The mid-year economic and fiscal outlook to be released next month will be very interesting. Scary, but interesting.
Among other things, it will help settle an old score that goes right back to 2009. That’s the year in which the Coalition began accusing Labor of massaging Treasury figures to make false promises of a budget surplus.
Labor’s reply through the GFC years and beyond was that the government -- and Treasury’s forecasting team -- were simply blindsided by global forces that shredded the revenue base.
A new study released on Monday by consultancy firm Macroeconomics provides an independent analysis of Treasurer Hockey’s first full year running the budget, and does much to reignite the debate.
It notes that the projections in Hockey’s budget -- for a deficit of $29.9 billion this financial year, decreasing to $2.8bn at the end of the end of the forward estimates (2017-18) -- were far too optimistic.
It argues instead that two factors would blow those figures out: the savings measures Labor is blocking in the Senate (such as welfare reforms and GP co-payments) and revenue writedowns flowing from a commodities prices slump that was worse than anyone expected.
Together, those factors would see a deficit this year of $48bn, and the budget still in the red to the tune of $24bn in 2017-18. Overall, those budget blowouts total $51bn over four years.
Hockey denies that the blowouts will be that big but is using the prospect of revenue writedowns to pressure Labor to pass more of his savings measures.
However, in the same breath, Hockey seems to have forgotten his long-running attacks on Labor’s Wayne Swan for releasing overly optimistic revenue forecasts each and every year of the Rudd/Gillard governments.
In essence, when Swan did that, it was a massaging of the figures. When Hockey does it, nobody could have foreseen the iron ore price slump.
Hockey told 2GB radio: “... ultimately there are things we can control in the budget – such as reducing government expenditure – and there are things we can't control, such as the income associated with iron ore."
During Tony Abbott’s highly successful (in political terms) time as opposition leader, the ‘debt and deficit’ debate he led focused on Labor’s ‘wasteful’ spending and tried to draw attention away from collapsing revenues.
So successful was he that few remember now that Wayne Swan’s 2012-13 budget was one of the sharpest fiscal consolidations in Australian history, and even had the BCA calling for the return to surplus to be more gradual that either side of politics was promising (A bipartisan surplus shipwreck, April 10 2012).
The fact that it took place during crashing revenues (see chart below) disguised the 2.5 per cent efficiency dividend Labor was implementing.
Swan’s claims at the time -- that it was Treasury and not him that had got the forecasts wrong -- were not given proper attention. As the chart shows, revenue writedowns of up to 3 per cent a year were still a lot closer to the mark than the overly pessimistic forecasts published in the last three Howard-era budgets. And dealing with upside surprises, as Howard did, is a much more pleasant task than the downside shocks that Labor experienced.
Hockey now risks being tripped up by his own rhetoric. In May 2012, for instance, he told Parliament: “The Treasurer is not up to the job. He simply tables advice from an agency and says, 'That's the reason why I take public policy decisions.'
“Why do we have him in the Treasurer role? Why don't we have the head of AOFM or a senior public servant acting as the Treasurer? You have to have a Treasurer who questions the department, questions agencies and seeks other advice in relation to these matters.
“Sadly, we have a weak and insipid Treasurer who simply, when he has to come to the Parliament and explain himself, refers to a tabled advice from his department, as if that is conclusive.”
Now, when MYEFO is handed down next month, should we expect ‘no surprises’, as Prime Minister Abbott promised upon taking power?
Hockey had better hope so. Having attacked Labor’s lack of prescience for so long, surely he’s “questioned departments” and seeks “other advice in relations to these matters”?
Attempting to defend its fiscal record, Labor sent assistant treasurer David Bradbury to the dispatch box in February last year to point out that: “We have seen, over the last couple of months, the full impact of revenue write-downs. In particular, most recently we have seen revenue write-downs of amounts in the order of $20bn.
“These, in their broader context, represent the fact that somewhere in the order of $160bn worth of revenue writedowns have been experienced over the last couple of years. That, in part, has been as a result of the global financial crisis and its ongoing effects. It has been about the impacts of the international economy and the challenges that have been faced right around the globe.”
While Hockey does expect some writedowns at MYEFO, they’re unlikely to be on that scale.
Overall, though, a new story is likely to emerge from the MYEFO and next year’s budget: that Labor was indeed whacked repeatedly on the revenue side, and that Hockey has now made similar forecasting errors on the downside.
If that is the case, Hockey will have to focus more of his attacks on Swan’s record on the ‘landmines’ buried in the forward estimates when Labor lost power (such as funding the NDIS and Gonski) rather than repeating the old line that Labor had “a spending problem, not a revenue problem”, as Abbott said in opposition.
If Hockey has the same revenue problem, some of the mud flung at Wayne Swan will no longer stick.