Thursday, May 03, 2018

Promises, promises. The big one this budget will break

Four years ago the Coalition penned a note to itself, as it was required to under the Charter of Budget Honesty Act.

The idea of such notes is that if a newly elected government sets down in advance what it is aiming to achieve, it can be held to account, both by itself and by voters.

Entitled “Fiscal Strategy” and reprinted or revised in every budget that follows, each note is a sort of letter to the future, a self-imposed straitjacket.

Here’s part of Joe Hockey’s, penned for his first budget in 2014:

The Budget repair strategy is designed to deliver budget surpluses building to at least 1 per cent of GDP by 2023-24, consistent with the medium-term fiscal strategy.”

The commendably specific target was repeated in Hockey’s second budget before being watered down by Scott Morrison in 2016 and 2017 to commit the government to deliver surpluses building to at least 1 per cent of GDP merely “as soon as possible”.

But it’s still pretty specific.

In each budget there are graphs showing what the government projects over the next decade. Only Hockey’s first budget projected surpluses building to and then exceeding 1 per cent of GDP.

His second budget and each of Morrison’s next two budgets haven’t got surpluses coming anywhere near 1 per cent of GDP at any time on the graph or (from the look of the slope) at any time beyond it. Morrison’s reach just half a per cent of GDP despite the goal printed alongside them in the Fiscal Strategy.

The straitjacket is more restrictive still.

Unchanged from when Hockey first set it down, another commitment says the overall impact of shifts in receipts and payments due to changes in the economy “will be banked as an improvement to the budget bottom line if this impact is positive”.

What it means is that if the budget picks up because the economy has picked up, the extra income will be used to build up the surplus rather than given away, either as tax cuts or extra spending. Scout's honour.

It’s a commitment Morrison is certain to break next Tuesday, and there’s a good chance he’ll change it so that it doesn’t look silly being printed in a budget that does the opposite.

I asked him last week whether he was still committed to his commitment or had walked away, and was rewarded with a non-answer.

“What you will see is that the budget is going back into balance on the timetable that we have noted,” he replied. That commits him to only a tiny surplus of half a per cent of GDP in 2020-21 with no necessary improvement beyond it, probably because the extra income will be given away.

Worse still (as far as the budget is concerned) he has as good as promised to give away the extra income.

“We have a speed limit on taxes which we stick to – 23.9 per cent,” he told reporters outside the Treasury building on Monday. “That is as high as we believe taxes should be as a share of the economy and we will be sticking to that plan.”

The number has a mythic significance. Not mentioned in the Fiscal Strategy, it is said to be the tax-to-GDP ratio the Howard government bequeathed to the Rudd government (although subsequent revisions have moved it down to 23.8 per cent).

For several years a mere forecasting assumption in the budget, it has been elevated of late by Morrison to the status of new target: a “guide rail” that will guarantee continual tax cuts as the economy grows and delay a return to a meaningful budget surplus.

Last week he spoke about his and Joe Hockey’s published fiscal strategies in the past tense. “The rules that we have been using to continue to guide our path back to balance have been incredibly important and we have been banking those,” he said. From here on the only thing that seems to matter as far as the budget balance is concerned is delivering the small surpluses previously forecast rather than banking the extra revenue that comes in to make them bigger as promised.

Will it matter if we’ve only small surpluses as far as the eye can see instead of the bigger ones that Hockey and Morrison once promised? It won’t, if everything goes right.

But we went into the global financial crisis with a budget surplus of well over 1 per cent of GDP, which we needed in order to spray around cash and keep ourselves out of recession without trying to borrow big as financial markets shut down. It was incredibly fortunate timing, which was the chief reason both Hockey and Morrison committed to building up a big surplus “as soon as possible”.

Without returning to the sort of surplus we were promised we are also seriously exposed to an increase in borrowing costs. If bond rates climb from 2.7 per cent to 3.7 per cent, the chunk of the budget devoted to interest payments will climb from $13 billion to $18 billion per year, which is as much as the budget on schools.

Banking rather than giving away what flows in when times are good would be the best way of protecting ourselves when they turn bad.

In The Age and Sydney Morning Herald