{"id":9407,"date":"2014-05-15T12:28:56","date_gmt":"2014-05-15T02:28:56","guid":{"rendered":"http:\/\/blogs.unsw.edu.au\/knowledgetoday\/?p=9407"},"modified":"2014-09-19T11:31:57","modified_gmt":"2014-09-19T01:31:57","slug":"a-lesson-in-budget-fudging","status":"publish","type":"post","link":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/blog\/2014\/05\/a-lesson-in-budget-fudging\/","title":{"rendered":"A lesson in budget fudging"},"content":{"rendered":"

Richard Holden<\/strong><\/p>\n

You can\u2019t fault a treasurer for trying to put the best possible spin on Budget numbers \u2014 and that\u2019s certainly what Joe Hockey has done.<\/p>\n

The most important numbers, of course, are the deficit projections\u00a0 \u2013 A$49.9 billion this year, falling to A$2.8 billion in 2017-18, the final year of the forward estimate period. Quite a hockey-stick.<\/p>\n

Looking at the forecast numbers in a chart reveals a nice, smooth, downward, exponential pattern. And that is no accident.<\/p>\n

But as always, the future amount of revenue and expenditure that the Budget deficit stems from are uncertain. Revenues largely come from tax receipts and they depend critically on how fast the economy grows. Expenditures are a little more certain, but again depend on factors such as the unemployment and inflation rates.<\/p>\n

The Budget estimates assume GDP growth of 2.5% next year, increasing to 3% and then 3.5% over the forward estimates period. And that\u2019s where the rabbit goes into the hat in Hockey\u2019s deficit forecasts.<\/p>\n

It would be hard to argue that growth will be much higher than 2.5% next year.<\/p>\n

First of all, estimates for the near future are almost always better than those for the medium and long term. Second, there is a pretty strong consensus among economic forecasters that growth won\u2019t be higher than 2.5%. What about the 3.5% GDP growth assumption for 2016-17 and 2017-18?<\/p>\n

Well, it could happen. It would be nice if it happened. It would also place Australia among the fastest growing advanced economies in the world. In short, it\u2019s no sure thing.<\/p>\n

On the flipside, cost growth is assumed to be relatively contained. Inflation is assumed to be 2.5%, which is not a crazy assumption, but actual inflation could certainly be higher. Since a range of benefits expenditure is linked to the Consumer Price Index, this is an important driver of government expenditures.<\/p>\n

The bottom line is that the nice, smooth, exponential decline in forecast deficits comes from just that \u2014 forecasts. And while those forecasts do involve a great many detailed categories, they are far less \u201cbottom up\u201d than, say, a household budget.<\/p>\n

Assumptions are made on macroeconomic aggregates like GDP growth and inflation, not how much a family\u2019s health insurance or mortgage payments will cost. And while that\u2019s inevitable, it does mean that there is a lot of uncertainty about those future numbers. They could be better, but they could be significantly worse.<\/p>\n

Then there\u2019s the claim about debt levels: both what was inherited from the previous government and where it will go in the coming years. Where it will go depends on the actual deficits over the forecast period, so it depends on the factors just mentioned.<\/p>\n

As to the line that the current government \u201cinherited $667 billion in debt\u201d \u2014 well that\u2019s false. And it\u2019s false for multiple reasons.<\/p>\n

The number is a projection for government debt at the end of the decade, it includes a range of actions by the current government (such as paid parental leave, removing the carbon and mining taxes, direct action on climate change, and others), it is not relative to GDP, and most importantly it is a projection about gross debt, not net debt.<\/p>\n

Net debt compared to GDP is what matters. Net debt is basically what we owe minus what others owe us. Gross debt is not relevant for our credit rating or ability to service debt.<\/p>\n

Indeed, when the government talks to ratings agencies and investors it talks about net debt. International agencies such as the International Monetary Fund and the OECD always focus on net debt \u2014 they barely mention gross debt.<\/p>\n

Moreover, net debt to GDP is what matters. Telling me that your mortgage is $250,000 is not very informative. If you have annual income of a million a year that\u2019s not very much debt. If you make $70,000 a year it\u2019s a lot.<\/p>\n

Our net debt to GDP is about 12%. It\u2019s the third lowest in the OECD, where the average is about 50%. It\u2019s lower than Germany, the UK and the US \u2014 and lower by a very wide margin.<\/p>\n

It\u2019s tempting to call Hockey\u2019s claim that Australia has a debt crisis \u201cfuzzy arithmetic\u201d. It may be fuzzy, but it\u2019s certainly not arithmetic. It\u2019s just wrong.<\/p>\n

So, what does this all mean for the Budget next year? Actually, probably not that much. Many of the cost-saving measures come into place (such as the age pension eligibility age) after the likely life of this parliament, let alone next year. The one thing next year will reveal is how the forecasts are looking. We\u2019ll have a better fix on the magic 3.5% GDP growth number.<\/p>\n

We should all hope it pans out. Hockey certainly should. He\u2019s wagered his political credibility on it.<\/p>\n

Richard Holden is a professor of economics at the Australian School of Business. A version of this post has appeared on The Conversation<\/a>.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Richard Holden You can\u2019t fault a treasurer for trying to put the best possible spin on Budget numbers \u2014 and that\u2019s certainly what Joe Hockey has done. The most important numbers, of course, are the deficit projections\u00a0 \u2013 A$49.9 billion this year, falling to A$2.8 billion in 2017-18, the final year of the forward estimate […]<\/p>\n","protected":false},"author":336,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[12809],"tags":[],"class_list":["post-9407","post","type-post","status-publish","format-standard","hentry","category-economics-2"],"_links":{"self":[{"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/posts\/9407","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/users\/336"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/comments?post=9407"}],"version-history":[{"count":2,"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/posts\/9407\/revisions"}],"predecessor-version":[{"id":9574,"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/posts\/9407\/revisions\/9574"}],"wp:attachment":[{"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/media?parent=9407"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/categories?post=9407"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/tags?post=9407"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}