The election campaign needs an honest economic foundation

Last week’s budget is like no other budget – it is a plan. We know that because the treasurer mentioned the word plan 29 times in his 30-minute budget speech. But like its predecessors, the 2016 budget provides no credible path back to surplus. Its rosy assumptions about commodity prices, inflation, productivity growth and economic growth have been selected to position a surplus as a shimmering light, like the Hotel California, on a dark desert highway of ongoing deficits.

This columnist has previously warned against the practice of forecasting a surplus by assumption (AFR, How you can write yourself a blue-sky budget, 20 May 2015). Here’s the ruse that governments use. The first two years of the four-year budget period are economic forecasts while the second two years are projections. The forecasts for key variables are decided by the Treasurer but signed off as credible by the Treasury. The projections assume the economy will automatically return to a normal, trend growth rate.

What does this budget assume? On the key variable of the iron ore price, a recent short-term spike has enabled the Treasurer to revise up the assumption from US$39 per tonne in the mid-year fiscal outlook only five months ago to US$55 for each of the next four years. Nothing structurally has occurred in the global iron-ore market to warrant this assumed long-term price lift. Yet company tax receipts are inflated by more than $20 billion over four years by this manoeuvre alone.

Next, the budget assumes that the present deflationary experience will be replaced from 1 July with annual inflation rising to 2½ per cent in the third and fourth years. This is at the upper limit of the Reserve Bank’s inflation forecasts released last week. The budget goes on to assume that inflation, together with real-wage growth, of which there has been none, will lift money wages by 3½ per cent in the fourth year. While this might not seem much, it’s a nice assumed money-spinner for the government, since the higher the inflation rate the larger the proceeds from bracket creep.

Then there’s a rosy assumption about productivity growth. Despite weak productivity growth since the turn of the century, the budget assumes that from 1 July this year Australia’s productivity growth rate will bounce back to its 30-year average, which is bolstered by the phenomenal rates of the late-1990s. The assumed productivity revival boosts profits and wages, again swelling the government’s coffers.

Throw all these optimistic assumptions into Treasury’s fiscal model and hey presto! The shimmering light of a budget surplus appears at the end of the decade. To be fair to Treasury, buried deep in the budget papers, far from the reach of meddling Treasurers, are the sensitivities and risks to the budget bottom line of less optimistic assumptions.

Treasury statistics also reveal that the Turnbull government will be a higher taxing, higher spending government than the Gillard government; in fact, the second-highest taxing government in Australia’s history behind the Howard government.

The government’s central critique of Labor’s fiscal management is that it did not fund spending on disability support, health and education over 10 years – despite the 10-year funding sources of the National Disability Insurance Scheme being set out in the budget documents. Yet when challenged to reveal the cost of its company tax cuts over the same 10-year time period the government protested that it is conventional to do so only over the four-year budget period. In this way, it hoped to conceal the $48+ billion cost to the revenue, but was forced by media pressure to reveal it.

Both the government and the opposition need to recognise that the Australian people can handle the truth: the budget deficit needs to be repaired. Bill Shorten’s budget reply outlined $71 billion in new savings measures. Most are on the revenue side. Expenditure, too, needs to be pared back.

In less than a fortnight, the Treasury and Finance departments will release the independent pre-election economic and fiscal outlook. It is a genuine opportunity for budget honesty. No more living it up at the Hotel California, no more nice surprises, no more alibis; just the truth that we have a deficit problem with no solution in sight.