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MYEFO: Hockey’s budget blows out

Joe Hockey has drawn a line under the Labor era and set the new government an enormous task to bring the budget back into surplus with the release of mid-year economic outlook figures.

The Abbott government’s first Mid-Year Economic and Fiscal Outlook has been released today, and features a $16.8 billion budget blowout driven by a weaker economy and spending decisions.

Treasury has downgraded its forecasts for nominal GDP but revised down its unemployment estimate this year. Real GDP will be 2.5% this year as forecast in the Pre-Election Economic and Fiscal Outlook (PEFO) in August, but has been revised downward to 2.5% next year; nominal GDP growth has been revised down a quarter of a percent this year and a full percentage point next year.

Across the forward estimates, the government will rack up $123 billion in deficits, and it has given up on the PEFO projection of a small surplus in 2016-17; instead, there will be double-digit billion-dollar deficits for the next four years. This year will see a blowout of nearly $11 billion in additional spending, the bulk of it Treasurer Joe Hockey’s handout of nearly $9 billion to the Reserve Bank.

The biggest cuts to revenue have come not from lower company tax, for once, but from forecast lower income tax receipts, which will cost over $3 billion, lower superannuation tax returns, and yet another writedown of the mining tax.

A comparison of the forecasts and estimates from August’s Pre-Election Economic and Fiscal Outlook, prepared independently during the caretaker period by Treasury and Finance, reveals the extent to which Hockey has presided over a dramatic writedown both of revenue and expected economic performance in 2013-14 and 2014-15:

  • Real GDP: PEFO 2.5% and 3% MYEFO 2.5% and 2.5%
  • Nominal GDP: PEFO 3.75% and 4.5% MYEFO 3.5% and 3.5%
  • Unemployment: PEFO 6.25% and 6.25% MYEFO 6% and 6.25%
  • Revenue: PEFO $379.9 billion (24.2% of GDP) and $397.7 billion (24.3%) MYEFO $373.9 billion (23.7%) and $387.9 billion (23.8%)
  • Spending: PEFO $401.5 billion (25.6% of GDP) and $416 billion (25.4%) MYEFO  $412.1 billion (26.1%) and $417.8 billion (25.6%)
  • Deficit: PEFO $30.1 billion and $24 billion MYEFO $47 billion and $33.9 billion

The key reason why Treasurer Joe Hockey has presided over a massive blowout in expected deficits over the next four years has nothing to do with Labor, and very little to do with his own spending — which admittedly has gone up nearly $11 billion this year in just 100 days.

No, the key reason is that forecasts for nominal GDP growth have been revised down, and revised down a lot.

In the Pre-Election Economic and Fiscal Outlook released by Treasury and Finance in August, untouched by political hands, budget deficits were expected to total about $55 billion over the next four years, with a small, almost notional, surplus in 2016-17. That’s now turned into $123 billion worth of deficits under Hockey. And nominal GDP growth forecasts have also changed dramatically. In PEFO, they were 3.75%, 4.5%, 5.25% and 5.25% for this year through to 2016-17. Now nominal GDP is forecast to be 3.5%, 3.5% 4.75% and 4.75% for the same years. They are the lowest nominal GDP forecasts since the global financial crisis.

This has a massive impact on revenues, which are very sensitive to changes in nominal GDP growth. Revenue will be $6 billion lower this year, $10 billion next year, $16 billion in 2015-16 and $19 billion in 2016-17.

In comparison, even including this year’s nearly $11 billion blowout, spending is only forecast to rise $20 billion in total beyond PEFO estimates. The deficit blowout is mostly driven by the government’s own decisions this year, but by downward revenue revisions in later years.

Nominal GDP isn’t the only area where Treasury has dramatically lowered expectations. Household consumption is forecast to grow 0.5 percentage points less than the 2% forecast in PEFO this year and a quarter of a percent lower next year. Housing construction is expected to grow by only 3% rather than 5% as forecast in August, although the forecast for next year remains unchanged. Flat business investment this year is now predicted to be negative, and a small fall in investment next year is now a larger one; ditto machinery and equipment investment this year, although it’s expected to grow more strongly next year. Terms of trade are expected now to fall a little less than forecast in August, but a lot more in 2014-15.

