Election Claims of Economic Benefit

On 9 May my Commentary drew attention to the estimates for the budget and the economy in the next two years and suggested that these should be the starting point for assessing election proposals by the major parties. I repeat here the following table summarising the budget estimates.

Receipts Payments Deficit
$bn %GDP $bn %GDP $bn %GDP
2015-16 388.0 23.5 425.0 25.8 39.9 -2.4
2016-17 411.3 23.9 445.0 25.8 37.1 -2.2
2017-18 437.4 24.2 459.9 25.5 26.1 -1.4

Since 9 May there have been increasing claims about the economic benefits from various policy proposals and increasing critiques of those claims. One such critique by the AFR’s Laura Tingle argued that Turnbull’s 10 year economic plan of company tax cuts is “thin” but she failed to explain why this might be so (see “Tingle on Turnbull’s Plan”). My letter published in today’s AFR suggests that
assessments of possible economic benefits from budgetary measures need to take account of the effect of the total budget, not just one item in it. The heading given by the Editor to the letter – Budget forward estimates just hot air – should not be taken literally, however!

The total budget analysis is particularly relevant to Turnbull’s tax cut as the budget estimates actually provide for an increase in the overall tax burden relative to GDP both next year and the following year ie economic benefits from the reduction in the tax on small business may well be more than offset by increases in other taxes. And beyond 2017-18 the obvious question is what proposals will emerge during the election and what will the total budgets be like in those years. In effect, the claim that the $48 bn cut in company taxes over ten years will add 1 per cent to GDP is a ceteris paribus one ie it assumes that everything else stays the same as it is now.

This is of course relevant to both the Coalition and Labor, which has yet to produce its budgetary picture. In fact, Labor says it will not release its budget outlook until the latter part of the campaign, after being assessed not by Treasury but, contrary to the “Charter of Budget Honesty”, only by the Parliamentary Budget Office. Whatever, it does appear likely that its tax proposals as announced so far will involve an increase in the overall tax burden and a bigger increase than in the Coalition’s budget. So far the Coalition seems to have let this pass through to the keeper presumably because it does not want to acknowledge the increase shown in its budget. Beyond all this, changes in either the domestic or overseas economies can require major changes in the originally intended budgets.

Labor has also run into trouble with its claim that its proposed increase of $37.4 bn in expenditure on schools education over ten years (see Labor’s Benefit Claim for Education) will increase GDP by 2.8 per cent “straight away” and by 11 per cent “in the longer term”. As indicated in the attached report in The Australian, this claim is based on a misinterpretation of an OECD report authored principally by an academic. But beyond that it is simply another ceteris paribus. Just posing one question alone exposes the absurdity of the claim, viz if the Federal government provides an extra $37.4 bn will the States continue to increase their school funding at the same rate as they have been doing or are they likely to reduce their contribution?

In the attached article The Australian’s Political Correspondent, David Crowe, suggests that “the clash over growth is now central to the election campaign”. Perhaps it will. But if so it will reveal the failure to undertake a meaningful economic analysis by both sides and the media.

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