14 May 2013

Budget Night By The Numbers

By Ben Eltham

According to tonight's Budget papers, the economy is in good health. So why the deficit? And who can expect an election-year handout? Ben Eltham has an overview of the numbers

The deficit
There's no getting around it: Labor has delivered yet another budget deficit this year. After all the revenue write-downs of recent months, the final figure for 2012-13 came in at -$19.4 billion, and this year the figure is forecast to be -$18 billion. Of course, this time last year, Wayne Swan promised a surplus. 

The revenue slump
Why is the budget in deficit? The Treasury says it's mainly because revenue has taken a hit. Labor has held spending increases below 2 per cent. But the shortfall in tax revenues has kept the bottom line in the red.

More broadly, the reason for the decline in revenue is the now-familiar story of falling commodity prices and a high Aussie dollar. This means that nominal GDP is actually less than real GDP — a   “highly unusual combination” that has crimped company profits and hurt tax revenues. The budget papers argue that “had tax receipts stayed at the share of 2007-08, the Budget would have been in surplus from 2012-13”.

So what's driving the ongoing weakness in many parts of the economy? The dollar. It's no secret that the persistently high Australian dollar is hurting exporters, as well as those businesses that compete with imports, particularly in the manufacturing, education and tourism sectors.

The Budget papers include a special break-out box on the topic, which bluntly states that “the persistently high dollar is creating acute and enduring challenges in many sectors and is weighing heavily on profitability and prices across the economy”. One of the most “acute” of these “challenges” is profitability. Non-mining profits essentially flatlined in 2012, punching a huge hole in federal company tax revenue. And that's a big reason why nominal GDP is so anaemic. Profits represent around 40 per cent of nominal GDP, so with profits way down, nominal GDP is too. Budget Paper 1 tells us that “through-the-year nominal GDP growth was below real GDP growth for the third consecutive quarter in December — its longest period of relative weakness on record.”

The economy: from “patch-work” to “transition”
According to the Budget papers, the economy is in good health. GDP growth is forecast to be 2.75 per cent in 2013-14 and 3 per cent in 2014-15, while unemployment is forecast at 5.75 per cent. Inflation will remain moderate, giving the Reserve Bank more space to cut interest rates if necessary; the Consumer Price Index is forecast to remain firmly in the RBA's target band at 2.25 per cent.

Last year's Budget was big on explaining Australia's so-called “patch-work economy”. This year, the Treasury says the Australian economy is undergoing two large-scale “transitions”. One is the transition from the investment and construction phase of the resources boom, into the production phase. Huge mines and natural gas plants are just starting to come on line and start exporting their lucrative raw materials. The Budget papers forecast a 30 per cent increase in non-rural commodity exports over the next three years, and that's even before the LNG starts to flow.

The second transition is to “non-resource drivers of growth”. As the mining investment boom slacks off, other sectors are expected to help out. Policy-makers have long hoped that the housing sector will be a key player. The Budget papers say that "after a decade of lacklustre growth in housing construction, conditions are favourable for a sustained recovery". Treasury points to a range of factors that could spur the sector, including demographics, low vacancy rates, high rental yields and low interest rates. However, in a reference to the difficulties of export sectors struggling with the high Aussie dollar, Treasury says that “the transition underway in the economy may not be seamless”.

Where are the pre-election handouts?
There aren't any. Labor has largely avoided a traditional pre-election spendathon on marginal seats and swinging voters, instead placing its emphasis on long-term social welfare reforms in schools and disability care. As a result, there are few of the usual sweeteners, cash handouts or tax cuts voters have come to expect in an election-year budget.

Gonski, Disability and the path to surplus
Rather than focus on the immediate spending plans of 2013-14, Labor has framed this Budget for the longer term. Many measures are presented over multiple years, and there is provision for the implementation of the national disability insurance scheme that won't properly begin until 2019. There's also billions of dollars promised in future years for the Gonski schools funding reforms.

In funding these commitments, Wayne Swan has made significant savings. The government says that both the disability insurance scheme and Gonski are fully funded. This has been done beyond the forward estimates, in some cases out to 2023. Big savings include various revenue increases (like the rise in the Medicare Levy) and spending cuts (such as abolishing the Baby Bonus).

