Budget Analysis

There is more than one way of skinning a cat – and of interpreting a budget. In previous messages I have criticised the (deliberately) leaked predictions that spending reductions in the Abbott government’s first budget would be too spread out over the years ahead, that unnecessary additions to taxes would be taken, and that the rationale for a “tough” budget had not been explained the community. I maintain these criticisms of the budget as announced.

This not to deny that, if realised, the budget is moving in the right direction and does include some appropriate initial spending reductions and policy changes. But contrary to what the usual suspects (such as the Labor Party and the ABC) are saying,  this is a “soft” budget which is an opportunity missed.

My interpretation focuses here on the aggregates of estimated/projected spending, revenue and deficit from the starting point for the Abbott government in 2013-14  in the MYEFO published in December to the last year of the forward estimates in 2017-18 (see also the graphs in the first article below). For comparison I include the aggregates for the start of the Howard government and the two years of Rudd’s “stimulus”.

This table shows that the budget proposes a reduction in spending of about 1% of GDP by 2015-16 and then no further reduction. In 2017-18 spending would be only slightly lower than in the first year of the Rudd stimulus in 2008-09 and the 1% of GDP reduction is spread over two years whereas the Howard government achieved that in one year (and the Hawke-Keating government reduced spending by about 4 percentage points of GDP to 23% of GDP in 1989-90 when faced with external problems not existing today). Further, the reduction in the deficit after 2015-16 is entirely attributed to (natural) increases in revenue.

It is little wonder that the economic forecasts for 2014-15 say that no “material effect” is expected from the reduced deficit. The implication is that, even if one accepted an adverse Keynesian effect from a larger reduction, more could have been done without seriously detracting the economy. Indeed, about a third of economic growth in 2014-15 and 2015-16 is forecast to come from net exports.

Now the Government faces the political difficulty of securing the passage through the Senate of a budget that is far from being tough and would likely have faced the same opposition if it had been tougher. This difficulty has been enhanced by suddenly announcing now, without any warning to State governments, that there will be major reductions in grants for health and education from 2017-18. This creates an additional unnecessary risk that the government will become involved now in  major dispute over the budget for 2017-18 and beyond! This possibility arises because the government has an objective of achieving a 1% surplus by 2023-24 and apparently feels the need to show now how that might be done. C’est la vie.