That is, in almost every forecast, Treasury has lowered its forecasts, often dramatically, for the performance of the Australian economy — except, oddly, in unemployment, which is now expected not to reach the 6.25% forecast back in May until 2014-15. Inflation, too, is now forecast to be a little stronger this year than previously expected.

In opposition, Joe Hockey and the Coalition derided the laments of Wayne Swan that Treasury kept writing down revenue on him, making it impossible to return to surplus. They would make sure Treasury offered more pessimistic forecasts, Hockey said, in order to avoid downside surprises on revenue.

That’s one interpretation of this MYEFO: that Hockey has demanded Treasury slash its forecasts and give him the worst-case scenario for revenue.

Another is that Hockey has insisted on the worst possible forecasts in order to blame Labor for the mess he inherited, and set a low bar to get over when reality turns out to be better than expected. It’s much easier to conjure stronger growth and a better budget outcome if you’ve forecast a looming disaster.

That’s a smart political strategy, but there’s one significant danger. Consumers may hear Hockey’s warnings of impending fiscal chaos and react by pulling their heads in even further, with household savings already at or near record highs. The downward revisions in household consumption could become a self-fulfilling prophecy, with knock-on effects on retail, in particular (one of the biggest-employing sectors of the economy).

It might be better for all of us if Australians are too preoccupied with Christmas and the cricket to pay much attention.

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  • 1
    Jimmy
    Posted Tuesday, 17 December 2013 at 1:37 pm | Permalink

    The Abbott government’s first Mid-Year Economic and Fiscal Outlook has been released today, and features a $16.8 billion budget blowout driven by a weaker economy and spending decisions.” Yeah sounds like it was the ALP’s fault to me!
    And we haven’t yet got to scrapping the carbon and mining taxes while shelling out billions for direct action and the PPL!

  • 2
    zut alors
    Posted Tuesday, 17 December 2013 at 2:18 pm | Permalink

    Watched the Hockey/Cormann press conference & was even less impressed than expected.

    Notably, Hockey didn’t answer Mark Kenny’s question about whether the RBA requested the extra $9Billion amd whether Hockey had the letter to prove it. Instead we heard bluster about the low level of RBA reserves which had occurred under the Labor govt blah blah blah…

    Notice how Abbott & Co won’t talk about themselves, they swing off on a tangent to criticise the former govt rather than clarify their own policies.

  • 3
    michael r james
    Posted Tuesday, 17 December 2013 at 2:20 pm | Permalink

    Even News Ltd David Crowe today ascribes $18.7 bn of spending/outlay decisions on the Coalition in their 100 days in power.

  • 4
    Dogs breakfast
    Posted Tuesday, 17 December 2013 at 2:43 pm | Permalink

    The $9B to the RBA is neither here nor there. Although it will appear in the accounts, it hasn’t left Australia, it’s just a transfer of funds.

    But the rest, ha, apart from being Labor’s fault from time immemorial, is largely about world conditions as much as local conditions, and the coalition blamed Labor for that, so they can take the blame for it now that they are in government.

    As much as I don’t want to see Oz go down the drain, the hypocritical sniping they did in opposition leaves them exposed. If it was good enough to blame Labor, it’s now good enough to blame the coalition.

    Stuff ‘em.

  • 5
    seriously?
    Posted Tuesday, 17 December 2013 at 3:01 pm | Permalink

    Re dogs breakfast - couldn’t agree more. This government as opposition wrote the rules on negative, simplistic, cynical politics but don’t seem to like it when the tables are turned on them.

  • 6
    Jimmyhaz
    Posted Tuesday, 17 December 2013 at 3:18 pm | Permalink

    Gee, falling revenues, low inflation, heightened unemployment and reduced GDP growth. It’s almost as if government spending is the sole driver of a fiat economy with a sovereign currency and a trade deficit.

    You would think that they would look at this and realise that the federal government should never, under any circumstances, post a surplus, but their continued slavish devotion to returning to surplus reinforces my thoughts that it is far more about slashing welfare and public services rather than any notion of fiscal responsibility.

  • 7
    cphards
    Posted Tuesday, 17 December 2013 at 3:22 pm | Permalink

    why doesn’t Jo invite his mates over to the treasury to write their MYEFO..oh sorry..he has done that already. I am totally disgusted at the greed of this govt for their wealthy mates while they leave the scrap heap to grow!

