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How Joe Hockey concocted a Budget ‘emergency’

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By Matt Cowgill

Economic Policy Officer at the ACTU

Tuesday, 13 May 2014

THIS wasn’t supposed to happen anymore.

Joe Hockey has followed a classic playbook since coming to office – find a Budget black hole, blame it on your predecessors, then use this revelation to justify implementing an agenda more aggressive than you’d let on before the election. But this strategy wasn’t supposed to be possible after the Howard Government passed the Charter of Budget Honesty into law.

Under the Charter, we no longer have to compare the new government’s numbers to the old government’s numbers and work out for ourselves why they don’t line up. Instead, the heads of the Treasury and the Finance Department are required to put out their own set of numbers, the Pre-Election Fiscal Outlook (PEFO), during the election campaign. This gives a neutral baseline against which we can assess the new government’s figures. PEFO is the only set of Budget forecasts that truly belong to the bureaucrats – all other documents (like the Budget) are issued by ministers.

The PEFO last year didn’t contain a Budget black hole. It didn’t depict a Budget emergency. In fact, the outlook in PEFO was remarkably close to the figures in the Economic Statement issued by Chris Bowen and Penny Wong just before the election was called. The public servants in PEFO projected the Budget balance out for a decade. They found that the Budget was on track, before the election, to return to surplus in 2016-17 and keep improving from there, eventually hitting a surplus of about 1% of GDP by 2023 with net debt approaching zero.

Some commentators have quibbled with these projections, suggesting that they’re implausible because they adopt the previous government’s policy of restricting real spending growth to 2% per year. This policy may well have been implausible, but PEFO didn’t hinge on it. Instead, the public servants also showed what would happen to the Budget if spending grew at its expected pace (instead of being restricted to 2% real growth) and revenue was allowed to grow. The result for the Budget bottom line is much the same as under the previous government’s policies.

Both of the scenarios – the first with the previous government’s 2% spending growth cap and the second that reflects the underlying trend in spending and taxing – factor in big ticket items including DisabilityCare Australia (aka the NDIS) and the National Plan for School Improvement (aka Gonski).

Analysis of the Budget’s fiscal and economic outlooks

cash-balanceSource: Pre-Election Fiscal Outlook 2013, Chart F3.

Despite the Charter and the neutral numbers in PEFO, Joe Hockey still played the Budget black hole card, just as Peter Costello (in 1996), Paul Keating (in 1983) and Phillip Lynch (in 1975) had done before him. The new government’s mini-Budget (MYEFO) contained dramatically bigger deficits than the bureaucrats’ PEFO projections, with no surpluses in sight. The worsened outlook was partly due to policy decisions taken by the new government (like scrapping the carbon and mining taxes and giving a large grant to the RBA), partly due to a change in the assumptions used for projections beyond the first two years of the forward estimates, and partly due to a slightly more pessimistic economic outlook.  Hockey’s first Budget confirms this Budget outlook, with Budget deficits for years to come.

Underlying cash balance

Source: Economic Statement 2014, Pre-Election Fiscal Outlook 2013, Mid-Year Economic and Fiscal Outlook 2013-14, Budget 2014-15.

For now, this sea of red ink is being used as the justification for deep cuts in spending and a few unpopular revenue-raising measures. But don’t be surprised if, in a couple of years’ time, the Budget outlook is a lot rosier. That’s the final step in the Budget black hole strategy – show that you’ve brought home the bacon and balanced the books despite your predecessors’ profligacy.

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Economic forecasts may be pessimistic

The Australian economy is going to keep growing at less than its trend pace for the next three years, with unemployment rising to 6.25% by June next year and remaining there for the following year.

Wages growth will remain sluggish, 2.75% this year and 3% for each of the next two years, and employment growth won’t be strong enough to keep up with population growth. By June 2015, just 60.5% of the population aged 15 and over will be in work, the lowest employment-to-population ratio since 2004.

That’s the pessimistic outlook set out in this year’s Budget. Not much has changed in the outlook since the new government’s mini-Budget (MYEFO) late last year. For the very near term, the Budget forecasts are in line with the RBA’s latest forecasts – both expect real GDP growth of 2.75% this financial year. But the Budget is a little more pessimistic than the RBA about what will happen in the next financial year, 2014-15, with the RBA forecasting growth of 2.75% (the midpoint of its forecast band) while the Budget forecasts only 2.5%.

It looks like the economic forecasts in this year’s Budget might be a little pessimistic. Recent data about the labour market has been positive. It’s always noisy, but the signs have been good – the unemployment rate has fallen, employment growth has picked up, job advertisements and vacancies have started to recover. Retail trade and housing construction have finally picked up in response to low interest rates, bringing the long-anticipated ‘rebalancing’ in economic activity away from mining activity. Despite all this, the Budget envisages unemployment rising for the next year at around the same pace that it was growing in late 2013.

This is a fair bit more pessimistic about the outlook for jobs than some other recent forecasts, particularly from the OECD. The OECD’s Economic Outlook, issued just a few days ago, envisages 6.1% unemployment by the end of this year, but a fall next year to 5.9% by the end of 2015.

forecasts

Source: ABS 6202, IMF WEO database April 2014, OECD Economic Outlook Annex Table 13, Budget 2014-15. Note that IMF forecasts are year averages; OECD forecasts are for the Dec quarter; Budget forecasts are for June quarter.

The Budget concedes that its forecast for unemployment might be a bit pessimistic. In the coded language of these sorts of documents, it notes that “an improvement in job vacancies and advertisements in early 2014 indicates that there are upside risks,” meaning that things might not turn out as bad as envisaged. If it turns out that they’ve been too pessimistic about the economy, then Joe Hockey will receive more tax revenue and spend less on welfare payments than they’ve budgeted for.

But what if it turns out the Budget is right? In that case, we’ll have spent this entire decade of the 2010 operating with an economy smaller than its potential level – an ‘output gap’ in the language of economists. We’ll have spent most of this decade with an unemployment rate well above 5%. That’s an intolerable situation.

So either the economic forecasts are pessimistic, in which case the Budget balance will turn out to be much better than the Government is forecasting, or they’re accurate or too optimistic, in which case we’ll have an intolerable stagnation in economic activity.

Read more about tonight’s Federal Budget in our special Budget 2014 section.


Working Life is a forum to share ideas and opinions about work and life, both light-hearted and serious. The opinions presented on Working Life are those of the author, and do not necessarily represent policies or views of the ACTU.

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Comments

  1. DMc
    Tuesday, 20 May, 2014 at 12:44 pm · Reply

    To hope for the best and prepare for the worst, is a trite but a good maxim.

  2. Cassandra
    Friday, 23 May, 2014 at 11:42 am · Reply

    If the budget is in such crisis can Hockey explain why he was able to give a 1.5% tax cut to business from 1/7/15?

    That is also the amount of his parental leave levy, so effectively that cost business nothing!

    Talk about mugging the mugs who voted for you and rewarding the ones who donated!


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