Monday, June 1, 2015

Hockey's return to surplus not credible

There's an obvious question mark over this year's budget that the media have yet to highlight: how could the Treasurer announce so many giveaways and backdowns but still claim that "our timetable back to a budget surplus is unchanged from last year"?

That's even harder to believe when you remember the $52 billion by which Joe Hockey has had to write down his expected tax collections, thanks to greater-than-forecast falls in commodity prices and slower-than-expected growth in wages.

The short answer is that Hockey is stretching the truth, creating illusions and padding his budget. And that's without questioning his forecasts and projections for the economy (as opposed to those for his budget).

In truth, his expected trajectory of the budget balance over the next decade is significantly inferior to the one he announced last year.

Last year the budget was expected to return to a surplus of about 1 per cent of gross domestic product (say, $20 billion) in 2019-20. This year the budget balance for that year is expected to be just the tiniest fraction on the positive side of zero. In reality, the projections show the budget returning  to a noticeable surplus a year later, in 2020-21.

Last year, the surplus in 2024-25 was projected to have grown to almost 1.5 per cent of GDP. This year, it's now projected to be less than 0.5 per cent.

Next, remember that the impression we were given of a bountiful, "stimulatory" budget was an illusion, the product of media manipulation. Study the budget figures and you see that when the small-business giveaways and more-generous childcare subsidies are seen in the context of all the policy changes made in the budget, the net effect on the budget balance is too small to matter.

That's mainly because of the saving of more than $10 billion over the forward estimates that the government will make by abandoning its earlier decision to introduce more-generous paid parental leave, plus its new decision to exclude big business from the cut in company tax.

The third factor that makes the revised projections for the budget balance look less bad than they actually are is that they've got a lot of padding in them.

For openers, there's what my colleague Peter Martin calls the "zombie measures" – measures announced in last year's budget that aren't alive because the Senate has rejected them, but aren't dead because they're still being counted in the forward estimates.

These include university fee deregulation, changes to family tax benefits and the discretionary increase in the pharmaceuticals co-payment.

Then there's the projected $80 billion saving  over 10 years from moving to stingier indexation of grants to the states for public schools and hospitals. These need no Senate approval, but are so tough on the states that the Feds are almost guaranteed to have to water them down.

John Daley, of the Grattan Institute, has pointed out that real growth in government spending is budgeted to average only 1.1 per cent a year until 2017-18.

"This would be remarkable restraint given long-term growth is more than 3 per cent each year," he says. "It would be particularly remarkable in a period that spans an election year."

Just a small part of this Herculean achievement would rest on the plan to claw back a grant of $1.5 billion from Victoria because the new government has refused to proceed with the East West Link. Good luck.

Another tiny part would come from the calculation that the "no jab, no pay" policy of denying benefits to parents who don't get their kids immunised would save $500 million over four years.

This is nonsense, based on the (usually sensible) rule that measures are costed without allowing for any change in behaviour they may prompt. But this measure is intended to change behaviour, forcing parents to get the jabs so they keep the pay.

To the extent it works, it will cost the government money (for more jabs) and save it nothing on benefit payments. The budget's costing assumes it will be a total failure, which is unlikely.

Saul Eslake, of Bank of America Merrill Lynch – who, along with former econocrat Dr Mike Keating, wins the prize for most diligent examination of budget entrails – has noted a change in the accounting rules so that, from 2020-21, the annual net earnings of the Future Fund will be counted as budget revenue, not as an increase in the balance in the fund.

More trivia? Not quite. Eslake estimates that this seemingly petty change will account for more than half of the budget surpluses projected for 2024-25 and 2026-26.

These books have been cooked.