Last nights’ Budget has inevitably attracted a raft of comment in today’s media. We don’t intend to add a great deal to that since one’s stance on the pros and cons of the announcements will largely be a matter for where your politics sit. What is interesting is the divergence of views being expressed with those in Opposition and from the “left” talking of savage cuts while those in Government and from the “right” making note about the need for fiscal consolidation in the face of a budget “crisis” and the need for “everyone to do their bit”. There is also an apparent consensus from the economics fraternity that actually there has not been enough done to address the structural problems inherent in the budget and disappointment that many of the bolder measures have been delayed, or financial repair made reliant upon a return to above-trend growth.
We try and maintain an apolitical position in this blog and will therefore focus our commentary on the economics. It is certainly interesting (and probably inevitable) that the dire economic predictions that were incorporated into the MYEFO in 2013 just after the election have been reversed somewhat in this budget. Indeed they are brought back largely into line with the pre-election PEFO. The Budget Papers detail a change in the way that Treasury will now treat the “projected” years (the 2 years beyond the “forecast” years). The old standard was that GDP in projected years was assumed to return to trend growth while unemployment was assumed to immediately return to 5%. This was amended in the 2013 PEFO to assume above-trend GDP growth and a gradually declining unemployment rate to allow for the gradual taking up of spare capacity in the economy. In the 2013 MYEFO the projected years were assumed to see trend GDP growth with the unemployment rate remaining at the level forecast at the end of the “estimate” years (in this case 6.25%). This was clearly a political move to make the fiscal picture look worse in order to allow more scope for an “improvement” in coming years. It is therefore no surprise to see the Budget again shift assumptions. Now excess capacity (which is forecast at 2% of GDP by the end of the “estimates”) is assumed to be taken up over a period of 5 years. This means that GDP growth in the Budget is higher than in the MYEFO (with GDP back to trend by 2020-12). Unemployment is forecast to converge to the long term trend over the 5 years and as a result the Budget assumes lower unemployment benefits than the MYEFO.
Taken together these changes in methodology and projections improve the cash balance by $3.4bn by 2024-25.
What will disappoint many economists (including this one) is that much of the heavy lifting is actually forecast to come from increased revenues caused by income tax bracket creep as the economy grows (or at least is assumed to grow). Revenue increases of $60bn by 2017-18 come from this bracket creep effect which compares to just $15.5bn of budget bottom line improvement from announced measures in the budget over that time (many of the big ticket improvements announced last night don’t start to have effect until after the next election).
As to whether we face a “budget crisis” or not, and whether or not the Budget addresses such a crisis, we will let the 2 graphs below speak for themselves.
What the graphs show is that (forecast) revenues growth is responsible for much of the bottom line improvement with only small changes on the payments side. Also of note is that net interest payments remain at very low levels; suggesting a very low level “crisis”!