Australia's shocking budget mess

The coming federal election campaign will simultaneously be the most hilarious and the most depressing in living memory.

Both major parties will assert that they will run budget surpluses without painful spending cuts or tax increases, when it will be plain to all that this is impossible.

The latest dose of reality on this subject comes from the economic consultancy Macroeconomics, whose mid-year budget bulletin was published yesterday by Andrew Robb, the Shadow Finance Minister.

Robb naturally used the calculations therein to floridly bag the government's own budget forecasts, especially about debt, as deceptive, in the process getting his metaphors a little mixed up: "Labor's debt deception is the dead cat on the table…”

Elsewhere yesterday the Shadow Treasurer, Joe Hockey, promised to have the Coalition's policies fully costed… in the last week of the campaign. Hopefully, by that time minds will have been made up and minor details such as arithmetic will be irrelevant.

Given the faux frenzy into which both Robb and Hockey descend at the merest hint that the government will run a deficit this year instead of the $1.1 billion surplus forecast in the MYEFO last month, the Coalition, too, will presumably promise to run the government at a profit.

However this is starting to get mighty difficult, according to yesterday's bulletin from Macroeconomics.

The team led by Stephen Anthony, a former policy officer at Treasury, the Department of Finance and the IMF, now calculates that the 2012-13 deficit will be $6.5 billion, due to a $6 billion shortfall in tax revenue, "associated with a more rapid decline in the prices Australian iron ore and coal producers receive for their output.”

The 2013-14 deficit will be $17 billion without policy changes; in 2014-15, $22.9 billion. Remember that these deficits apply equally to both parties – perhaps more to the Coalition since it is promising to repeal two taxes, the carbon tax and the MRRT.

More alarming, Macroeconomics calculates the "structural deficit” (that is, when the temporary impact of the terms of trade is removed) at $34 billion in 2012-13. The firm says commodity prices are contributing around $27 billion in windfall revenues to the budget on average each year.

"By our reckoning in five budget rounds since coming to office, the Rudd-Gillard government has generated new net discretionary spending (including fixed assets purchases) totalling $120 billion, including temporary GFC Mark I stimulus spending worth around $70 billion based on the expenditure reconciliation tables in Budget Paper No. 1. These tables suggest a net increase in policy spending of around $50 billion over five years.”

But the Labor government just continued the undermining that the Howard government had begun.

We are reminded that earlier this year, Treasury Secretary Martin Parkinson revealed that the revenue hole facing the government was 4 per cent of GDP. Says Macroeconomics: "This is driven in large part by the structural rebalancing of tax revenue collections towards company tax receipts following the individual income tax cuts introduced by the Howard and Rudd governments. It is also driven in part by cyclical factors associated with the decline of business tax receipts since the GFC Mark I due to the collapse of capital gains revenues and impact of large depreciation claims from the China Boom Mark II investment phase.”

The Howard government's "wasteful spending and tax cuts,” it says, "frittered away the surpluses without offsetting structural reform of the tax system.”

So here we are with the end of commodity price boom apparently upon us with a $34 billion structural hole in the budget caused by the Coalition's personal tax cuts and the ALP's spending, and with both parties now promising to maintain impossible surpluses.

Mind you, if they actually do it, then Swan/Wong or Hockey/Robb would be economic heroes, deserving of a plaque and a Twitter hashtag in their honour.

Cutting government spending sufficiently to achieve a surplus this year and next is precisely the correct fiscal strategy: it would put downward pressure on interest rates and therefore the Australian dollar, and encourage private spending that would offset the decline in public spending.

On the other hand, more spending through the various big picture policies already announced (health, education, super, etc) would put upward pressure on interest rates and the dollar and lead to higher unemployment and a weaker economy.

In the meantime we have an election campaign to endure sometime in the next 12 months, in which both sides will accuse the other of running deficits and being hopeless at managing the economy and the federal budget.

They'll both be right.

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