Friday, May 20, 2016

Don't trust the budget numbers. Treasury says so

About the only thing the Treasury believes about this year's budget is the economic forecasts. It certainly doesn't believe the deficit forecasts.

Temporarily unmuzzled by its political masters, the Treasury has revealed that the forecasts are propped up by $18 billion of budget measures still on the books but not yet through the Senate. Many date back to 2014. They are propping up their third budget.

They are propped up too by "the established practice of assuming that, once the economy returns to potential, it remains growing at that rate".

The practice assumes away problems. "Should Australia experience a significant negative economic shock, the fiscal position would be expected to deteriorate rapidly and not be consistent with the projections," the Treasury warns.

The most bizarre and unlikely assumption is that Australia's tax receipts will never climb above 23.9 per cent of GDP. It's a government-imposed figure which is the average between the introduction of the GST and the global financial crisis. There's no particular reason for it, and it makes budgeting nonsensical. When Australia's tax receipts eventually climb back up to that level it will be impossible to improve the budget by tightening up on tax concessions. As soon as that's done, other taxes would need to be cut in order to stay below the ceiling. The budget could be improved by eating into pensions, but not by eating into super concessions.

The Treasury is also worried about Australia losing its triple-A credit rating, far more so than it was able to admit in the budget papers that were signed of by the Treasurer. "It is crucial for Australia to maintain its top credit rating to ensure the Commonwealth's borrowing costs, and those across the economy more generally, are kept as low as possible," it says.

If the government's rating was downgraded, the ratings of the banks would also fall. Private estimates say it would add about $200 million to banks' interest bills.

The Treasury left its economic forecasts the same in order to avoid implying false precision, and perhaps also to avoid distracting from its central message, that the projections in the budget it helped produced just three weeks ago are less than believable. 

In The Age and Sydney Morning Herald

Lift tax or cut spending - budget update

Treasury and finance have warned both sides of politics that big spending cuts, or higher taxes, will be essential if the budget is to be returned to surplus.

And in a blunt message to their political masters, departmental secretaries John Fraser and Jane Halton say it is "crucial for Australia to maintain its top credit rating".

The warnings are contained in the Pre-Election Economic and Fiscal Outlook, which is prepared by the two top financial authorities without input from ministers and released shortly after the start of the campaign.

Coming so soon after Scott Morrison's May 3 budget, the major forecasts for gross domestic product, unemployment, wage growth and the consumer price index are unchanged, despite a recent interest rate cut, a fall in the iron price and weak wages and labour force data.

"Without considerable effort to reduce spending growth, it will not be possible to run underlying cash surpluses, say in the order of 1 per cent of GDP, without tax receipts rising," it says.

The government has imposed a ceiling on tax revenue of 23.9 per cent of GDP.

The heads of treasury and finance say that even if the government manages to spending back down to its long-term average, tax receipts would still need to climb to around 24.2 per cent of GDP by 2026-27, well above the average of the past 30 years, and well above the government's target in order to achieve a surplus of 1 per cent of GDP."

It says the budget forecasts are propped up by $18 billion of unlegislated so-called zombie measures from this year's and earlier budgets that have yet to pass through the Senate. If they remain stalled, the five-year budget outcome will be $18 billion worse than the budget papers suggest.

The document quotes tax commissioner Chris Jordan as saying that one of the budget measures, the tax cut for Australians earning over $80,000, is unimplementable without leglislation. The government says the tax cut is means it will start on July 1 as promised however income will be deducted from pay packets under the existing schedule. If later the measure is approved by the Parliament the schedule could be amended, or extra could be returned to high income earners in their tax returns.

Finance Minister Mathias Cormann said that wasn't a problem given that people would not be putting in their income tax returns for the 2016-17 financial year until next year. It was how previous Labor governments had handled similar tax cuts.

Shadow treasurer Chris Bowen said Labor backed the tax cuts but that the government had "clearly not done its homework".

"The dysfunction of having a budget brought down and then three weeks later, less than three weeks later, the secretaries of the departments reporting that a key measure might not be delivered says it all. This is a budget which veered from thought bubble to thought bubble."

Mr Cormann called on Labor to explain how it would fund its promises. The release of the document left it "no more excuses"

The department echos a warning from ratings agency Moody's last month that Australia's AAA rating was be at risk.

"Commonwealth government debt levels are projected to reach recent historical highs, both on a gross and net basis," it says. "These debt levels are not an immediate concern given historically low interest rates and a growing economy, but should Australia experience a significant negative economic shock or increased interest rates or debt levels rise above current projections over the medium term, the debt burden will impose an increasingly significant cost on the fiscal and economic outlook."

"It is crucial for Australia to maintain its top credit rating to ensure the Commonwealth's borrowing costs, and those across the economy more generally, are kept as low as possible."

Mr Morrison and Mr Bowen will face off in a debate next Friday.

In The Age and Sydney Morning Herald