As con jobs go, Treasurer Joe Hockey’s MYEFO yesterday wasn’t particularly subtle. But then the Coalition in “budget black hole” mode rarely is. The $10 billion “Beazley black hole of 1996” was a fiction cobbled together by Finance bureaucrats and flogged remorselessly by the Howard government.
But it’s Treasury bureaucrats who are complicit in this one, because the invention of nearly $70 billion worth of extra budget deficits is, after you take out the surge in expenditure this year since Hockey became Treasurer, almost entirely the product of a big downward revision in nominal GDP growth forecasts and thus of revenue.
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. In PEFO, nominal GDP growth was forecast to be 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 lower in 2015-16 and $19 billion lower in 2016-17. That’s $50 billion extra in deficits, right there. The rest is additional spending Hockey committed to yesterday, like rural infrastructure projects promised by Labor that the Nationals refused to give up.
Treasury also downgraded forecasts in other areas: household consumption will 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.
The only things that didn’t fall were inflation, which is going to be slightly higher this year, and jobs: Treasury actually reduced the expected unemployment rate by a quarter of a per cent this year. It’s a peculiar economy that has such anemic growth and yet somehow performs better than expected on jobs and produces higher inflation.
But you can see where all this is heading: the economy may well perform better than the dire predictions of Treasury in MYEFO, gifting Hockey the claim of economic and fiscal wizardry. Only, bookmark the independently prepared PEFO and come back to it later, because that’s the standard against which Hockey should be judged in the future, not this confection.
“The fiscal challenge for Parliament — not just the government — remains the same today as before yesterday’s silliness …”
One of the things Hockey liked to do in opposition was to underplay the extent to which revenue write-downs had crimped Labor’s quest for a return to surplus. Ahead of the budget this year, for example, Hockey said:
“The mid-year budget update shows that revenue this year was expected to increase by $37 billion. Even after the $17 billion write-down, revenue this year will increase by $20 billion higher than last year. That is a rise of over 6%, or more than double the rate of inflation. Wayne Swan described this as a ‘sledgehammer hit to revenue’. His grandiose rhetoric suggesting a wrecking ball impact on the budget when in fact his revenue increased by $20 billion. No wonder business and consumer confidence is fragile!”
Well let’s apply Joe’s test to himself. Yesterday’s documents show that, even after a revenue writedown of nearly $5 billion this year between PEFO and MYEFO, Hockey will still have revenue of nearly $14 billion more than in 2012-13, or an increase of 4%, well ahead of inflation.
Yet despite this surge in revenue, somehow Joe is still on track to double Labor’s 2012-13 deficit of $19 billion.
Voters, with the aid of the Coalition’s media cheerleaders and journalists not smart enough to look through the numbers, may well come to believe that Labor somehow bequeathed the Coalition an extra $70 billion in debt, although such tasks are harder now than they were in the analog media days. If it happens, good luck to Hockey — that’s politics, and we shouldn’t expect anything less from politicians. But the real issue is whether Hockey can use the numbers within his party to build support for hard decisions.
The fiscal challenge for Parliament — not just the government — remains the same today as before yesterday’s silliness: address the federal government’s structural deficit in a context where, beyond Hockey’s nominal GDP trick, there are no easy options because revenue is on a lower growth path. Maybe Joe will get lucky, the dollar will fall to 70 US cents, or commodity prices will surge again, and deliver him the sort of windfalls that Peter Costello enjoyed, but it’s unlikely to fix the problem that we don’t tax ourselves enough to fund the high levels of health, education, defence and infrastructure spending (and yes, we do spend a lot on infrastructure) that we have.
There will still be hard, unpopular decisions to make — not politically painless ones from yesterday like ripping money out of health services in western Sydney (that’ll teach ’em not to elect Jaymie Diaz, eh?), but ones of the kind the Grattan Institute was talking about a few weeks back, like requiring people to work longer and tax super more. The measure of Hockey’s success as Treasurer will be in whether he has the will and skill to drive those sorts of savings through the joint party room and past the Prime Minister, who appears to see his role as playing umpire to various factions within the Coalition.
If he doesn’t, yesterday’s numbers will just be crass politics and nothing more.