Hence, despite the extra spending, Labor says it has a “sensible pathway to surplus” which will see a $10.9 billion deficit next year and a small surplus in 2015-16.

Why were the budget forecasts so wrong?
You're probably wondering why Treasury gets its forecasts so wrong, so consistently. Wayne Swan certainly must be: the unexpected cratering of tax revenues is the main reason he has deficit egg on his face tonight. Treasury Secretary Martin Parkinson has also apparently been looking into the matter. He's commissioned an internal review into the way the department makes its forecasts.

The results of that review are provided in a special appendix to Budget Paper 1. It's a mea culpa, of sorts. “Macroeconomic forecasts are always subject to a margin of error,” it admits. The average error in Treasury growth forecasts going back to 1990 has been 0.9 per cent. Given that growth in an average year is 3 per cent, that's quite a lot. An extra per cent of growth this year would go a long way to alleviating Swan's deficit problem. One per cent less growth would have seen unemployment starting to rise.

On the other hand, Treasury does get it right, most of the time. It was Treasury, remember, that came up with the advice for a big stimulus program in 2009, at a time when many right-wing economists argued that fiscal stimulus couldn't work. To give the boffins their due, their forecasts generally get the direction of a given trend right, but fail to pin down an exact number. Nor can Treasury foresee “black swan” events like the Japanese tsunami, or a US debt default brought on by a bickering Congress.

In the end, forecasting something as complex and unpredictable as the Australian economy is pretty difficult. Treasury says it does about as well (or as badly) as other forecasters overseas.

Some highlights
The government says it will implement $43 billion in savings including the $16.4 billion announced in the 2012 mid-year economic and fiscal outlook. These can be split into revenue increases, and spending cuts.

All these figures are “over the forward estimates”, in other words, out to 2016-17.

Revenue measures

  • increase in the Medicare Levy to 2 per cent, to help pay for NDIS: $11.7 billion over the forward estimates
  • 457 visas - increased application charge: $198 million
  • higher import duties and customs charges: $674 million
  • R&D tax incentive tightening: $1.1 billion
  • deferral of the carbon tax compensation tax cuts: $1.49 billion
  • net medical expenses tax offset being phased out: $963.5 million
  • reforms to self-education tax breaks: $520 million
  • thin capitalisation and transfer pricing tweaks: $1.490 billion
  • company taxes: “closing the loopholes in the consolidation regime”: $540 million
  • Offshore Banking Unit loophole closed: $320 million
  • increasing ATO compliance checks on offshore marketing hubs: $576 million
  • mining exploration tax break tweaked: $1.1 billion
  • foreign resident CGT tweaks: $230 million
  • superannuation concessional contributions tweak: $365 million
  • winding back tax breaks for earnings on superannuation assets: $356 million
  • ATO to crack down on trusts: $379 million
  • ATO data matching crackdown: $610.2 million

Spending cuts

  • “Cross-portfolio efficiencies” in the public service - $227 million
  • Baby bonus phase out, Family Tax Benefits and Child Care Allowance reforms: $2.8 billion
  • Family Tax Benefit A not increased as promised in 2012-13 budget: $2.5 billion
  • foreign aid increased more slowly: $1.9 billion
  • HECS and tertiary scholarship tweaks; university funding cuts: $2.321 billion

Spending announcements

  • Gonski schools funding reforms: $473 million this year, $2.8 billion over the estimates, $9.8 billion out to 2020-21.
  • Disability spending (the NDIS): $2.4 billion in launch funding between now and 2019, and then annual funding beginning at $3.8 billion in 2017-18 and $6.2 billion in 2018-19. All told the federal government has budgeted $19.3 billion for DisabilityCare Australia, the new disability scheme, but stretching out many years.
  • $24 billion in road and rail infrastructure projects from 2014-15 to 2018-19, including $4.1 billion for the Bruce Highway, $715 million for Brisbane's Cross River Rail bridge, $1.8 billion towards Sydney's M4 and M5, $718 million on the Gateway Motorway, $525 million on the M80 ring road in outer Melbourne, $500 million on Perth public transport, $500 million for Tasmania's Midlands Highway, and $448 million on the South Road upgrade in Adelaide.
Log in or register to post comments

Discuss this article

To control your subscriptions to discussions you participate in go to your Account Settings preferences and click the Subscriptions tab.

