Tuesday, May 08, 2018

Budget 2018: Morrison budgets for good times

Rarely has a government so brazenly broken its compact with the Australian people.

Set down in every budget since the Coalition's first in 2014, and reprinted in this one, is a commitment that any boost to the budget due to better economic circumstances "will be banked as an improvement to the budget bottom line" rather than given away as tax cuts, or a package for Baby Boomers, or anything else.

That boost, bestowed on the budget in just the past six months since the December update, is an extraordinary $35 billion over four years.

Company tax collections are up 22 per cent, takings from super funds are up 34 per cent, takings from natural gas producers paying the resource rent tax are up 18.5 per cent. If ever there was an opportunity to bank a really big improvement in the budget's fortunes resulting from higher iron ore and coal prices and improving economic conditions both here and overseas, this was it.

Instead, the government's decided to bank only a bit over half of it – $14.8 billion of the $35 billion will be spent on us rather than on the bottom line, on things such as tax cuts and freeways and railways and seniors packages and abandoning the scheduled increase in the Medicare levy.

The tax cuts are more than they seem, and also less than they seem. They are more than they seem because they come on top of the decision to abandon the 0.5 percentage point increase in the Medicare levy. In the financial year beginning mid next year the tax cuts will be worth $4.1 billion and the Medicare levy decision $3.5 billion, making the impact on our wallets twice as generous as the tax cuts alone would suggest.

They are less generous than they seem because they don't hand back all of the effects of bracket creep. Ahead of the budget the Parliamentary Budget Office said it expected bracket creep and employment growth to net the government an extra $27 billion over four years. The tax cuts hand back only $13.4 billion of it.

The most remarkable thing about the budget forecasts is the way the surplus grows, and grows, to easily exceed the government's target of 1 per cent of GDP by mid next decade. In the budget update released just five months ago in December, the surplus flatlined at just half a per cent of GDP with no improvement in sight.

Some of it is luck. Treasury officials in the budget lockup said the sudden jump in revenue in the past six months is being treated as permanent. Even though revenue isn't expected to keep growing as fast, it'll grow from the new higher level, pushing up all the forecasts years out into the future.

Also, in a remarkable instance of fortunate timing, from 2020-21 on, Future Fund earnings get counted towards the surplus. They haven't been to date, because the whole point of the Future Fund has been to build up money to pay public service pensions. The legislation setting it up envisaged that by 2020-21 that work would be done and any further earnings could count towards the budget bottom line. Its work probably isn't done, it reckoned without the global financial crisis, but the government is going ahead regardless. In 2020-21 the Future Fund will bequeath the surplus an extra $4 billion, and probably more each year as time goes on.

And timing helps. The second big lick of tax cuts take place in 2022-23, conveniently one year beyond the four-year forecasting horizon, as does much of the promised infrastructure spending.

And some of the infrastructure spending is off-budget. The government says the $5 billion it will tip into the Melbourne Airport Rail Link will be invested as equity in a profit-making corporation, which means it won't need to show up in the budget, a plan about which its partner in the enterprise, the Victorian government, has other ideas.

And the forecasts are rosy. They say wage growth will climb from 2.1 to 3.5 per cent, and growth in consumer spending will climb to 3 per cent. They were released as the Bureau of Statistics reported that retail sales had been flat for the past three months, meaning the turn-up will be have to be dramatic.

It is what the Treasury expects. It believes that strong employment growth, combined with the effect of strong employment growth on perceptions of job security will encourage us to save less and spend more, for as long as international economic conditions remain good.

And here's the catch – a beautiful one for the budget numbers. The first two years of budget numbers are always "forecasts" – they are what the Treasury expects to happen. The following two are "projections" – they are based on long-run averages. As it happens, the Treasury is relaxed about the economy over the next two years. It is only after that, in 2020-21 and beyond that it is worried, primarily about what will happen in the US in the aftermath of the Trump tax cut boost as interest rates rise. But it doesn't need to incorporate those worries into the budget. They would be forecasts, not projections.

We've been handed a budget for the good times that pays out as if those good times will last, even though they may not.

In The Age and Sydney Morning Herald