MYEFO: Under-promising pays off for prudent Josh Frydenberg

The release of the Mid-Year Economic and Fiscal Outlook ends the political year. Barring some economic catastrophe, which looks very unlikely at this stage, we should expect Josh Frydenberg to take a well-earned break.

It has been a big year for the ­Coalition government, with its ­unexpected re-election in May. The Treasurer was one of the senior members of the government who simply would not give up, making important pre-campaign contributions starting in January.

His principal theme has been consistently stated: the government will manage the budget ­responsibly while Labor cannot be trusted to do likewise.

In keeping with this theme, the most recent MYEFO document reflects a degree of caution.

Under-promising and over-­delivering have more political ­appeal than the reverse.

Labor’s Wayne Swan was the past master of the latter. Who can forget the “four budget surpluses I announce tonight” or the many billions of revenue that were going to flow from the imposition of his ill-fated mining tax?

Frydenberg would never fall into the same traps.

MYEFO has revised down likely revenue over the four-year forward estimates period by nearly $33bn. The combination of lower tax revenue from company and ­individual income taxation as well as from the GST are the principal factors behind this writedown.

Mind you, the Treasurer is being cautious when it comes to making assumptions about the iron ore price. The assumed figure of $US55 a tonne in MYEFO is more than 40 per cent below the current price.

If global economic conditions are about to improve as a result of the first stage of a trade deal ­between the US and China and the election of the Johnson government in Britain, there are reasons to expect that the higher iron ore price (and other commodity ­prices) will persist. Such an outcome will add billions to the budget’s bottom line.

Recognising that the labour market may have changed in a fundamental way, MYEFO contains more realistic assumptions about the future growth of wages. In 2020-21, for instance, the wage price index is expected to increase by 2½ per cent rather than 3¼ per cent. The latter had been assumed in the budget delivered in April. This lower rate of wage growth feeds into lower growth in individual income tax revenue, although the very high rates of employment seem likely to continue. Record numbers of workers are associated with higher income tax revenue.

Finally, on the criticism that the Coalition’s budget strategy is fundamentally based on the government being high-taxing — a higher-taxing government than Labor ever was — two points need to be made. (Unsurprisingly, this myth is being peddled by a former economic adviser to Julia Gillard and picked up by the ABC.)

First, decades-long comparisons of taxation receipts as a proportion of GDP make no sense given the introduction of the GST in 2000. Even though GST revenue is remitted entirely to the states, it is recorded as a commonwealth tax. Pre- and post-2000 comparisons are therefore misleading. Second, taxation receipts are endogenous — they respond to economic conditions and the design features of the particular tax. Swan dearly wanted more tax revenue but the economic conditions were not conducive to this happening. And some of the features of the taxes in place — the dud mining tax, but also the delay in the surge in company tax receipts because of a high level of prior investment – meant his dreams were never fulfilled.

By the end of the forward estimates in 2022-23, taxation receipts as a proportion of GDP will be 23.2 per cent, well below the cap that the Coalition has set itself of 23.9 per cent. Recall that former Labor Treasury spokesman Chris Bowen had run with a much higher cap going into this year’s election.

The Coalition’s budget strategy is based on disciplined control of spending growth in combination with a tax base (and non-tax receipts) that generates enough revenue to more than cover expenses. My guess is that’s the kind of approach that appeals to most voters.