The Federal government has continued its remarkable record of underestimating revenue by upgrading the 2006-07 budget surplus forecast from $10.8 billion to $11.8 billion despite downgrading forecast economic growth from 3.25% to 2.5%.

Booming commodity prices and a record company tax take have once again underpinned the surplus but economists remain amazed at Treasury’s apparent deliberate underestimation of revenue.

Economic growth is the biggest driver of revenue so if you get growth forecasts right, you should revenue right as well.

Based on Peter Costello’s record over the past decade, it looks like Treasury has deliberately understated revenue by about $4 billion a year. An unexpected $1.5 billion in income tax drove the better outcome.

Even when growth falls 0.75 percentage points short, the forecast surplus is still conservative to the tune of $1 billion, meaning Australia is headed for its third biggest surplus ever in 2006-07 and will finally have a positive net worth by 2008-09.

The following table pulls together the entire budget forecasting record over the Howard and Costello years, including the original forecast in May before a financial year commences, the mid-year update shortly before Christmas, the next year’s forecast when there are only seven weeks of a financial year to go, and then the final outcome:

Year Budget Mid-year update Next Budget Outcome Forecasting error
1996-97 -5.65bn not done -6.89bn -$5.28bn +$370m
1997-98 -3.85bn -$2.75bn -$1.1bn $1.17bn +$5.02bn
1998-99 $2.69bn $3.27bn $2.88bn $4.34bn +$1.65bn
1999-00 $5.21bn $2.69bn $7.79bn $13.06bn +$7.85bn
2000-01 $2.84bn $4.33bn $2.25bn $5.97bn +$3.13bn
2001-02 $1.52bn $0.5bn -1.19bn -$1.06bn -$2.58bn
2002-03 $2.09bn $2.14bn $3.92bn $7.48bn +$5.39bn
2003-04 $3.66bn $4.64bn $4.59bn $8.04bn +$4.38bn
2004-05 $2.39bn $6.21bn $9.23bn $13.62bn +$11.23bn
2005-06 $8.92bn $11.5bn $14.8bn $15.8bn +$6.88bn
2006-07 $10.8bn $11.8bn to come to come + $1 bn
Average $2.78bn $3.61bn $3.63bn $5.36bn +$4.33bn

As you can see, Treasury’s credibility as a forecaster is pretty ordinary, but this has suited the government’s political agenda. The question now is whether this deliberately conservative approach can be sustained or whether changes will be made in Treasury.

Whatever the case, both Labor and the Coalition have almost $12 billion to spend so stand back for another pre-election spending spree, despite the drought and slowing economic growth.

Peter Costello has just had a 50 minute press conference covering a raft of topics, so expect the detail of these budget figures to be mixed in with various other stories such as Qantas, AWB and Pink’s criticism of our sheep farmers.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey