Tuesday, November 03, 2009

But the numbers don't seem to add up - Colebatch

I love these lines:

"The Coalition, apparently unhappy that we're doing better than expected, wants the Government to withdraw its stimulus so we can do worse."

"The Government, already committed to what now looks like an excessive level of stimulus, has to convince us that it is still needed."

The full thing's in the National Times, and below the fold.

"THERE'S a puzzle in the Government's budget update. On one hand, it lifts the growth forecast for this year by 2 percentage points, which you'd think would reduce the deficit. Yet no. Somehow they end up with a worse deficit than they started with.

It sums up the weird debate we're having. The Coalition, apparently unhappy that we're doing better than expected, wants the Government to withdraw its stimulus so we can do worse.

The Government, already committed to what now looks like an excessive level of stimulus, has to convince us that it is still needed - while telling us at the same time that we are doing better than anyone else in the world.

''Australia is the strongest-performing advanced economy in the world,'' Treasurer Wayne Swan declared yesterday.

I guess that's why we've got unemployment up to 5.7 per cent now, forecast to rise to 6.75 per cent next year, whereas poor old Norway only has 3.2 per cent of its workforce unemployed, the Netherlands 3.5 per cent, Korea 3.8 per cent, and so on.

Perhaps the Treasurer thinks that the higher your unemployment is, the stronger your economy.

Some of us hoped that the midyear economic and fiscal outlook might shed some objective light on the debate. But as soon as you open it - on page three - you find a graph showing how well Australia is doing compared with other countries.

Only the footnote tells you it is actually comparing Australia in one period with the rest of the world in another. Spin has taken over.

For the economy, Treasury's new forecasts are far less gloomy than its previous, set six months ago. Compared with its May budget forecasts, its estimate of growth in 2009-10 is up by 2 percentage points. Its estimate of employment in mid-2010 has risen by almost 200,000 jobs. Its forecast of unemployment is down from 8.25 per cent to 6.75 per cent - which it now thinks will be as bad as it gets.

By normal rules of thumb, that should lower the budget deficit.

Access Economics director Chris Richardson, who was formerly Treasury's numbers man on all this, estimates that 1 percentage point increase in growth improves the budget bottom line by almost $3 billion. A higher exchange rate also boosts the bottom line. And Treasury estimates that paying fewer unemployment benefits will save it $1.4 billion this year, $5.2 billion over the next four years.

Access publishes its own budget forecasts, and it predicts all this will cut the deficit by $12 billion this year, $20 billion next year and $64 billion over the four-year forecast period. Yet Treasury, working off broadly similar economic forecasts, predicts a net increase in the deficit of $100 million this financial year, although it would shrink over the following three years by a total of $36 billion. So $28 billion is missing. Where did it go?

Almost half of it has been swallowed up by programs costing more than expected. Installing insulation batts alone will cost almost $1 billion more this year than anticipated. The midyear review revises up total program costs by $2.6 billion this year, $13.5 billion over four years. It quotes many reasons why, but the bottom line is that these revisions lift government spending by 1 per cent across the board.

The other gap is that Treasury forecasts no revenue bounce from the dramatically improved economic outlook until 2010-11. In fact, it now predicts $1.5 billion less personal and corporate income tax revenue for 2009-10 than it predicted six months ago.

Access disagrees. It expects income tax revenue to rise $10 billion above the May forecasts, mostly in corporate tax, but also in tax on the super funds, the self-employed and the oil and gas sector. That's why it forecasts a $45 billion deficit this financial year, which would then slim by about $10 billion a year, to be $14 billion in 2012-13.

That last figure is roughly what Access sees as the ''structural deficit'' left by the Howard government's spending on middle-class welfare during the minerals boom and the Rudd Government's stimulus measures during the crisis.

''There is still a substantial budget repair task ahead,'' it warns. ''Having partied during the good years, we now face the hangover.''

But we won't face it until after the election. On Treasury's forecasts, growth in 2010-11 would be not quite enough to trigger the Government's pledge to restrict growth in real spending to 2 per cent. It would still be free to spend up in next year's budget if, as one suspects, Treasury revises up its revenue forecasts in May rather than now.

Even on these estimates, though, public debt is now forecast to peak at just 10 per cent of GDP, rather than the 14 per cent previously forecast, and a sharp contrast to debt ratios ranging from 82 per cent (Germany) to 144 per cent (Japan) in the biggest Western economies.

Seriously, folks, that is not a problem - so long as the Government keeps to the path of fiscal discipline it set out.

We have a good story to tell, even if the Government keeps exaggerating it, and even if Treasury is right in forecasting unemployment to rise by another 100,000 before it peaks.

The Coalition should shift the debate from its futile attempt to demonise the stimulus to focus on the real victims of the recession: the unemployed, now condemned by the Rudd Government to survive on a dole benefit of just $32.57 a day, plus whatever the welfare agencies can give them. Why don't we aim to lead the world on that?"

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