Why Hockey dodges budget bullet
Starting with the worthy ones, Hockey is perfectly justified in saying the outlook for the economy as it makes the transition to more normal sources of growth is far too uncertain, and the consequent forecasts and projections for the budget balance shown in Treasury's pre-election economic and fiscal outlook far too unreliable, to provide any sensible basis for such a commitment.
Everything Treasury said in the outlook about its uncertainty and the fallibility of its forecasts confirms the foolishness of treating the latest estimates as offering anything but the roughest of rough ideas of what the future holds.
What Hockey is not justified in doing is impugning the professional competence of Treasury - when it comes to guessing the future, the econocrats are at least as good as the rest - or implying it had been got at by its political masters. Nor is he justified in telling the punters that wrong forecasts equal economic mismanagement and profligate spending by Labor.
The second worthy reason for the Coalition parties to make no firmer commitment than their uncheckable promise to always do better than Labor is that, despite their fear campaign on the evils of deficit and debt, sensible fiscal policy tells us there's no urgency about getting the budget back to surplus.
When the Rudd government laid out its "deficit exit strategy" in its second big fiscal stimulus package in February 2009, it specified that the strictures it would impose on itself - to avoid more tax cuts and limit the real growth in government spending to 2 per cent a year - wouldn't take effect until the economy had turned up and was back to growing at its medium-term "trend" rate (3 per cent a year).
For as long as it seemed the economy had returned to growth at or near trend, it was reasonable to stick to those strictures and thereby do nothing to hinder the budget's automatic stabilisers in their role of returning the budget to surplus as the expansion proceeded.
With hindsight, however, it is clear growth has reached or exceeded 3 per cent only in one year - 2011-12 - since the global financial crisis hit in 2008-09. It was well below trend in the first three years. For the past financial year growth is now expected to be 2.75 per cent, falling to 2.5 per cent in 2013-14.
This below-par performance was concealed by Treasury's persistent over-forecasting of real growth. And that's before you get to its recent over-forecasting of the growth in nominal gross domestic product - and thus tax collections - because it underestimated the fall in export prices.
The point is that the bipartisan "medium-term fiscal strategy" simply requires governments to let the automatic stabilisers do their job of returning the budget to surplus without hindrance by explicit policy decisions.
You don't make the deficit worse - after any initial temporary stimulus - but nor are you required to hurry things along except to the extent that you're acting to reduce any structural - that is, longer-term - component of the deficit once strong growth has resumed, and such efforts won't be counterproductive ("pro-cyclical") as they've proved to be in Europe.
Of course, none of this absolves the Coalition from its obligation to show how it will pay for its election promises, with costings done by the Parliamentary Budget Office and consistent with Treasury's costing conventions - as applied to their Labor opponents - not fudged-up costings supposedly audited by some underqualified, little-known firm of accountants, as in the last election, nor some panel of retired worthies with no access to the multitude of data needed to cost programs with any accuracy.
And the unworthy reasons for avoiding any firm commitment on when an Abbott government would get the budget back to surplus? I can think of three. Because it's a safe bet the Coalition parties intend to put their debt-and-deficit rhetoric on the back burner as soon as they're back in power and the fear campaign has served its purpose.
Because, even in government, Tony Abbott is likely to prove an incorrigible populist with little interest in or sympathy for the precepts of rational economics. As is clear from the way he keeps departing from the agreed line in this campaign, Hockey, Arthur Sinodinos and Malcolm Turnbull would have an unending struggle trying to keep the boss up to the mark. He could easily prove worse than Kevin Rudd in fiscal indiscipline.
And, finally, because an Abbott government would have handicapped itself so badly on the tax side of the budget that fiscal responsibility would require a degree of continuing restraint on the spending side of which no flesh-and-blood government is capable.
Twitter: @1RossGittins
Frequently Asked Questions about this Article…
Hockey said the economic outlook is too uncertain and Treasury's pre‑election forecasts are too fallible to justify a firm surplus date. The article explains that when forecasts are unreliable, committing to a specific timetable for returning the budget to surplus is not sensible.
The article notes Treasury has a history of over‑forecasting real growth and recently over‑forecasting nominal GDP because it underestimated the fall in export prices. For investors, that means official budget projections should be treated as rough guides rather than precise predictions.
Automatic stabilisers are built‑in fiscal mechanisms (like tax receipts rising and welfare payments falling as the economy improves) that help return the budget to surplus as growth resumes. The bipartisan medium‑term fiscal strategy described in the article recommends letting these stabilisers work without hasty policy changes.
No. The article argues sensible fiscal policy suggests there is no urgent need to force a quick return to surplus. Instead, governments should avoid pro‑cyclical measures and focus on reducing structural deficits only once strong growth is sustained.
The piece points out that since the global financial crisis, growth exceeded 3% only in 2011‑12; recent years were below trend. The latest expected growth was about 2.75% for the past financial year and 2.5% for 2013‑14, which helps explain why forecasts and tax revenue projections were optimistic.
The article insists the Coalition must provide credible costings for election promises, done by the Parliamentary Budget Office and consistent with Treasury conventions. It criticises relying on underqualified firms or ad hoc panels that lack access to the necessary data.
The article suggests three unworthy reasons: the Coalition may shelve debt‑and‑deficit rhetoric after winning power; Tony Abbott could act as a populist, departing from agreed fiscal discipline; and tax changes the Coalition proposes might force spending restraints that a real government would struggle to sustain.
Investors should monitor the credibility of official forecasts, corrections to growth and nominal GDP estimates, and whether costings for policy promises are produced by the Parliamentary Budget Office using Treasury conventions. These factors influence fiscal policy, tax revenue projections and market confidence.
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