With the long-term structure of the budget suddenly an issue of interest to politicians, the Parliamentary Budget Office has released its estimate of the structural budget balance from 2001-02 to 2017 this morning — and the results won’t sit comfortably with today’s budget reply speech by opposition Treasury spokesman Joe Hockey.
Hockey is expected to call for a structural analysis of the budget to be published each year. Treasurer Wayne Swan had previously asked for Treasury to prepare a structural analysis, which will be released shortly, but the independent PBO — under its chief Phil Bowen — has struck first.
The structural budget balance reflects the underlying budget balance after adjusting for the effect of cyclical and temporary or one-off factors. But determining it accurately is problematic, as it depends heavily on what assumptions modellers make about cyclical effects. As Treasury Secretary Martin Parkinson said yesterday:
“Structural budget balances are not difficult to produce, as is evident from the proliferation of think tanks and economic consultancies that are now producing structural budget balance estimates in Australia. But as we have made clear before, there are significant caveats that are associated with this type of analysis … In particular, identifying the structural or long run level of variables like the terms of trade and capital gains is conceptually challenging, with different assumptions for these variables leading to very different results.”
The PBO offers similar caveats, and presents its results only within a “plausible band” rather than specific estimates. “Taken in isolation, the SBB does not provide a sufficient basis for short-term fine tuning of fiscal policy,” it says.
As expected, the paper shows a marked decline in the SBB over the course of the last two terms of the Howard government and under the Rudd government before the impact of the financial crisis. More surprisingly, it suggests the SBB is recovering relatively quickly under Prime Minister Julia Gillard.
The PBO says: “Over two thirds of the 5 percentage points of GDP decline in structural receipts over the period 2002-03 to 2011-12 was due to the cumulative effect of the successive personal income tax cuts granted between 2003-04 and 2008-09.” Much of the rest, it says, “was the result of a decline in excise and customs duties as a proportion of GDP. Significant factors driving this trend included the abolition of petroleum fuels excise indexation in the 2001-02 Budget and the decline in the consumption of cigarettes and tobacco over the period.”
It’s long been known that the Howard government’s decision to abandon excise indexation in 2001 has seen billions, and probably tens of billions, in cumulative losses to budget revenue. That decision was made in a panic by Howard amid claims the newly established GST was hurting pensioners. In early 2001, a beleaguered government had to deal with a beat-up over a misleading claim by the Australian National Audit Office that a promise to set aside a proportion of fuel excise for roads spending had not been kept.
Amid pressures over the GST, rising world oil prices and polls showing Labor heading for a landslide victory under Kim Beazley, the Howard government dumped indexation.
Labor can’t claim full credit for the dramatic recovery in the SBB currently underway. “The estimated 1.75 percentage point increase in structural receipts over the period 2011-12 to 2016-17 is mainly the result of increasing personal tax receipts due to the impact of bracket creep (fiscal drag),” says the PBO. But it also identifies the carbon price and the mining tax as contributing to the recovery. It notes:
“Contributing to the decline in the estimated structural deficit over the period of the 2013-14 budget and forward estimates years is the impact of the savings that have been identified to fund the National Plan for School Improvement and DisabilityCare Australia. This is because the level of savings over this period is greater than the costs of these schemes. Beyond the forward estimates years, however, these savings will be largely consumed by the costs of the schemes and, therefore, they will no longer be available to alleviate pressure on the SBB.”
So, Hockey is getting his wish for a structural analysis of the budget earlier than he might have expected. But the results don’t help very much with his claim that the government can’t control the budget: the only improvement since 2001 in the SBB is happening at the moment under Gillard and Swan. And while Treasury can be attacked as partisan by the Coalition, it’s rather harder to do the same to the PBO.