A funny thing happened on the way to the 21st Century – the budget papers were utterly corrupted. They are useless, so politically compromised that their authors are able wilfully to mislead the public. Last Friday’s pre-election fiscal and economic outlook contained a two-page confession from the heads of treasury and the department of finance: while the economic forecasts are unchanged they are not believable.
Of course, they suit the government of the day – in this case the Coalition government – for they show a return to surplus at the end of the decade. But the two secretaries make clear in their two-page alert what this columnists has warned in these pages on numerous occasions; this is a surplus by assumption. The budget assumes that productivity growth will revive to its long-term average, which includes the boom years of the 1990s. It assumes that economic growth will magically bounce back to its trend rate. It assumes iron ore prices will hold firm for four years at US$55 per tonne, sharply up from the US$39 per tonne in the mid-year outlook released only last December, despite plummeting in the last few weeks. And it assumes a hefty dose of inflation to bump up personal tax receipts through – you guessed it – bracket creep, despite worldwide deflation that has now swept onto our shores.
Thrown together, all these favourable assumptions yield a budget surplus just beyond the four-year budget period, the shimmering mirage that has eluded successive governments since the peak of the mining boom. Then, after the election, the new government will announce that, based on updated projections just to hand, the cupboard is bare. All those promises, made with hand on heart, can no longer be afforded. We would have told you before the election if we had known. Blah, blah, blah!
How has it come to this? A former minister for finance in a Latin American countrytold an Australian audience that in his country there were not two instruments of macroeconomic policy but three: one, fiscal policy; two, monetary policy; and three, if one and two fail, falsify the statistics. Australia is not quite there yet, thanks to an independent statistics bureau. But big, bad changes have been made to the budgetary processes since the Hawke years.
Back then, the forecasts of economic growth, inflation, unemployment, the exchange rate, commodity prices and other key variables that affected the budget bottom line were prepared by treasury and the finance department. They were delivered to the government not for negotiation or alteration but as parameters. The government had no choice but to accept the parameters the public servants gave it.
Not now. Many of these key numbers nowadays are decided by the government of the day. Yes, by the politicians. If the politicians want to show a budget returning to surplus early, they need only pick a favourable iron ore price to bolster company tax receipts. The only constraints on the politicians are that if the numbers they choose are ridiculously fanciful, market economists will criticise them.
Yet the public innocently assumes the budget forecasts are the work of treasury and the finance department. It is not clear when and how this perversion of the budget processes began but it is clear that they are now rubbish, tailored to meet the interests of their authors – the politicians whose name appears on the budget’s front cover.
So badly corrupted have the budget processes become that there is only one solution. In future, all key parameters must be set by a truly independent agency – the parliamentary budget office, modelled on the US congressional budget office. As opposition leader in 2009, Malcolm Turnbull proposed the establishment of such an office in his budget reply speech. The Gillard government established the parliamentary budget office.
Labor’s shadow treasurer, Chris Bowen, announced at the national press club earlier this month that a future Labor government would rely on the independent parliamentary budget office to set the key parameters and he would quickly bring down a mini-budget based on them. That’s two good ideas to restore integrity to the budget processes: one from Turnbull to establish a parliamentary budget office and the other from Bowen to use it in the budget processes. Let’s end the present farce and adopt both ideas, enabling us to avoid using the Latin American finance minister’s third instrument of macroeconomic policy.