Review finds Treasury struggles in forecasting tax

A review into the Federal Treasury's economic forecasting has found the body is on par with the best of the world's agencies, but has some trouble predicting how much tax business is paying.

The review by former Treasury and Access Economics forecaster David Chessell recommends Treasury bolster its business liaison program to improve its understanding of how the corporate sector is tracking.

The Reserve Bank of Australia has a better resourced Business Liaison program with about 20 staff members who keep in touch with nearly 100 businesses or industry groups on a monthly basis to obtain assessments on key indicators like wages, profits and stocks.

The independent Reserve Bank is expected to oblige with the report's recommendation that it share those findings with the Treasury without compromising any of their confidential relationships.

The report says Treasury's largest forecast errors relating to revenue in recent years are due to poor forecasting models for company taxes and capital gains taxes, which do not properly account for depreciation in the mining sector during slower economic times, or factor in businesses that report in September or December.

Treasury is now devising a "three-sector" company tax forecast model that splits the economy into mining, finance and insurance and other sectors, but the report says problems with the company tax forecast model remain a "concern" and are being investigated, although company and capital gains taxes remain two of the most difficult to accurately predict.

Treasury secretary Martin Parkinson initiated the Chessell review following a series of major write-downs in revenues in since the global financial crisis.

Dr Chessell's report notes Treasury's "mixed success" in forecasting over this period but says most forecasters around the globe have also failed to accurately identify and predict the turning points in the economy.

Treasurer Wayne Swan says his department will take on the report's 11 recommendations in full and "will improve the accuracy and transparency of the budget numbers".

Opposition treasury spokesman Joe Hockey has previously criticised the Treasury's ability to accurately forecast, saying earlier this month he was "disappointed" the Treasury had gotten "every number wrong over the past five years".

But a spokesman for Mr Swan says the report shows Australia's Treasury is "one of the best in the world" and forecasting "is an inherently difficult task".

'Asian Century' The Chessell review has also highlighted Treasury's "misjudgements" of China's growth and commodity prices, and their affect on the Australian economy during the mid-2000s.

Treasury also failed to assess how infrastructure bottlenecks as well as natural disasters in Australia would curb our exports and repeatedly overstated supply volumes.

Treasury's since established a unit focussed entirely on understanding the Asia economies and has also opened up a post in India.

Last year the Federal Government released its Asian Century white paper promising to boost Australia's Asian literacy and economic understanding of the East.

A bipartisan report also released last year, complained about the "" of the Department of Foreign Affairs and Trade over the past 30 years, arguing it was causing Australia to miss out on economic opportunities policymakers could not fully comprehend.

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