The Piffle statement

The PEFO’s return to surplus is obviously based on false assumptions, but what’s a non-core promise or two between national leaders and their voters?

Yesterday’s Pre-election Fiscal Outlook PEFO statement should be renamed the Piffle statement: it is a triumph of hope over experience, guesses over reality.
Despite the fact that both parties are promising to increase spending and to not cut anywhere – beyond relatively minor “efficiency dividends” from the public service – and to not increase taxes, but instead to cut them, Treasury is forecasting that spending growth will drop suddenly from 8 per cent a year to less than 4 per cent from now on, and that revenue growth will increase from 4 per cent a year to 6.5 per cent.
It is pure fantasy and virtually guarantees that the budget will remain in deficit.
Australian national government is currently running at a $30 billion loss because the average annual growth in revenue fell from 7.4 per cent in the decade to 2007 to 4 per cent over the following six years, while spending growth kicked up from an average of 6.2 to 8 per cent a year.
And it’s going to keep running at a loss because the return to a surplus in 2016-17 is based on the obviously false assumptions that the annual increase in spending will fall back to 3.66 per cent and that annual revenue growth over the next few years will rise to 6.5 per cent.
Another way of looking at it is that if revenue as a percentage of GDP was 25.5 per cent as it was in 2002-03, instead of the 23.2 per cent that it is now, revenue would be $40 billion higher, and the budget would be $10 billion in surplus.
That fall in revenue as a percentage of GDP was not forecast nor prepared for; in fact spending growth increased sharply and stayed there. Now it’s forecast to decline, without any policy measures to support that forecast.
A big part of it is due to a sudden drop in the forecast unemployment rate between 2014-15 and 2015-16 from 6.25 per cent to 5 per cent, which Treasury more or less admits won’t happen.
Forecasts of the labour market were not published until the 2002-03 budget. In yesterday’s PEFO, Treasury says: “Since then, the assumption that the unemployment rate would settle at around 5 per cent in the projection period has been maintained, with the exception of the 2009-10 Budget.”
In other words, Treasury always forecasts a 5 per cent unemployment rate. In the 2009-10 budget (that is, in May 2009, when everyone was very gloomy) unemployment was forecast to rise to 8.5 per cent, which turned out to be very wrong. So, back to the old 5 per cent standard forecast.
During the Howard government, nominal spending growth averaged 6.2 per cent a year, according to the PEFO. During the Rudd/Gillard government it averaged 8 per cent a year.
The Howard growth was set up by a near zero (0.6 per cent) increase in spending in its first budget; without that, the average growth in spending was 6.8 per cent a year – still a lot less than Labor’s.
During the Howard years, revenue growth averaged 7.4 per cent a year because of the minerals boom. Over Wayne Swan’s years it averaged 4 per cent a year because of the GFC.
Yet spending growth kicked up from 6.2 per cent to 8 per cent, thanks mainly to a 16 per cent lift in spending in 2008-09.
Needless to say, neither party is proposing to address the problem with the budget during this election campaign. In fact both are proposing to increase spending or cut taxes while – so far – mumbling about possible revenue to match it.
That especially applies to the Coalition. It has promised to repeal the carbon and mining taxes and the tighter FBT on cars, and to cut company tax. Also the Coalition has promised to match Labor’s proposed increased spending on education, spending $17 billion extra on infrastructure and introduce a fully paid parental leave scheme.
Tony Abbott and Joe Hockey are no doubt hoping they can get through the campaign without actually saying they plan to do what Howard and Peter Costello did in 1996-97 – that is, bring down a budget that has zero spending growth, or perhaps even less.
And no doubt they have in mind John Howard’s old gag about core and non-core promises, which was quite useful back then.
But if unemployment doesn’t fall to 5 per cent – suddenly, as forecast by Treasury – they’ll all have to be non-core.


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