One question which you could raise is this. If Costello were CEO or CFO of a publicly-listed
Company, and he sat – for more than 3 months – on knowledge that the
company’s end-of-year financial result was materially very different
from that expected by market, or from that foreshadowed by earlier
‘guidance’, he would be guilty of a pretty serious offence, would he

Could it not be argued that the market in Commonwealth securities
(bonds) has been seriously mis-informed, no less than the market in BHP
Billiton’s shares would have been mis-informed if (hypothetically) Chip
Goodyear had known for three months, but kept silent, the ‘fact’ that
BHP Billiton’s earnings were several billion dollars higher than the
consensus of market expectations?

Why, in this as in so many other respects (to do with financial
reporting), is the Government not bound by the same laws and
regulations that governments impose on corporations?



Attached as promised is a file showing the extent of Costello’s
forecasting “misses” for the key Budget aggregates, in both $mns and
percentage terms. On average since 1999-00 (when accrual accounting was
introduced), his full year-ahead projections of the underlying cash
balance have been out by over 200%; the Mid-Year Economic and Fiscal
Outlook projections (typically made about 7 months before the end of
the financial year) have been out by a factor of almost 200%; and the
projections made in the budget for the following financial year (ie,
about seven weeks before the end of the financial year) have been out
by a factor of around 75%. To be fair, the underlying cash balance is
the difference between two numbers (outlays and receipts) which are
each in the vicinity of $200bn, so that relatively small errors in
either (say, of the order of 1-3%) will produce relatively large
‘misses’ in the ‘cash balance’ projection.

Also note that the final outcome has almost always been “better” (ie a
larger surplus) than projected, whether in the original budget, MYEFO
or the budget for the following financial year – with the exception of
2001-02 which was the year when the economy slowed unexpectedly and the
budget went into deficit. Typically, the Government underestimates
revenues (which, again to be fair, are harder to estimate accurately
than outlays since they are more dependent on economic parameters).
Treasury says it now “understands” better why it has consistently
underestimated revenues, so perhaps we can expect more “accurate”
projections of the cash balance henceforth. However the record also
suggests that, in the event of an unanticipated downturn in the
economy, there would likely be a nasty surprise in the opposite
direction for the budget bottom line (although, of course, a smaller
surplus or even a deficit would probably be appropriate in the event of
a downturn in the economy).

I’ve also included a separate spreadsheet showing long-term historical
budget data. These show among other things that Commonwealth taxation
revenue including revenues from the GST (which the Feds continue to
pretend is not a Commonwealth tax, contrary to the accounting
standards, the ABS GFS guidelines and the Auditor-General, but which
you can get from Chapter 4 of the Final Budget Outcome document)
amounted to 25.8% of GDP in 2004-05. That exceeds the previous record
of 25.5% of GDP set in 2000-01. The claim that this makes the Howard
Government the highest-taxing government in Australia’s history has
always over-looked the fact that (at the time of its introduction) the
GST replaced not only the previous Federal sales tax but also a variety
of State franchise fees (tobacco, alcohol and petrol) which had been
invalidated by the High Court just before the 1999-2000 tax reforms,
and which the Commonwealth was, as an interim measure, collecting on
behalf of the States. For a valid comparison, one should arguably
exclude an amount approximating the revenue which would have been
collected by these taxes from the total. Since they represented 0.9% of
GDP in their last year of operation, that’s the proportion I’ve taken
off (see columns AB, AD and AL in the spreadsheet). Once you do that,
Commonwealth taxes (including the GST but excluding that part of the
GST which equates to the revenue which would have been collected by the
State franchise fees) amounted to 24.8% of GDP which for the first time
exceeds the previous record set in 1986-87. Thus, it is now valid to
say that the Howard Government is the highest-taxing in Australia’s
history, in a way which strictly speaking has not hitherto been true.

Peter Fray

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