AFR: Budget 2015 | How You Can Write Yourself A Blue-Sky Budget

Question: how does a government achieve a budget surplus? Answer: by assuming one. Which is what last week’s budget does. By assuming a return to annual growth of 3½ per cent after two years and commodity prices stabilising at more than 20 per cent above the average of the preceding pre-boom decades, a surplus almost appears at the end of this decade.

Almost. But even that virtual surplus depends on the government collecting through bracket creep an increasing share of the real incomes of wage and salary earners which have been falling for the last two years. Workers simply will not accept a continuation of falling real wages from which the government collects rising amounts of tax.

The budget surplus will again be a mirage disappearing through the shimmering heat on Mad Max’s Fury Road, its elusiveness ultimately setting off an apocalyptic downgrade of Australia’s AAA credit rating.

It’s easy to blame the previous Labor government for all this. Spending as a proportion of GDP in the Labor years – which included a global financial crisis – averaged 24.9 per cent but is expected to average 25.5 per cent in the coming four years. Taxation was 20.8 per cent of GDP under Labor but is expected to average 22.9 per cent over the next four years, finishing at 23.4 per cent – the highest level since the last Howard-Costello budget. Official budget statistics confirm that, contrary to the budget-night rhetoric of lower taxes and less spending, this is a tax-and-spend government – much more so than the previous Labor government.

It is true that major savings measures are being blocked in the Senate. Labor should reconsider its position on any that are not manifestly unfair. But Labor did not force the government to use the proceeds from its abandoned gold-plated paid parental leave scheme on a new child-care scheme that requires taxpayers to foot the bill for half the child-care costs of families earning more than $170,000 a year.

Canberra must get serious about budget repair. An essential first step is to abandon the contrivances and manipulations made possible by the existing budget processes. Treasurers should not be allowed to pick their own, politically advantageous forecasts for key variables such as commodity prices and exchange rates. Shadow treasurer Chris Bowen has announced that if he became treasurer this power would be taken out of his hands and given to the independent Parliamentary Budget Office.

Next, the standard Treasury assumption that the economy will return to trend growth after two years needs revisiting. Treasury correctly points out that it cannot reliably forecast how the economy will be performing in two years’ time. But in lieu of forecasts it simply assumes a return to trend growth, or in the case of this budget, above-trend growth. By what magic will an economy struggling to make the transition from the end of the mining boom, having grown at just 2½ per cent in each of the last two years, surge to 3½ per cent growth two years from now? More relevant for estimating future revenues and budget bottom lines, nominal GDP growth is incredibly assumed to jump from 1½ per cent this year to 5½ per cent at the end of the budget period. That’s a lot of inflation in circumstances where nominal wages have been growing at their slowest rate on record and unemployment is forecast to rise further and remain high thereafter.

Treasury presents sensitivity analysis of key variables and confidence levels for the budget bottom line but the government of the day announces only a single figure. It would be political suicide for a treasurer to unveil a budget which forecasts continued slow economic growth and high unemployment over four years. Contrivances and manipulations in the budget process enable treasurers to avert such a fate and to gain accolades for a return to surplus. At a time when the crucial challenge is to lay out a credible path to surplus in an economy sliding down the wrong side of the highest terms of trade in 140 years, the political manipulation of budget processes might fool the public but it won’t fool ratings agencies travelling along the Fury Road in search of an illusory surplus.

Craig Emerson, managing director of Craig Emerson Economics, is an adjunct professor at Victoria University’s College of Business.