Enter your comments here

apolsasam
Posted Tuesday, May 14, 2013 - 21:44

If the economy is in good health, then why the deficit. I just hope everything goes well. Life is hard, I just pray that everything goes well though. - James Stuckey

Herbydad
Posted Tuesday, May 14, 2013 - 22:54

Why are we in decefit?  Because the backside has dropped out of the capitalist system.

Why do we need to be in a surplus? 

When you compare our economy with most other so called developed nations we are doing very nicely thank you.

You can terosie on the economy but there is always one very basic test. Are residents leaving this country to go to greener pastures.

All I can notice is that people are fighting to get in.

 

Before we go knocking our economy look at how other countries are going. 

 

This user is a New Matilda supporter. Joe Politico
Posted Tuesday, May 14, 2013 - 23:00

Deadshit Wayne Swan cuts tax relief on higher education fees, slashes $2bn from university funding whilst wimping on taxing the miners and using rent payers tax dollar to subsidise landlords losses.

 

This government deserves to have its arse booted to the kerb and every MP live off Centrelink.  Scumbags.

kwv42
Posted Tuesday, May 14, 2013 - 23:55

I agree with Joe, but reality is Abbott and The Opposition well do a lot worse to University Funding just to please their mining mates like Palmer and Gina.

 

So in writhing  "every MP live off Centrelink" I hope Joe includes Abbott and The Opposition Members?

This user is a New Matilda supporter. aussiegreg
Posted Wednesday, May 15, 2013 - 02:56

 

Ya gotta love the Newspeak introduced to the discussion of budgetary matters by Swan and his Labor mates in the media (oh, and his Greens mates in the media like Ben).

This gives us the situation where revenue goes up in 2012 by over 7% (anyone reading this have their income go up by 7% in the last year?) but this is always referred to as a "fall" in revenue. The failure of even a booming economy to deliver the double-digit year-on-year increases predicted so heroically (and spent in advance) by Swan and his government is presented as a dramatic and damaging (and completely unpredictable) reduction in taxation, when yet again this government reaps a record revenue and yet spends itself into another deficit larger than any recorded by any other government in Australia's history.

Here is a classic example of Newspeak from Ben in the article above:

"Non-mining profits essentially flatlined in 2012, punching a huge hole in federal company tax revenue".

I'll translate. Non-mining profits were slightly up in 2012, contributing a new record to federal company tax revenue. Wayne predicted a much higher record, but when we had all finished laughing ourselves silly we realised this was just the politics of justifying the massive new spending programs he was determined to introduce. He didn't really believe it either.

 

This user is a New Matilda supporter. aussiegreg
Posted Wednesday, May 15, 2013 - 03:15

 

@Herbydad

If "the backside has dropped out of the capitalist system", where are all these socialist enterprises paying record levels of tax to give Swan record revenues to spend and lending him the $300billion he has needed to cover all the extra spending he has done over and above those record revenues?

That public debt, growing at a record pace, is the reason "we need to be in a surplus". It has to be paid back eventually, with interest, and in the meantime the servicing costs alone could provide Australia with an NDIS every year. The only way we reduce that debt and that debt-servicing burden is for the government to spend less than it takes in in taxes and put the surplus towards paying down the debt. 

You may remember this is what the evil Conservatives did, in the face of the most vicious attacks from Wayne, Ben, and the rest of the economic illiterates, and thank God they did, otherwise the GFC could well have put us in the same situation as "most other so-called developed nations" despite the best efforts of the mining boom and China to keep us out of it.

If we cannot run a surplus while we have the greenest pastures in the world, what hope do we have of running surpluses (of a cumulative size equal to all the deficits so far accumulated) once the mining boom busts or the contradictions within China bring her economic miracle to a shuddering halt?

 

kevin1
Posted Wednesday, May 15, 2013 - 06:19

"Profits represent around 40 per cent of nominal GDP," ????

EarnestLee
Posted Thursday, May 16, 2013 - 14:12

This Budget scores an "F".

Too many children condemned to poverty and malnutrition.

Get real Abbott & Co. You have just commerated ANZAC day. Now lets add some meaning to that sacriice and look after this Nations children!