NEWSFLASH! In September I will join The Conversation as its Business and Economy Editor. I have been honoured to work at The Age for the past ten years, originally alongside the legendry Tim Colebatch, and for the past four years as economics editor in my own right.

At The Conversation, my job will be to make the best thinking from Australia's 40 univerisites accessible to the widest possible audience. That means you. From the new year I will also write a weekly column.

On this site are most of the important things I have written for Fairfax and the ABC over the past few decades. I recommend the Search function. The site is a record for you, as well as me.

I'll continue to post great things from The Conversation and other places here, and also on Twitter and Facebook. Enjoy.

Tuesday, December 20, 2016

MYEFO. Call that an improvement? The ratings agencies won't

The ratings agencies won't fall for it, and neither should you.

Treasurer Scott Morrison has revised down tax revenue by $30.7 billion over the next four years in a belated admission he has a revenue problem.

But he says the budget deficits will only deteriorate by $10.4 billion.

We're meant to think the $20 billion difference is the result of cost-control. But it isn't. All up, government measures to make up the difference net out to just $2.5 billion. Over four years, that's a cut in projected spending of 0.13 per cent, barely a rounding error.

Instead it's pulled out the savings from the fiscal equivalent of the back of the couch.

It's discovered that childcare benefits aren't being taken up at the rate expected, so it's lopped $7.6 billion off the amount it expects to pay. It's discovered that pension payments are growing more slowly than expected, so it's lopped off another $2.7 billion. The support for carers program is also costing less than expected, so it's lopped off another $1.9 billion.

All up these "parameter variations," colloquially known as "hollow logs", amount to $12.2 billion. They're handy for making it look as if you're doing something to fight collapsing revenue when you're not doing much.

There's a lot the government could do if was minded to. It could abandon or postpone its largely-unfunded company tax cuts, saving $2.7 billion over the forward estimates, and eventually $8.2 billion per year, it could slash the capital gains tax discount, saving $5.4 billion, it could end negative gearing on newly-purchased assets, saving $2.6 billion, which would grow to something much bigger. They are the type of things the ratings agencies expect from governments just re-elected.

As it is, it is attributing a big chunk of the improvement in the deficit to bracket creep brought on by an arguably implausible lift in wage growth. Right now, wage growth is just 1.9 per cent, the lowest on record. We are asked to believe it will climb to 2.25 per cent and then to 2.5 per cent. We're not told why.

Even with apparently heroic forecasts and hollow logs, the surplus it is forecasting for 2020-21 is now close to nonexistent. It's $2 billion, around 0.1 per cent of GDP, which isn't enough to convince anyone of anything.

In The Age and Sydney Morning Herald

Bad news now in the hope of good news in May

Treasurer Scott Morrison loaded up the mid-year budget update with bad news in the hope that the budget itself, due in May, will appear to contain good news.

At his instruction, the Treasury has included the recent extraordinary jump in commodity prices in its budget estimates for the current financial year, but not for future financial years, even though it would have been perfectly entitled to.

"In recent years, Budget and mid-year update forecasts have used an assumption that commodity prices would remain around a recent average over the forecast period," the Treasury explains in a statement.

"In light of the current exceptional circumstances for bulk commodities, this assumption is not considered prudent at this time. An alternative assumption of a phased reduction in prices from recent levels has been adopted for metallurgical coal and iron ore.

"The metallurgical coal price is assumed to be US$200 per tonne free on board in line with the December 2016 quarterly contract price, before declining through the September and December quarters of 2017 to reach a level of US$120 per tonne in the March quarter 2018.

"This price is consistent with recent industry liaison."

As a result, the budget position has been revised up for this financial year, but revised down for those that follow. It means that, if commodity prices do indeed turn down, as the Treasury expects, the May budget won't contain a nasty surprise.

If they stay high, as is possible, the May budget will look better than expected.

It matters that the May budget will be produced when everyone is watching, while Parliament is sitting and TV networks and newspapers are producing special editions. The mid-year budget update is being released more quietly, days before Christmas in a news event that's likely to be forgotten before its properly remembered.

By bringing forward potential bad news, the Treasurer has ensured it will be barely noticed, compared to what he is hoping will be good news in May.

In The Age and Sydney Morning Herald