It’s budget day tomorrow, so we’re going to hear a lot of tosh. To help guide the way, I thought I’d set out some facts.
It is inevitable that this will be sold as an inflation busting budget. The ALP has an interest rate problem so they will sell the budget as doing something about the economy’s inflation problem – this way, they can show that they are doing something about your looming interest rate problem (and so do something for their looming political problem).
Most people won’t be able to validate this claim – I hope that this post will help a little.
First of all — the most straightforward metric (the change in the fiscal balance as a % of GDP) shows that the federal government’s fiscal stance has been adding to the inflation problem – relative to the 2010/11 budget forecasts – and my personal forecast for 2011/12 suggests that the budget position will also be more stimulatory in 2011/12 than previously expected.
The fact that 10/11 and 11/12 are going to be so much worse means that there is much work left to do – and as a result of the assumption that they do obtain surplus in 2012/13, that’s where the fiscal contraction occurs.
The change in the fiscal impulse between budget 2010/11 and budget 2011/12 is set out in the above chart. As you can see, the fiscal stance is more stimulatory than previously expected this year and next, and less stimulatory in 2012/13.
To be clear here, the problem is not that GDP is smaller – nominal GDP is likely larger due to the higher terms of trade – it’s that unexpected weakness in tax collection has meant that fiscal drag is less than expected. Another way of saying this is that the government is not taking as much money out of the economy (because they underestimated depreciation and capital loss allowances) so ordinary folks have more money to spend. It’s like a little (accidental) tax cut!
But it’s not all revenue — expenses look like coming in too high, in addition to the too low revenue. We have the monthly returns to March, and the rolling twelve month sum of expenses comes to 353bn just now, while revenue comes in at 299bn. I am tipping a deficit of around 52bn in 10/11, and a little better than half that in 2011/12.
Notice that the steep uptrend in payments starts in 2007 – as PM Howard tried to spend enough to avoid losing the 2007 election – and then really accelerated in the GFC. We are now growing around the historical pace – but thus far there has been no pull back from the GFC surge in spending.
So while it’s true that their budget is shot because the forecast two years of revenue growth exceeding 10% did not begin in 20010/11 as had been hoped, the structural problem is that the surge in spending during the GFC has not (yet) been temporary. The ongoing excess of spending is the reason we have a deficit right now, and the reason we’ll have one for the next few years.
I only have the returns to March, and there is a little room for things to change in the final three months (typically good ones for the budget) – however I can’t see the Government putting lip-stick on this pig.
The 2010/11 budget is a goner now – might as well trash it!
I expect that they’ll try and dump as much spending into 2010/11 as possible, thereby boosting the expenditure baseline for the later years – when the 2% real spending cap may get uncomfortable.
And, of course, Government spending causes inflation – because the government is not a price or quality sensitive buyer. Public servants care less than the average person does about value for money – as only a tiny fraction of what a public servant spends it is their own money … thus, government spending drives up prices for everyone.