The 2017 budget’s inconvenient truth

It’s shaping up to be an atypical year, 2019-20.


In this year and the two that follow, government spending is forecast to grow by 2.3 per cent per year over and above inflation, which is pretty normal. But in 2019-20, for one year only, the budget tells us that number will drop to 0.9 per cent, before bouncing back to 2.1 per cent.

That curious dip, for one year only, is enough to push down the projected 2019-20 deficit from $10.5 billion to $2.5 billion and to turn what would have been a deficit in 2020-21 into a surplus.

Neat, eh?

And it’s not the only convenient oddity.

Family benefit payments are projected to decline over the next four years, rather than increase as is usual.

“I’ve been forecasting these budget lines for a long time, and I’ve never seen anything like it,” Industry Super analyst Stephen Anthony told a Melbourne post-budget forum on Wednesday. Anthony used to forecast budget numbers for Treasury and the Reserve Bank.

Wage growth, which in figures released on Wednesday sank ever so slightly lower, from a record low of 1.874 per cent to a new record low of 1.865 per cent, is projected in the budget to jump to 3 per cent and then to 3.75 per cent.

Wages drive tax collections. The outsized projections have personal tax collections climbing to 12 per cent of GDP; the most this century and more than at any point during the two mining booms.

The Grattan Institute’s Danielle Wood says if something more likely is projected, like wage growth of around 2 per cent, which is what we’ve had for the past three years, the projected surplus disappears.

The Reserve Bank was keen to point out in typically guarded remarks in this week’s board minutes that it’s unreasonable to expect wage growth to bounce back from its record low (lower than the rate of inflation) in the way it once would have.

“The share of part-time employment in Australia, which had increased from around 10 per cent in the early 1970s to over one-third at present, was relatively high by international standards,” it said. “Especially for younger workers.”

Workers no longer have the bargaining power they once did. Trade union membership has plunged from 40 per cent to just 15 per cent.

Anthony says if he makes only “slight tweaks” to make the assumptions that underlie the budget projections more realistic he can’t find a surplus at any time in the next 10 years or beyond.

“I know the parameters that underpin the projections,” he told the budget forum. “I have talked to the Parliamentary Budget Office. “If I readjust the things that have been adjusted to move the budget to balance, what I get is an exploding deficit.”

“And this is with an economy that is growing consistently for 26 years and is forecast to do so for time immemorial. We’ve got really strong terms of trade relative to the historical norm. God help us if things turn south.”

ANU economics professor Bob Gregory says until the global financial crisis the budget more or less took care of itself.

He has produced a graph of government spending and income going back to the start of the 1970s. It shows that the size of government shot up dramatically with the election of Labor’s Gough Whitlam as prime minister in 1972 and didn’t fall back after he was sacked and replaced with the Coalition’s Malcolm Fraser. Before Whitlam, the Commonwealth collected and handed back around 20 per cent of GDP. After Fraser it was 25 per cent. if(“undefined”==typeof window.datawrapper)window.datawrapper={};window.datawrapper[“RDip5”]={},window.datawrapper[“RDip5”].embedDeltas={“100″:534.8,”200″:467.8,”300″:424.8,”400″:424.8,”500″:399.8,”600″:399.8,”700″:399.8,”800″:399.8,”900″:399.8,”1000”:399.8},window.datawrapper[“RDip5”].iframe=document.getElementById(“datawrapper-chart-RDip5”),window.datawrapper[“RDip5”][“RDip5”].embedDeltas[Math.min(1e3,Math.max(100*Math.floor(window.datawrapper[“RDip5″].iframe.offsetWidth/100),100))]+”px”,window.addEventListener(“message”,function(a){if(“undefined”!=typeof[“datawrapper-height”])for(var b in[“datawrapper-height”])if(“RDip5″==b)window.datawrapper[“RDip5”][“datawrapper-height”][b]+”px”});

It shot up because we wanted to spend in entirely new fields such as single parent pensions, disability pensions and Medibank. Once it had, there was no turning back (although Fraser succeeded in briefly turning back Medibank before Hawke reinstated it as Medicare).

Gregory says what’s remarkable, from today’s standpoint, is how easy it was.

Before the crisis, revenue had a way of automatically catching up with spending. Not immediately, but within a couple of years of each extra bout of spending, revenue bounced up towards it.

That stopped in 2008. Revenue collapsed and spending exploded. But instead of getting back together as had happened in the past, the two lines on the graph stayed separate and have run more or less in parallel ever since.

Shane Wright, economics editor of the West Australian, has dug into what’s odd about the fortuitous projections for 2019-20. He finds that between the last budget and this one the government has revised down spending on the age pension that year by $2 billion, spending on the national disability insurance scheme by $2 billion, spending on support for carers by $1.3 billion and spending on defence equipment by $1 billion.

It might be a way of cooking the books. It might be because they’ve received genuine new information. It shields us from the inconvenient truth that we’re going to need much bigger tax increases or much worse budget cuts than they’re prepared to admit.

Peter Martin is economics editor of The Age.

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