Cast your mind back to May, if you can. It was a different world. We looked on the cusp of severe worldwide recession. Governments across the globe were still putting together stimulus packages. And in the Budget, the Treasury forecast -0.5% economic growth in 2009-10, before the economy picked up in 2010-11 and then posted above-trend growth in the following two years. The result would be, Treasury forecast, 8.5% unemployment in 2010-11, a Budget deficit of $57.6 billion, and deficits well into the next decade.
And, if you remember, Treasury and the government were attacked for being too optimistic. Treasury’s forecast of a return to above-trend growth in the recovery was criticised by the Opposition as some sort of plot by a biased Ken Henry to help the government.
“Given that in the last 30 years there have only been five years in which GDP has grown at 4½ per cent or more, how can the Prime Minister expect Australians to believe that two years from now we will enjoy six consecutive years of growth at 4½ per cent?” Malcolm Turnbull demanded in Question Time the day after the Budget, calling the Treasury figures an “incredible forecast”.
The following week Joe Hockey devoted much of his Budget reply at the National Press Club to attacking the forecasts, referring to “considerable disquiet about the Budget’s growth assumptions”. That argument was a key part of the Coalition’s “debt and deficit” strategy, intended to suggest that the government’s fiscal position was even worse than it admitted to.
Well, in a way, Hockey and Turnbull have been vindicated. MYEFO revises down the forecast for the recovery in 2011-12 and 2012-13 — from 4.5% to 4%. Unfortunately, that’s only because the recovery has kicked in earlier and harder, with growth this year up a full 2% on forecast and growth up next year 0.5%.
And in fact the “Treasury was too optimistic” theme lasted only a matter of weeks before GDP and unemployment data showed that things were not going to be as bad as forecast. As well, Malcolm Turnbull got interested in a Treasury official named Godwin Grech.
Ever since, the constant criticism of the government has been that it is too pessimistic. And the government has played along. No piece of good economic news emerged without being met with the inevitable “not out of the woods yet” or “long way to go” from Kevin Rudd and, particularly Wayne Swan, the first Treasurer since Federation to look like he actually preferred bad economic news to good.
The new forecasts mean the jig is up. The government will have to shift its rhetoric to recovery mode. It will place greater pressure on the Budget process, which is under way, in which spending will have to be curtailed and political pain endured. On the upside, the faster recovery means a significant fall in deficits in the out-years, although this year is still expected to end with Australia $50-plus billion in the red. The Opposition will persist with its deficit strategy — should they ever get back onto it in between internal disunity, the ETS and asylum seekers — but they’ll struggle to sell it even if they get clear air. A net debt of $150 billion doesn’t sound anywhere near as bad as the $200-plus billion figures in which the debate has been conducted since May.
MYEFO also provides, for the first time, a comprehensive accounting of the cost of the government’s CPRS. Previously we have only seen the impacts for the first two years of the scheme, meaning the ETS debate was being conducted in a fiscal twilight in which estimates of how much money was available were thrown around without any sense of their accuracy.
According to Treasury, however, there is no money at all to fund the Coalition’s proposed amendments: the CPRS will not turn revenue-positive until 2016-17, and will only slowly increase its return to the Budget thereafter, meaning in 2020 the CPRS will still have cost us a net $2.5 billion. That partly reflects that Treasury has assumed — contrary to the announced policy — that that absurd fuel tax offset will remain in place permanently, costing more than $2 billion year in and year out, but also because, despite being intended to taper off, assistance to emissions-intensive, trade-exposed industries will increase from $3 billion to more than $5 billion a year over just eight years.
That’s why we’ll be paying for this scheme well into next decade.
A final thing: Wayne Swan made the MYEFO available from 11.30 this morning, and didn’t hold his press conference until 12.15. Journalists therefore had 45 minutes to analyse the material before grilling Swan. Normally this government would have held the press conference and handed out the material at the start. It’s a small thing, but commendable. A good Treasurer isn’t afraid of well-informed scrutiny.