As much as he might resist the idea, if only Scott Morrison had succeeded Wayne Swan rather than Joe Hockey, yesterday’s MYEFO write-down ritual might have been at least a little less painful.
Remember that between 2001 and 2007, the persistent problem with Treasury’s revenue forecasts was that they were too conservative, even though forecasts grew significantly every year — Treasury would tell Peter Costello to expect $X billion in tax, and $X+$40-odd billion would show up, giving Costello and John Howard a nice problem of what to do with all the extra money (TL;DR: they blew it). In 2008, Treasury forecast another big rise in revenue for Labor’s first budget, only for the financial crisis to cause revenue to fall — not just in in real but in actual terms (real in a fiscal sense means adjusted for inflation), while Swan and Kevin Rudd, having initially trimmed spending in that budget, pumped it up with their first stimulus package. In 2009, Treasury dramatically scaled back its revenue growth forecast, but it still proved too optimistic — from 2009 into 2010, revenue fell in actual terms for a second year in a row — something that had never happened before in the modern fiscal era.
Thus was born the first of the explanations for collapsing revenue. Back then, it was the accumulated losses that companies had incurred in the financial crisis, which were being used to offset profits once the economy began growing again. Treasury and other senior public service figures were certain revenue would bounce back. But the bounce never came — less than half Treasury’s forecast increase in revenue in 2010 eventually made its way into the government’s coffers. In 2011, Treasury did better — but still barely two-thirds of its anticipated revenue rise appeared.
By that stage, new revenue problems were emerging: nominal GDP was driven down by falling terms of trade while the dollar climbed into the $US0.90 range in late 2009 and, with a brief lull the following year, kept climbing, passing parity in early 2011 and staying there, for the most part, for the next two years. The strong Aussie clobbered the manufacturing and import-competing sectors, further undermining tax revenue.
While Swan endured death by a thousand revisions, however, he was also busy cutting spending. After the stimulus packages — specifically designed to be temporary — increased spending first by over 12% in 2008 and then another 4% in 2009, spending fell in real terms in 2010. Swan originally aimed to keep spending low the following year, but then ended up loading in extra spending at the end of 2011-12 in a desperate effort to achieve his promised surplus in 2012-13 — he later had to eat humble pie and abandoned the promise. Even so, Swan managed to cut spending in 2012-13 not merely in real terms but in actual terms — another first in modern fiscal history. And Labor copped plenty of flak for it — from the Left, for example, for cutting single mothers’ benefits and from the Right for cutting defence spending. And, most of all, from an opportunistic opposition.
The result: spending fell from 26% of GDP during the stimulus to 24.1% of GDP in 2012-13, a strong outcome even with the shuffling of spending back into 2011-12. What Swan had going for him was a strong economy — growth had surged to 3.7% in 2011-12, enabling him to cut without worrying about the impact on the economy. But it began slowing again at the end of 2012, when unemployment began rising. That’s when the pursuit of surplus was broken off.
Scott Morrison — who now has falling commodity prices driving his revenue down, even though the dollar is in the low US$0.70 range — is stuck with the same problem as Swan at the end of 2012: despite falling revenue, he doesn’t dare cut spending more because of its impact on the economy. But Morrison’s position is worse: while Swan had already done a lot of cutting to get spending below 25%, while Morrison has arrived at the crease with spending rising to over 26% of GDP; the cuts announced yesterday are merely to get spending back to where it was supposed to be back in May: 25.9% of GDP. That’s still higher than 2013-14, into which Joe Hockey piled extra spending after the election in an effort to make Labor’s fiscal management look worse.
In short, Morrison’s problem is significantly worse because he’s following Joe Hockey, not Wayne Swan.
The other difference is that Morrison unsurprisingly resembles Swan in his early days as Treasurer — nervy, clunky and unsure in his delivery. His performance yesterday — where in effect Mathias Cormann babysat him — was poor, especially with that wretched car trip analogy that represented a new low in politicians’ efforts to compare household activities to government budgeting. It was not the kind of performance that would assure either voters or investors that the government had a handle on fiscal policy.
One thing Morrison does have going for him, though, is that Labor appeared unsure about which angle to take on the blowout — criticise the government for spending cuts or criticise it for fiscal mismanagement. Unlike Morrison, Labor accepts that there’s a revenue problem and has taken the politically brave option of putting forward revenue measures to deal with it. But spending can’t stay at its current levels either, especially with the economy gaining “momentum”, as Morrison claimed yesterday. Wayne Swan got spending below 25% of GDP; both sides need to seek to emulate him.