In August 2023, Australian Treasurer Jim Chalmers launched the latest update of the Intergenerational Report (IGR). The IGR projects the economy and government budget over the next fifty years. In the IGR, the term “projection” is used rather than “forecast”. The Treasury is not pretending to tell us what the precise values of economic and demographic variables are expected to be in future decades. Instead, they indicate their general magnitude, based on the projections of trends. Even with that qualification, the usefulness of projections over fifty years may be questioned. Projections in previous IGRs have been very wrong. For example, the first IGR in 2002 projected that Australia would have a population of 25.3 million people in 2042. However, at the end of 2022, i.e. 20 years earlier, Australia’s population had already exceeded 25 million and was around 26.3 million. In 2042, Australia’s population is projected to be nearly 34 million, according to the latest IGR.
Clearly, projecting the future is hard, and so is forecasting in the shorter term. The forecasting failures by the Treasury and Reserve Bank of Australia regarding wages growth and inflation in Australia are well-known. Australian economic institutions are not alone in the world when it comes to poor forecasts and projections. For example, the Bank of England has been criticised for failing to forecast the inflation surge in recent years. This failure partly motivated the appointment in July 2023 of former US Federal Reserve chairman Ben Bernanke to lead a review of forecasting at the Bank of England.
A colleague of Adept Director Gene Tunny’s, Dr Nicholas Gruen, CEO of Lateral Economics, has suggested in a Financial Times opinion piece that Bernanke should consider recommending the Bank of England adopt a Superforecasting approach. Gene and Nicholas discussed the idea in a recent Policy Provocations episode available via YouTube: 60% chance of economic downpour?
The Superforecasting approach, pioneered by political scientist Philip Tetlock, is an approach to forecasting which encourages clarity in forecasting (i.e. giving a specific probability an outcome will occur), diverse and possibly interdisciplinary teams, and cognitive reflection. It is an attempt to avoid forecasts contaminated by groupthink or bias. For further information on the superforecasting approach, check out:
How to be a superforecaster, or at least a better forecaster
A superforecasting approach has recently proven very successful in forecasting US Federal Reserve decisions, as discussed in this previous post: Mounting evidence of Superforecaster success.
As part of a broad superforecasting approach, Nicholas suggests economic institutions such as the Bank of England, or Australia’s Treasury and Reserve Bank, could run economic forecasting competitions, which would allow the public to determine the forecasting abilities of economic officials compared with external forecasters. While this could be embarrassing for central bank and Treasury economists in the short-term, we expect that competition will have a salutary effect. It will ultimately improve the quality of economic forecasting in our institutions, for the good of us all.
Published on 30 August 2023. This article was prepared by Adept Economics Director Gene Tunny with input from Research Economist Arturo Espinoza. For further information, please get in touch with us via contact@adepteconomics.com.au or by calling us on 1300 169 870.