Monday, May 17, 2010

Rudd's budget trick: pie in the sky when you die

The annual debate about the budget gets ever more unreal. This year it reached the height of absurdity. Budgets used to be about what the government plans to do in the coming financial year. Now they're about what supposedly will happen any time over the next four years.

How unreal can you get? Who on earth knows what will happen over the next four years? No one. Certainly not Treasury (nor any of the smarties who think they know better than it). This time last year Treasury's best guess was that unemployment would peak at 8.5 per cent next year; now we know it peaked at 5.8 per cent in the middle of last year.

This time last year we were told revenue collections over five years would be down $210 billion on what the "forward estimates" had told us the year before. Now we're told they'll be down $110 billion - but why would you set much store by that guess? We know from repeated experience that Treasury is quite bad at telling us in early May what the budget balance will be at the end of the following month. And yet we take seriously what it says the balance will be in three or four years' time.

This year there's been huge emphasis - encouraged by the government's rhetoric and amplified by the media (including yours truly) - on one figure: the projected budget balance in three years' time, a surplus of $1 billion. Hallelujah! Home and hosed. All over bar the shouting.

How absurd can you get? Treasury isn't even prepared to dignify this figure with the status of a "forecast"? It's the product of a completely mechanical, punch-in-predetermined-numbers "projection". Here's another absurdity: the public debate about the budget treats all its figures as if they were accomplished facts. No ifs or buts or maybes. And do the purse-string ministers - who know better than anyone how unreliable these figures are - make it their responsibility to warn us not to take them too literally? Not a bit of it.

Here's Lindsay Tanner: "The result is that we are back in surplus three years ahead of schedule in three years' time and the level of debt Australia has will be half of what was initially projected" (my emphasis).

Last year's projection was rubbish, but this year's is fact. Of all the (inescapably) rubbery figures in the budget, the one we've fixated on is the rubberiest: the $1 billion cash surplus in 2012-13. The one thing you can bet on is that the budget balance that year won't be a surplus of $1 billion.

One billion! One billion! Do you realise how infinitely small that figure is in what's projected to be a $378-billion budget and a $1.6-trillion economy?

What if it turns out to be an equally infinitesimal $2 billion overestimate? Oh my lord, still in deficit! By any sensible metric, any outcome within $5 billion either side of zero represents a balanced budget. Why allow commonsense to spoil a good story?

This relatively recent shift from focusing on the budget year to taking a blurry look at the next four years has made it easier for governments to manipulate our perceptions of the budget. And boy, weren't the pollies working hard at it this year.

The budget papers boast that all the new budget measures since November "have been delivered within the fiscal strategy and are fully offset over the forward estimates by a reprioritisation of other policies".

Reprioritisation? That's the latest econocrats' weasel word. What does it mean, exactly? We're not told. I think we're meant to guess it's a euphemism for spending cuts (think canning the home insulation scheme and breaking the election promise to build 260 childcare centres).

I suspect it also covers changing the timing of spending, pushing it off into the future beyond the four-year forward estimates. Consider defence spending. About 10 days before last year's budget Kevin Rudd made a grand announcement that the previous government's commitment to increasing real defence spending by 3 per cent a year would be continued.

But 10 days later the budget pushed a lot of that spending (mainly the purchase of major equipment) off into the never-never. This year's budget papers say real defence spending is expected to fall by 6.5 per cent in 2011-12 and by a further 3.8 per cent in 2012-13 (the year we supposedly return to surplus).

Then, however, it grows by 5.3 per cent the year after (and, if we only knew, no doubt skyrockets in the years beyond the forward estimates). Rudd's grand promise just gets rolled further and further into the future.

Though it's true Rudd's new spending programs are planned to be fully offset by "reprioritisation" over the forward estimates, it won't become true until the last year of the forward estimates, 2013-14, when "saves" are intended to exceed "spends" by $5.9 billion. Until then, spends exceed saves - and worsen the budget balance - by $1.9 billion this financial year, $2.4 billion in the new financial year and $2 billion in 2012-13. See what I mean about exploiting the four-year fuzzy focus?

Then we have the discovery by Joe Hockey's people that some helpful fiscal fairies improved the budget's profile of ever-diminishing deficits by bringing $1.8 billion in spending forward to this financial year, thus making the base-year higher and the subsequent improvement greater.

The other trick is that so many of the vote-buying goodies - the cut in company tax, the small-business instant write-off, the superannuation concessions, the new standard deduction and the bank interest concession - don't take effect for two or three years. This budget's "fiscal conservatism" rests heavily on the promise of pie in the sky sometime before you die.