  • 8
    LeighE
    Posted Tuesday, 17 December 2013 at 4:57 pm | Permalink

    Apart from “warnings of impending fiscal chaos”, the other thing that’s going to move consumers to pull their heads will be a growing sense of unease surrounding job security.
    After Holden, Toyota? Qantas? Health? Education?

  • 9
    westral
    Posted Tuesday, 17 December 2013 at 6:56 pm | Permalink

    So where is the promise of returning the budget to surplus in four years now - Abbott is the victim of his own one liner policies that were never realistic in the current economic climate.

  • 10
    klewso
    Posted Tuesday, 17 December 2013 at 7:40 pm | Permalink

    Look over there!”?
    And what better time to give Miraball a job on the board of ASC P/L? What she wouldn’t know about submarines?

  • 11
    klewso
    Posted Tuesday, 17 December 2013 at 7:41 pm | Permalink

    Abbo’s little mole”?

  • 12
    Steve777
    Posted Tuesday, 17 December 2013 at 8:07 pm | Permalink

    Joe Hockey should have used the write downs as an excuse to drop Paid Parental Leave and Direct Inaction and to keep Carbon Pricing and the Mining Tax for another couple of years.

    Other things he could do: drop the Captital Gains Tax discount; wind back Superannuation tax concessions back to compensating superannuants for not drawing the pension; phase out negative gearing; wind back subsidies for elite private schools; phase out the private health insurance rebate; have a close look at tax loopholes for big business; abolish concessions like novated leases - if someone is paid in kind, tax them the same as if they were paid in cash.

    If we have a genuine ‘budget emergency’ Joe Hockey needs to seriously consider a list like this.

  • 13
    Steve777
    Posted Tuesday, 17 December 2013 at 8:15 pm | Permalink

    Re Zut Alors (No 2 above): if Joe Hockey didn’t answer the question on whether the RBA asked for an injection of $9 billion we are entitled to place the most unfavorable construction on what if anything, transpired, i.e they didn’t ask.

  • 14
    klewso
    Posted Tuesday, 17 December 2013 at 8:26 pm | Permalink

    That RBA investment? A “down-payment on a CRISIS!!!!!”?

  • 15
    Suzanne Blake
    Posted Tuesday, 17 December 2013 at 9:06 pm | Permalink

    What a mess Rudd, Gillard, Swan and Bowen have left. They have done a runner and left us in the hole.

    Just like Keating in 1996.

    Now Gillard is sunning herself in a ocean front house at Glenelg in Adelaide. Funny, that Keating, Hawke and now Gillard are all in beach or harbourside houses. The battlers they are.

  • 16
    Hamis Hill
    Posted Wednesday, 18 December 2013 at 7:33 am | Permalink

    The “Inevitable Abbott Recession” creeps closer.
    You’d think someone would have mentioned this to the voters, before it was too late?

  • 17
    klewso
    Posted Wednesday, 18 December 2013 at 8:31 am | Permalink

    Howard-Wooldridge-Nelson necessary cuts” all over again?
    To education, home grown doctor numbers (to protect incomes?), more Patels?

  • 18
    klewso
    Posted Wednesday, 18 December 2013 at 8:33 am | Permalink

    Did anyone mention “The War of the Shilling” - and what that’s cost us since Howard took us there?

  • 19
    Suzanne Blake
    Posted Wednesday, 18 December 2013 at 8:35 am | Permalink

    I agree Mirabella would know as much as Sgt Schultz about submarines. Can’t imagine her doing and inspecting inside it either, maybe OK on the deck

  • 20
    Jimmy
    Posted Wednesday, 18 December 2013 at 8:46 am | Permalink

    SB - If you think this is a mess that is of the ALP’s creation you once again show your complete ignorance!

    And what happenned to all that business and consumer confidence that was supposed to drive the economy now that the Libs are in charge?

  • 21
    Suzanne Blake
    Posted Wednesday, 18 December 2013 at 8:53 am | Permalink

    @ Jimmy boy

    Next you will be denying death and taxes!!

    Of course those Labor / Green muppets are to blame. Not one piece of legislation has passes, so how can you blame the new Govt?

    Labor said no boat arrivals would be able to get Australian residency, they did not budget for the Manus etc cost, so there goes another billion.

