Lack of carbon tax detail distorts bottom line

YESTERDAY'S budget was more than a little incomplete for not including the impact of a carbon tax in its projections.

YESTERDAY'S budget was more than a little incomplete for not including the impact of a carbon tax in its projections.

 After all, a carbon tax fundamentally changes the Australian taxation system. But despite the political attacks by Tony Abbott, it is unreasonable to expect a still to be finalised new tax to be set into the budget mix.

Abbott tried to exploit the carbon tax not being in the budget by saying it would leave a "hole in its heart". He is right, but so is Wayne Swan when the Treasurer identifies the hypocrisy of Abbott, noting that the Goods and Services Tax the Coalition introduced wasn't included in the budget estimates when it was announced two years before implementation.

Like the carbon tax now, details were still being drawn up. But that doesn't alter the fact that without a carbon tax in the mix the budget we have the details for is likely to be even more inaccurate than usual.

Treasury has turned inaccuracy in forward estimates into an art form in recent years. During Howard's time in office, the rivers of gold from the mining boom swelled government coffers beyond predictions, leaving larger than projected surpluses year on year.

This led to ad hoc spending commitments by the Coalition over and above longer-term economic restructuring in the second half of its life cycle. During Labor's period in office, most estimates have under-calculated the size of deficits, leaving Labor to scurry around at five to midnight to find more savings.

Projecting what the economy will and won't do, and how it will operate, is anything but an exact science. That's why Labor's frothing at the mouth about the Coalition's $10 billion black hole in its election spending calculations is a little over the top.

Yes, Joe Hockey and Andrew Robb made some elemental mistakes when putting together their costings, such as including dividends for Medibank Private even after they had put in place a policy to sell it. I'd love to keep receiving dividends for stock I have sold off but I am not sure the companies would find it in their hearts to keep sending me the cheques. That example was embarrassingly amateur by the Coalition's finance team.

But despite such mistakes (and there are others), the baulk of the so-called black hole in the Coalition's election costings came about because the opposition used different calculations to Treasury when making their assumptions. That said, the Coalition went into the last election well aware of what modelling assumptions Treasury used, and chose not to follow them. Which is why it chose not to submit many policy costings until after the election, when both sides were scrambling for the support of the independents.

Labor couldn't be expected to include a still unformed carbon tax in yesterday's budget.

But it also must accept that the rest of us will be cynical about the projected path back to what is a very narrow surplus because a carbon tax has the potential to impact so heavily on assumptions underlining the budget.

This is an important point. Labor is pinning its economic credibility on a return to surplus, yet it is pinning its environmental credibility on a carbon tax that still unformed will need to be included in future economic assumptions. Because the surplus is expected to be quite small in the years ahead, you have to wonder if the target will be reached once a carbon tax is in the mix.

If the new tax affects investment in mining, steel production and so on, the revenue assumptions in the budget will be overblown. If it makes Australia's exports uncompetitive, projections will also be out. If the cost to households from higher prices reduces how much money people spend into the economy, that will knock assumptions out of whack as well.

All of this underscores the significance of the carbon tax as we wait for details, as well as the insignificance of the surplus target, no matter how much the government crows about it.