sent Treasurer Keating a detailed personal assessment that, without major changes in economic policies, Australia was likely to experience a serious recession, which in the end "we had to have".
Treasury advice may not always be correct or appropriate but nor should Treasury be put in a position where it holds back on advice in the national interest. Forecasts aside, there is good reason to believe Treasury did not provide hard-nosed assessments of the workplace relations and emission reduction policies. That is bad news for Australia - and for the Rudd Government.