    Laughable your analysis again. Please remove blinkers

  • 22
    Jimmy
    Posted Wednesday, 18 December 2013 at 10:53 am | Permalink

    SB - Look at the difference between the August PEFO and the Dec MYEFO - $17b blowout and $8.8 is due to Hockey giving the money, another roughly $2b is due to another decisions made by the new govt and the rest is due to a loss of revenue due to a slowing economy which is beyond the control of any govt.
    Furthermore if you looked at the underlying structural deficit that is causing the problem it was created by the Howard govt largess in making permanent expenditure (reduced taxes and increased middle class welfare) from the proceeds of a temporary boom!
    Additionally right now we aren’t really in a mess, growth is reasonable, unemployment is low, debt is low, inflation is low - the mess is yet to come and it is the decisions that are made now that will determine how big the mess gets.

    You are right about one thing - there has been no legislation through so just imagine what happens to the deficit when Abbott cuts the income form the mining and carbon taxes and adds the expenditure of direct action and the PPL.

    Of and you didn’t say what happenned to the confidence lead boom?

  • 23
    Suzanne Blake
    Posted Wednesday, 18 December 2013 at 3:03 pm | Permalink

    @ Jimmy

    The difference between PEFO and MYEFO is 90+% cause Labor did not fund items they committed to, like stop the boats and others. Also because of pre-election giveaways

  • 24
    Hamis Hill
    Posted Wednesday, 18 December 2013 at 4:46 pm | Permalink

    So, Suzanne, got plans to spend the recession selling bankruptcy priced real estate to cashed up overseas buyers?
    Somebody has got to do it, why not you or your friends?

  • 25
    Suzanne Blake
    Posted Wednesday, 18 December 2013 at 10:16 pm | Permalink

    @ Hamis Hill
    Comment:
    So, Suzanne, got plans to spend the recession selling bankruptcy priced real estate to cashed up overseas buyers?
    Somebody has got to do it, why not you or your friends?

    Hamis, I don’t own any property to sell. Have no real estate experience and certainly would not sell off Australia to foreigners or be part of it. They are already buying up huge tracks of rural land and our Governments are asleep for fear of being called racist

  • 26
    Jimmy
    Posted Thursday, 19 December 2013 at 9:11 am | Permalink

    SB - You are the only person of that view - Alan Kohler had the $47b deficit as 38% Liberal 62% Labor - basically the $30b PEFO was labor and the additional $17b was liberal.
    Ross Gittins is another of a similar view.

    Look at any credible analysis and you will see the blow out is enitrely down to dwon grading future growth (which the current govt does have some control over although a lot is due to global conditions) and decisions the new govt has taken - and that is before we get to direct action orthe PPL.

    And still no comment on what happenned to the massive surge in consumer and business confidence that was supposed to increase growth enough to pay down the debt?

  • 27
    Jimmy
    Posted Thursday, 19 December 2013 at 9:13 am | Permalink

    SB - You are the only person of that view - Alan Kohler had the $47b deficit as 38% Liberal 62% Labor - basically the $30b PEFO was labor and the additional $17b was liberal.
    Ross Gittins is another of a similar view.

    Look at any credible an al ysis and you will see the blow out is enitrely down to dwon grading future growth (which the current govt does have some control over although a lot is due to global conditions) and decisions the new govt has taken - and that is before we get to direct action orthe PPL.

    And still no comment on what happenned to the massive surge in consumer and business confidence that was supposed to increase growth enough to pay down the debt?

    And I am shocked a successful foresnic auditor like you has never been able to acquire property? But for the record I don’t think an agent has to own the property to make money off selling it - which is what Hamis was what I think Hamis was getting at.

  • 28
    Sir Lunchalot
    Posted Thursday, 19 December 2013 at 10:39 am | Permalink

    @ Jimmy

    The surge in confidence after the election has dimished, as we come to terms with the fact that the position Labor has left us in is much worse then they said it was.

    No one should be surprised, Swan missed EVERY budget number EVERY year, and some by more than double.

    So consumers and businesses are now aware that we need massive savings to return budget to at least balance, and that will now take a decade.

    Same hole Keating left us in, 17 years ago.

  • 29
    Jimmy
    Posted Thursday, 19 December 2013 at 10:49 am | Permalink

    Sir Lunchalot - Costello missed EVERY budget number EVERY year and some by more than double!

