Numbers puzzle yet to pan out
If the Pre-Election Economic and Fiscal Outlook (PEFO) is to be believed, Australia is a rock-solid enterprise with a temporary cash-flow problem that will disappear in about two years.
The problem is that PEFO's last portrait of the economy in 2010 turned out to be as sloppy as a kindergarten kid's finger-painting. It's an anchor for an election economic debate assuming the Coalition references it, but not much more.
The headline numbers in PEFO are almost identical to the ones that Treasurer Chris Bowen released 11 days ago. The same forecast deficit of $30.1 billion for the current financial year, leading to a $4.2 billion surplus in 2016-17, $200 million more than Bowen's mini-budget predicted.
On PEFO's scenario, the government runs operating cash deficits for only two years. It borrows $40.7 billion this financial year, $39.4 billion in 2014-15, $22 billion in 2015-16 and $21.5 billion in 2016-17 as it covers the operating deficits and rolls over debt, and net debt rises from $184 billion this financial year to $217 billion in 2016-17.
Nobody is arguing that $217 billion isn't a lot of money, but it has to be put into context with the economy as a whole. As net debt rises the economy also grows. PEFO's estimate is that net debt will equate to 11.7 per cent of annual gross domestic product this financial year, rise only marginally to 12 per cent by 2016-17, and be eliminated by 2023-24.
By any measure other than the zero-debt nirvana that Australia achieved during the resources boom before the global crisis hit, those are low ratios. The post-global crisis plimsoll line for developed economies is around 80 per cent. Australian household debt was running at 147 per cent of household income at the end of the March quarter this year. Housing debt was 133 per cent of household income, and owner-occupier debt was 90 per cent.
The percentage of annual GDP sucked up by interest payments is another measure. In Europe, it has become an existential one. Here, PEFO estimates that over four years interest payments will rise from 0.5 per cent of GDP to 0.6 per cent.
PEFO's number-work is, however, based on a raft of assumptions, and the report's authors, Treasury and the Department of Finance, have Panglossian predicting form.
The July 2010 PEFO predicted a surplus of $3.5 billion in 2012-13. The actual result was a $41.4 billion deficit. It predicted a $4.5 billion surplus in 2013-14. The new PEFO predicts a deficit of $30.1 billion.
It was the revenue estimates that went most badly awry, as spending shifted from consumers who pay tax to businesses that can claim tax concessions, as paper capital gains were vaporised by the crisis, as credit expansion collapsed, and as the Australian dollar stayed stronger for longer than expected, defying a slide in commodity prices and the terms of trade, and delaying a baton pass from the resources investment boom to the non-resources sector.
The question is how much forecasting risk still exists, and there are some brave assumptions in the new outlook.
The two government departments predict that Australia's terms of trade will fall by only 5.75 per cent and 3.75 per cent respectively this financial year and next, and they assume that a threefold carbon price rise will deliver $9.7 billion of revenue in the three years to 2016-17. They raise predicted receipts from a Minerals Resource Rent Tax that might be generating more tax credits than income right now by $150 million over the next two years, and expect it to rake in $5.95 billion over four years. Their forecast of 2.75 per cent GDP growth in the two years to next June is bracketed by a 2 per cent to 3.75 per cent range that they say has a 70 per cent probability.
Some of the factors that caused the 2010 PEFO to be so wrong were once-offs. A shift up in household savings that depressed consumer spending while it was happening is now over, for example. The $A is 13.5 per cent below its mid-April levels, and share prices and house prices have been rising, pulling capital gains back into the frame.
Fears of a northern hemisphere recession are meanwhile receding. America's recovery is already translating to significant national balance sheet improvement. The US budget deficit topped out at 10.1 per cent of GDP in 2009. It is now 4.2 per cent of GDP, driven by a stronger mix of the fiscal restraint and improving revenue that PEFO also applies in its forecast of a return to surpluses in Australia by 2016-17. Europe is also showing signs of economic recovery and China's most recent data was promising.
Who knows? If the global recovery continues, PEFO's growth outlook may turn out to have been conservative. If it turns out to be wildly over-optimistic again however, commitments both sides are giving to not countenance a rise in the goods and services tax that could probably underwrite a fiscal repair job and personal income tax cuts would surely have to be reviewed. A new government of either persuasion would be under pressure to do the obvious thing, and push the GST higher.