Budget kicks the can of structural repair down the road

Posted on May 10, 2017 by Pete Faulkner - General Economics, Uncategorized

Among all the Budget 2017-18 announcements and trumpeted measures (of which Nick Behrens from QEAS provides as good a summary as any here) the most interesting (disappointing?) chart for me comes in Budget Paper 1, Statement 3 regarding the Structural Budget Balance. As the Budget acknowledges; “Restoring the structural integrity of the budget is crucial for achieving surpluses on average over the economic cycle and paying down government debt“.

The Budget papers go on to say…”The structural budget balance estimates seek to remove factors that have a temporary impact on revenues and expenditures, such as fluctuations in commodity prices and the extent to which economic output deviates from its potential level. Considered in conjunction with other measures, estimates of the structural budget balance can provide insight into the sustainability of current fiscal settings. Improvements in the terms of trade since the 2016-17 MYEFO are cyclical. As such, Treasury estimates of the structural budget balance over the forward estimates are largely unchanged since MYEFO.”

Essentially what they are saying here is that the resource price led mini-windfall that the Government is enjoying now (and which has added some $5bn to revenues over the forecasts to 2020-21) is unlikely to last. Additionally, none of it is being used to improve the long-term structural position. In the years to 2020-21 total revenues are forecast to be some $11.4bn above those forecast in the 2016-17 MYEFO ($6.4bn of that due to increased taxation of various types announced in this Budget) and yet, as the Treasury admits, “estimates of the structural budget balance over the forward estimates are largely unchanged since MYEFO.”

If we want to address the structural deficit that we face then we need to be bold enough to take opportunities to improve it when they present themselves. This Budget has used such an opportunity to increase spending instead.