Budgets are always a mixture of economics and politics. Pre-election budgets are always more politics than economics. Shadow treasurer Jim Chalmers may think he’s on to something pointing this out; it would be exactly the same were Labor in power.
But one of the outstanding themes of this year’s budget is to highlight how weak the Treasury is at forecasting both the economic and fiscal outlooks. In effect, the Treasury was far too pessimistic last year and even in the mid-year statement but, having come to its senses, the budget is looking up.
Of course, it was always going to be difficult to make accurate forecasts in the context of a worldwide pandemic as well as, more recently, natural disasters and the war in Ukraine. But it’s unclear what conceptual model was in play when it forecast unemployment to shoot up so dramatically.
The fact is the main economic effect of the pandemic was to create some temporary supply-side impediments to economic growth – think lockdowns, social distances, border restrictions – that could not be remedied by traditional demand measures.
That the saving ratio increased to the degree it did – twice in response to different waves of the virus – tells us that people had too much to spend but couldn’t.
The Treasurer may speak with pride about the $314bn of economic support – around 15 per cent of GDP – committed since the start of the pandemic.
But this doesn’t answer the central question of whether either the level or mix of spending was appropriate given the consequential increase in government debt to be picked up by future generations.
A key table in the budget papers is the reconciliation of the underlying cash balances between the effect of government decisions and that of parameter impacts, the latter being in effect forecasting errors. For 2022-23, the parameter impact was estimated at $38bn.
The budget deficit could have been as low as $51bn.
But the government decided to spend more/tax less to the tune of $17bn, meaning that the budget deficit comes in at $78bn.
The best that can be said about this is that it could have been worse, but clearly more fiscal consolidation was possible – just not in an election year.
When it comes to the Treasury’s forecasts, there are some significant queries, particularly in relation to future inflation.
Given what is happening overseas with price rises – the latest figure for the US was a 40-year high – it is surely optimistic to think the CPI will increase by only 3 per cent in 2022-23 and 2¾ per cent the next year.
It is only on the basis of these optimistic forecasts that wages are expected to increase (slightly) in real terms over the course of the next two years.
The discussion in the papers about using an alternative wage measure – average wages from the National Accounts, which includes bonuses, overtime and promotion – looks a bit forced given the Treasury’s woeful record in predicting the course of wages and the government’s embarrassment about the sluggish growth of wages.
By contrast, the Treasury is expecting very substantial falls in commodity prices (coal/iron ore) in the near future, even though it is anticipating reasonable growth in our largest trading partner, China – 5¼ per cent in 2023 and 5 per cent in 2024.
When it comes to the medium-term estimates and projections, there are still no budget surpluses expected between now and 2032-33, although the deficits now look smaller than last year (see above re Treasury’s excessive pessimism). How this fits in with the government’s stated Economic and Fiscal Strategy of “targeting a budget balance, on average, over the course of the economic cycle that is consistent with the debt objective”.
The debt objective is “stabilising and then reducing gross and net debt as share of the economy.”
But be clear, this debt objective is only met by dint of the assumptions made, including continuing low interest rates and robust nominal GDP growth.
It’s essentially a house of cards that could easily come crashing down.
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