A year after the government promised that the days of overestimating revenue were at an end, Treasurer Joe Hockey has unveiled another write-down for revenue this year and in following years. That’s on top of the write-down back in May. Since the Pre-Election Economic and Fiscal Outlook in August 2013 — the one genuinely independent guide to the nation’s budget, prepared without government interference by Treasury and Finance — the 2014-15 budget deficit has blown out by nearly $16 billion, despite the government’s constant rhetoric about its bringing the budget back under control, and despite all the political pain that the government has endured. And the deficits for the years beyond have gone up by nearly $50 billion, we have learned in this year’s Mid-Year Economic and Financial Outlook.
For the man who promised, as late as January 2013, to deliver a surplus in his first year and every year after that, it’s an inglorious failure. This is how Hockey’s fiscal problem has unfolded since his first MYEFO in December 2013 (forecasts surpluses appear as negatives).
As the graph illustrates, yesterday’s MYEFO has wiped out all of the gains Hockey made toward a return to surplus in the May budget compared to last year’s MYEFO — and then some. All that pain has been, in fiscal terms, for nothing, with a return to surplus now pushed out to 2019-20 — the fiscal equivalent of the never-never.
On the positive side, Treasury is bravely sticking to its GDP forecasts from May of 2.5% growth this year, then 3%, 3.5% and 3.5% across the subsequent years. Unemployment, however, is expected to worsen: the budget forecast unemployment to peak at 6.25% this year and stay there into 2016, before falling to 6% in 2016-17 and 5.75% in 2017-18; now it is expected to remain at 6.5% until 2016-17.
Inflation is expected to remain subdued, with a slight revision upward this year to 2.5%, but nothing that will concern the Reserve Bank; Treasury has also revised its wage price index forecast down to 2.5% this year from 3%, placing further pressure on the budget. Nominal GDP, too, has been revised downward, which will also put revenue under pressure.
Despite the revenue write-downs, Hockey is still expecting $379 billion in revenue, $19 billion more than in 2013-14 — compared to Wayne Swan’s situation in 2008 and 2009, when revenue actually fell in nominal terms. The Commonwealth will take 23.6% of GDP in revenue, a full 0.8 points higher than last year and the highest level since Peter Costello’s last budget, while spending will now increase from 25.7% of GDP to 25.9% of GDP.
Hockey has to take some of the blame himself for his own revenue situation. It has been his poor handling to 2014-15 budget that has contributed to a collapse in consumer and business confidence, making the transition from fading mining investment to more traditional housing and consumer-based economic drivers much more difficult than it should have been. And despite the government’s rhetoric about getting the budget under control, it handed out big tax cuts to carbon emitters, mining companies, tax rorters and wealthy superannuants.
But the collapse in the terms of trade — expected in May to be -6.75%, but instead forecast to be -13.5% — is something entirely beyond the government’s control. The only control the government has is over how it reacts, and in this case it has reacted appropriately, by declining to slash spending to match falling revenue. As a result, it is providing more stimulus to the economy than it had planned, and given the circumstances, that’s exactly the right call. Indeed, if economic weakness persists, the 2015-16 budget may include some further stimulus, not in the automatic stabiliser sense, but reflecting a conscious decision to undertake further, stimulatory spending.
Hockey is thus in exactly the same position as Wayne Swan was: battling external forces (Swan had the high dollar, Hockey has low commodity prices) that keep sucking up his revenue, he’s declined to try to offset those losses for the sake of economic growth, and he finds his previous rhetoric about surpluses now very inconvenient.