    My point regading confidence was that prior to the election I pointed out how the liberals policies did not fit into their pay down the debt narrative (ie they were promising to cut taxes and increase spending) SB’s answer was that the increase in consumer & business confidence would drive growth and increase revenue.

    Now confidence hasn’t risen, the MYEFO is factoring in lower revenue form lower growth (the biggest factor in the change between PEFO and MYEFO) and this new govt hasn’t outline any significant net savings and still has no economic policy to speak of.

    The loss of confidence is nothing to do with Hockey’s con on MYEFO (ie that the ALP supposedly left a mess) and everything to do with the fact this new govt’s economic direction is largley unknown and what is known doesn’t make sense.

    And could you answer this - if the economy is slowing and the new govt signiifcantly cuts expenditure what happens to our future growth?

  • 30
    Hamis Hill
    Posted Thursday, 19 December 2013 at 1:03 pm | Permalink

    Suzanne, you don’t really understand conservatives.
    You could star in modern Shakespearian tragedy, supporting that which you do not understand, and inevitably suffering for your misplaced trust.
    But hang on that’s post medieval, not part of the new political landscape.
    But the only jobs in the “inevitable Abbott Recession” will be selling real estate.
    It’s a sort of real estate agent government.

  • 31
    Jimmy
    Posted Thursday, 19 December 2013 at 3:53 pm | Permalink

    SB & Sir Lunchalot - have a look at this editorial by Michael Pascoe today - it might enlighten you.
    “A barista for everyone : Why Australia’s economy is looking far from bleak”

  • 32
    Suzanne Blake
    Posted Monday, 23 December 2013 at 9:12 pm | Permalink

    Looks like Hockey made a good call on Archer Daniels and Graincorp. More charges of wrong doing

    http://www.theland.com.au/news/agriculture/agribusiness/general-news/adm-charged-with-bribery/2682737.aspx

  • 33
    Sam Hoang
    Posted Friday, 3 January 2014 at 10:48 am | Permalink

    Blaming the former government for budget deficit until 2017 is just an excuse to explain for the Abbott government’s shortcoming in economic management and improper policies, which are cutting taxes (carbon and mining tax) for ‘’rich people’’ and cutting funding for poor people who are vulnerable in society and need support to sustain well-being.

    Prime Minister Tony Abbott used to say ‘‘A healthier Australia means a stronger and more productive Australia’’ (Coalition’s policy to support health system, 2013). And “Mental illness is a crucial issue, both for those workers who are affected, but also for the overall productivity of Australia” (Michael Borowick – assistant secretary of Australian Council of Trade Union, 2013). But half a billion dollars from health budget has been cut and NIDS program which is to support people with a range of disabilities, including a psychosocial disability related to mental illness is currently delayed. So I’m unsure of how this government can help Australian people sustain and improve their well-being when they are living in a more polluted environment and a weaker social welfare system (health budget cuts)? How can Australia develop toward productivity and sustainability when many Australian people suffer mental health illness but cannot access services they require?

  • 34
    Jimmyhaz
    Posted Sunday, 5 January 2014 at 7:43 pm | Permalink

    That’s what this is all about Sam, this government is all about wealth redistribution, that is, distributing it from the poorest to the wealthiest.

    I think that what it all boils down to in the end, is the standard conservative ultra-simplistic view of the world, black-and-white, with everyone getting what they deserve based on their relative merits.

    This is of course, total rubbish (I mean, I’d like to believe that I’ve earnt everything I currently possess, but I can’t help but feel that the circumstances of my birth made it all but inevitable), but it is this world-view that allows them to cut public services for the neediest, slash taxes on the wealthiest (after all, they earned it!), and continue to push for ever-increasing punishments in the form of jail-time and financial impositions upon minor criminals, as all criminals are bad people regardless of circumstance.

    On top of that, it’s this black-and-white mentality that makes them so electable, as they provide simple, easily translated solutions to ultra-complex, multifaceted problems (such as the economy, who knew that the solution to all of our economic woes was a budget surplus! Certainly not any academic, that’s for sure).

    I honestly think that what we can draw from all this is that we are reaching the ends of democracy, the problems we are facing, and those that we will face in the future, require far more specialised, compartmentalised knowledge than your average voter can ever be realistically expected to educate themselves on.

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