Friday, September 03, 2010

Coalition costings: The inexcusable, the inexplicable...

The Coalition made four kinds of mistakes in its costings according to the Treasury; the understandable, the inexcusable, the inexplicable, and those resulting from a failure to comprehend the nature of the process.

Although concealed from the public at the time of the vote, the decision of Andrew Wilkie to go with Labor on the basis of the costings suggests they've come at a price.

The inexcusable:

According to Treasury the Coalition counted the interest to be saved on debt from selling Medibank Private, but not the dividends it would lose as a result of the sale. It's a bit like deciding to selling a rental property without noticing you will no longer be able to collect the rent.

Also inexcusable was double counting savings to be made by increasing the efficiency dividend, effectively double counting savings already factored into the Pharmaceutical Benefits Scheme, measuring the wrong time period when calculating money to be made from the parental leave levy, and failing to update its savings from abandoning the National Broadband Network to reflect the smaller amount actually spent.

All up they're worth $2.7 billion.

The inexplicable:

The Coalition announced spending from the Health and Hospitals Fund, the Education Investment Fund, the Building Australia Fund and the Nation Building Fund without apparently checking that there was enough free money in the funds. Treasury and Finance have examined what had already been allocated and found that adding on the Coalition's promises would more than empty the funds, pushing them $3.3 billion into the red.

The departments acknowledge that it may be possible to cancel or defer projects to make room for the $3.3 billion but says the Coalition provided no such details.

The nature of the process:

The Charter of Budget Honesty sets out guidelines for election costings, in order to make sure they are done on the same basis. One forbids the counting of proceeds from expected "second round effects" such as a saving on the dole from a jobs creation program. The Coalition counted such an effect because it says the National Centre for Economic Modelling told it its program would take 51,000 people off the dole. (NATSEM said yesterday it had in fact had no communication with the Coalition and would have only worked for it indirectly as part of a contract with the Parliamentary Library.)

It's the same with the accounting measure known as the Conservative Bias Allowance. Under the rules changing it doesn't change a thing. The Treasury says such an adjustment would not create "actual budgetary savings".

All up these are worth $3.5 billion.

And the understandable:

The Coalition used an interest rate of 5.5 per cent in calculating savings on debt replayments. Treasury says it should have used 4.9 per cent, the same as was used in the pre-election outlook. But Treasury never actually included the figure the outlook. Without a lot of digging the Coalition wouldn't have found it out.

Unless perhaps it took Treasury into its confidence early, as it might now believe it should have.

Published in today's SMH and Age

Treasury's analysis of the Coalition Costings

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. Thursday Column: Could Costingsgate widen?

. The Coalition costings as presented

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Marek said...

I don't accept that the problem with 5.5% vs 4.9% figure is understandable, unless you are willing to accept that they have no knowledge of how Govt bonds function. The information about yields on govt bonds is easily available at

Also wasn't the fact that this was wrong leaked from the treasury a few weeks ago? What's the reason why they didn't double check the numbers after that came out?

Peter Martin said...

Treasury uses a weighted average of the AOFM's cost of funds.

Calculating it would be difficult, even if they knew the formula (not that there is much evidence they attempted to).

Apparently the forumla was outlined once in a Senate estimates hearing, but apart from that has not been in public domain.

You might be right about the leak.

Oliver Townshend said...

How much was the Interest difference worth? Can't make out it's value.

Marek said...

fair enough about not knowing the exact formula, but even taking the average from recent auctions i can't get the rate above 5.24%

Really what's even worse is they are not even admitting its a mistake. They could have simply said that we don't have access to treasury so our number is a bit out, instead they are sticking to the line that treasury is wrong

Peter Martin said...

Marek, Agreed.

The important point is the level playing field - their costings should use the same interest rate as other costings.

That way they can be COMPARED - D'oh!

Don't know the answer Oliver - If I find out I'll let you know.

Marek said...

I believe it a 900mil difference

Anonymous said...

Particularly savage piece by Laura Tingle about this in today's AFR

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