The manner by which the Mid-Year Economic and Fiscal Outlook is being released – a speech by Treasurer Joe Hockey to the National Press Club – tells you all you need to know about what this document is really all about.
For many years now it has been apparent that the main significance of the major Government economic statements, the annual Budget and MYEFO, has been as set pieces of political theatre rather than anything much to do with running the economy.
The days of markets surging or tumbling on Budget forecasts for growth and spending are long gone.
In the hands of Treasurers who were able political operators (think Paul Keating and Peter Costello), Budgets were more about imagery than numbers.
Keating had his emblematic turns of phrase, like “this is the one [Budget] that brings home the bacon”. During the 2000s, Costello delivered a string of Budgets with “surprise” revenue upgrades (to the extent that Treasury’s forecasting abilities became the butt of jokes).
This is how Hockey’s performance today needs to be viewed.
When he bemoans the parlous state of Government finances bequeathed to him by Labor, take it as a piece of political theatre, rather than an unsentimental appraisal of the fiscal position.
As has been extensively telegraphed by the Government through a series of leaks, MYEFO is likely to show the Budget deficit has ballooned out to close to $50 billion – a massive deterioration from the $30.1 billion estimated in the Pre-Election Economic and Fiscal Outlook released in mid-August.
Has the world really become so much darker in the past four months? The short answer is no.
While all the publicity surrounding the departure of Holden and other high profile business problems may have you thinking otherwise, the evidence in fact suggests that things are improving.
Internationally, the US recovery appears to be strengthening, China shows no signs of falling into the hole that many feared, and the euro zone appears to be negotiating the (very) early stages of a recovery.
Domestically, low interest rates are boosting housing activity and the dollar is easing lower. Treasury is basing its gloomier outlook on several developments since PEFO. It says the pick-up in non-mining activity and housing activity is slower than it was expecting, while mining investment has fallen more sharply than anticipated. “As a consequence,” MYEFO says, “employment growth is expected to remain subdued, and wage growth is forecast to remain well below trend.” This in turn will mean households hold back on their spending, restraining growth. All quite plausible.
But as Treasury itself admits, “nominal GDP growth forecasts carry with them additional uncertainty. The 70 per cent confidence interval for average annual nominal GDP growth over the forecast period ranges from 2 per cent to 5 per cent”. That is a not-insignificant range.
The economy’s transition away from mining investment-led growth to other supports for activity remains hesitant, and the speed with which other sources of growth develop is uncertain. But there is evidence that consumers and businesses hare shedding the funk that has held back spending and investment (excepting resources) ever since the GFC.
But the political story line Hockey wants to outline begins with Australia under Labor being driven into the ground. Queue forbidding music, dark skies and storm-lashed seas.
Over coming years, the narrative will go, the storm clouds will gradually dissipate, and at some yet-to-be-determined point in the future (though possibly in the months before the next Federal election) the first rays of economic sunshine will pierce the gloom, and the Coalition will be able to assure voters is has the country on track.
It is all a piece of political alchemy.
The fact is, in recent weeks, Treasury will have presented Hockey with a range of forecasts for nominal GDP (and hence, revenue) that range from the optimistic to the pessimistic, depending on various scenarios regarding developments in international economic conditions, the exchange rate, commodity prices, the rate of slowdown in mining investment and the speed of improvement in activity in other parts of the economy.
For his political purposes, Hockey has plumped for the worst-case scenario of soft growth and weak revenue flows.
This is not to say that Treasury has ‘invented’ the numbers to suit the Government’s political agenda – the forecasts are plausible and justifiable.
But they are just part of a range of possible outcomes, as Treasury itself explains in Attachments A and B in Part 3 of MYEFO.
On page 57, Treasury publishes a chart (Chart 3.9) indicating that “there is notable uncertainty around receipt forecasts and that this uncertainty increases over the estimates period”. For 2013-14, the 70 per cent confidence interval is a range of $20 billion and, at 90 per cent confidence interval, it is $30 billion.
Treasury is similarly cautious about its forecasts for the underlying cash balance (Chart 3.11, p58). The 70 per cent confidence interval for its 2013-14 forecast is $25 billion, and at 90 per cent it is $40 billion.
What the Coalition is doing with the Treasury numbers is nothing new. In the same way, for several years in a row, Labor Budgets contained projections for growth and revenue (particularly earnings from the mining tax) that were much more optimistic than many thought probable, because they supported the-then Government’s political goal of achieving a surplus in a set period.
Don’t get me wrong – Government spending is a problem. But the Coalition so far is taking the same Magic Pudding approach to public finances as Labor.
The current game of deficit/surplus one-upmanship between the major political parties is tiresome and empty.
It will only mean something when there is recognition of the much more important issue (as Rob Burgess highlights in Business Spectator today) of the structural position of the Budget.
The Parliamentary Budget Office forecasts the Budget to be in structural deficit until at least 2016-17, and thought bubbles like the Coalition’s ‘Direct Action’ climate change policy and its over-the-top paid parental leave scheme suggest the Government has no more appetite to tackle the problem than Labor ever did.
Outlier 