MYEFO an extraordinary turnaround, but maybe not enough to save them

Today’s MYEFO reveals an economic pot of gold, but it might not be enough to save the Coalition at the next election.

Treasurer Josh Frydenberg and Finance Minister Mathias Cormann in the Treasurers office before the release of the mid-year economic and fiscal outlook (MYEFO). Picture: Kym Smith

The government has been kicked up the backside by a fiscal rainbow. MYEFO reveals that nominal GDP has accelerated from 3.75 per cent as forecast in the May budget to 4.75 per cent in MYEFO.

In other words there has been a large increase in revenue via higher tax receipts. In his media conference the Treasurer said the nominal GDP figure was “critical” to the outcomes today.

He’s absolutely right.

The nominal GDP surge explains in large part the change to the forecast deficit for this financial year, from a $14.5b deficit to one of just $5.2b.

The changes in the terms of trade underlines the commodity led recovery over the last six months. The terms of trade went from a May budget forecast of minus 5.25 per cent to 1.25 per cent according to MYEFO.

That is an extraordinary turnaround in just six months.

With some hard work and clever accounting the government now has the genuine option of handing down a small surplus for this financial year in the April budget next year.

Doing so would give it a powerful economic argument, but it might not be enough to save them at this election.

More likely it is something the next generation can refer back to from opposition, as a way of maintaining economic credibility, especially if the numbers went south again under a new Labor government.

Any decision whether to tighten the belt and deliver the surplus a year early will likely be an argument between Josh Frydenberg who as Treasurer may want to do so, and PM Scott Morrison who more likely wants to pork barrel (to some extent) and try and spend his way out of electoral trouble.

He certainly might not want to use clever accounting to hand down an early surplus lest it be called out in the short term and damage any electoral advantage from doing so.

Today’s Fairfax-Ipsos poll (Coalition trailing Labor 46-54 per cent on the two party vote) reflects the last two Newspolls (45-55 per cent).

Morrison has a serious electoral problem.

What we also know from MYEFO is that the government is hiding over $9b of tax cuts to be announced, presumably during the election campaign or in the April budget, over the forward estimates.

This comes from “decisions taken but not yet announced” in MYEFO. $2.5b worth in 2019/20, $3.8b in 2020/21 and $3b in 2021/22. The smart money must be on the tax cuts coming in the form of highly targeted income tax cuts.

MYEFO also reveals over $1.6b “decisions taken but yet to be announced” in spending.

This will include money being handed out to win votes on the campaign trail.

It’s relatively modest, certainly compared to the tax cuts being planned.

The money has been set aside so any such announcements can be made without impacting on the forecasts.

The take out is simple: the government plans to use tax cuts more so than pork barrelling to try and win the next election. Labor will seek to do the opposite.

This will create a genuine contrast for voters when deciding between the government and the opposition.

While the government got lucky off the back of surging nominal GDP, it also helped make such luck. Spending has been relatively restrained. Without such discipline the surge in revenue wouldn’t have delivered the numbers we’ve seen today.

— Peter van Onselen is a professor of politics at the University of Western Australia and Griffith University.