The previous section considered the fiscal implications of independent variations in selected economic parameters. Typically, however, variations in economic parameters do not occur in isolation. For example, general economic conditions may differ from expectations, particularly in the event of an unanticipated economic or financial shock, causing most or all economic parameters to vary from forecasts. This section considers two examples where general economic conditions varied significantly from expectations, resulting in the broad sweep of economic parameters being different from forecast. In the first example, in 200607 growth was significantly stronger than anticipated while in the second example, in 200809 the onset of the global financial crisis resulted in most economic and financial variables being lower than initially forecast. The analysis confirms that the fiscal impact of variations in economic parameters can be significantly greater than indicated by the sum of each variable’s individual impact. This highlights the point that the relationships between economic parameters and fiscal aggregates are complex and heavily influenced by the specific nature and characteristics of a given economic shock. Such shocks affect Victoria’s fiscal position to varying degrees, but given the composition of Victoria’s revenue base, propertyrelated shocks are likely to have the largest impact on the fiscal situation. The State’s fiscal position in any year is the product of economic trends and policy changes in that and previous years. Similarly, an economic shock in a given year will affect fiscal outcomes in that and later years. The outcomes for a particular year will diverge from forecast values because of forecast errors and policy changes. This analysis highlights the critical impact that government policy decisions have on the result, which by nature cannot be captured by standard sensitivity analysis. 200607 economic growth exceeding expectations – Table B.2 presents a situation where economic growth was underestimated. It shows the largest forecast error in the macroeconomic variables was for employment. Real GSP was also underestimated, and there were relatively minor errors in the forecasting of prices and wages. Table B.2: Actual deviations of growth rates of key economic variables from 200607 Budget forecasts (per cent) 200607 200607 Forecast budget (a) actual error (b) Real GSP 3.3 3.8 0.5 Employment 1.3 3.1 1.9 Consumer price index 2.5 2.6 0.1
The previous section considered the fiscal implications of independent variations in selected economic parameters. Typically, however, variations in economic parameters do not occur in isolation. For example, general economic conditions may differ from expectations, particularly in the event of an unanticipated economic or financial shock, causing most or all economic parameters to vary from forecasts. This section considers two examples where general economic conditions varied significantly from expectations, resulting in the broad sweep of economic parameters being different from forecast. In the first example, in 200607 growth was significantly stronger than anticipated while in the second example, in 200809 the onset of the global financial crisis resulted in most economic and financial variables being lower than initially forecast. The analysis confirms that the fiscal impact of variations in economic parameters can be significantly greater than indicated by the sum of each variable’s individual impact. This highlights the point that the relationships between economic parameters and fiscal aggregates are complex and heavily influenced by the specific nature and characteristics of a given economic shock. Such shocks affect Victoria’s fiscal position to varying degrees, but given the composition of Victoria’s revenue base, propertyrelated shocks are likely to have the largest impact on the fiscal situation. The State’s fiscal position in any year is the product of economic trends and policy changes in that and previous years. Similarly, an economic shock in a given year will affect fiscal outcomes in that and later years. The outcomes for a particular year will diverge from forecast values because of forecast errors and policy changes. This analysis highlights the critical impact that government policy decisions have on the result, which by nature cannot be captured by standard sensitivity analysis. 200607 – economic growth exceeding expectations Table B.2 presents a situation where economic growth was underestimated. It shows the largest forecast error in the macroeconomic variables was for employment. Real GSP was also underestimated, and there were relatively minor errors in the forecasting of prices and wages. Table B.2: Actual deviations of growth rates of key economic variables from 200607 Budget forecasts (per cent) 200607 200607 Forecast budget (a) actual error (b) Real GSP 3.3 3.8 0.5 Employment 1.3 3.1 1.9 Consumer price index 2.5 2.6 0.1
state-budget-pre-election-budget-update-2014-15.docx