The Drum Unleashed, 7 May 2014
Joe Hockey’s policy prescriptions along with stronger economic parameters could have the budget heading towards a surplus in 2016-17 and beyond, writes Stephen Koukoulas.
The budget will comprise thousands of pages of documents, perhaps a million words, and many hundreds of tables and charts. No one will read it all, not even the Treasurer Joe Hockey or his trusty sidekick, Finance Minister Mathias Cormann.
That matters little, because from a macroeconomic perspective, which looks at the total impact of the policy decisions that will be taken in the budget, it is thankfully possible to focus on less than a dozen pages and just a few tables.
The big picture view will boil down to a comparison of the new data within the budget with that presented in the Mid-Year Economic and Fiscal Outlook (MYEFO) in December 2013 and the Pre-Election Fiscal Outlook (PEFO) in August 2013.
The main interest from a macroeconomic perspective will be the total impact on the budget bottom line from policy decisions taken by the Government. Changes in spending on defence, pensions, paid parental leave, the ABC, Direct Action and a myriad other programs together with the impact of any tax changes such as a deficit levy will indicate the extent to which government policy decisions will be adding to or subtracting from the economy.
Given the recent rhetoric of Treasurer Joe Hockey and Prime Minister Tony Abbott, there seems little doubt that the net effect of policy decisions will be to reduce the budget deficit and increase the surplus in the out-years of the budget projections. The question that will be resolved on budget night is “how much” this fiscal tightening will be from these policy changes and on whom the burden of these policy changes falls.
There is another aspect of the budget number crunching that almost certainly will have a significant impact on the budget bottom line – the strength of the economy.
A strong or weak economy has a huge impact on the budget bottom line. In Mr Hockey’s upcoming Budget, changes to the forecasts for the economy that underpinned the MYEFO, or the so-called parameter changes, are likely to work in favour of a smaller deficit and early return to surplus.
The parameters include Treasury forecasts and estimates for GDP, employment, inflation, wages growth, company profits, and all of the other aspects that Treasury uses to build up its best guesses for overall government revenue and spending. Treasury even forecasts cigarette sales for its calculation of expected revenue from tobacco excise.
It quite simply boils down to policy changes and parameter variations as the two items that will determine the change in the budget bottom line between the time of MYEFO and budget night, just as these two items accounted for all of the difference in the budget bottom line between the release of PEFO during the 2013 election campaign and MYEFO.
What is often overlooked in that instance is that the $68 billion increase in the cumulative budget deficits that occurred between the PEFO and MYEFO was driven both by policy decisions taken by the Abbott Government (which added more than $13 billion to the deficit) and the use of weaker economic parameters (which accounted for the other $55 billion deterioration).
Nothing else changed from a top-down budgeting perspective.
It is difficult to ascertain the net impact of policy decisions that will be included in the budget. The Government has until Saturday, May 10 to add or take things out of the budget, and there still appear to be many moving parts. Suffice to say, net savings and tax hikes totalling $40 billion over the four budget years seem to fit with the rhetoric of the Government as the Budget is being finalised.
What’s more, the clear and sustained pick up in economic activity since the time MYEFO was framed means perhaps a further $40 billion to the budget bottom line from a stronger economy. More economic growth, a lift in employment and even slightly higher inflation are all good news from an accounting sense in the Budget.
Assuming some backloading of the likely policy changes and the benefits to the budget bottom line from even slightly stronger economic parameters, the budget will be remarkably close to surplus for 2016-17 and beyond. The issue for locking in that surplus probably won’t fall to this budget, but to Mr Hockey’s second budget in May 2015, which will be delivered less than 18 months out from the 2016 election.
