The structural budget deficit is around 1ppt of GDP larger, for each 20ppts we wipe off the terms of trade (in terms of deviation from the long run pre-boom level). This seems fair to me.
So, while we have a deficit of ~1.1% of GDP forecast for 2013-14, in terms of the underlying cash balance (or 1.5% of GDP using the headline cash balance, which we probably should use given that there is no way the NBN or CEFC are ‘financial investments’ worth book value), the structural position is said to be something like a deficit of ~2% of GDP (the band is 1% to 3%).
The error bands are fair enough in one sense, but i think the way they have positioned them boarders on abuse. The mid point should have been the long run average, and the error bands should have allowed for the true upside and downside cases: some small persistent increase (to reflect resource scarcity) in the terms of trade; and the probability that resources prices would resume their relative price decline, causing the terms of trade to resume their century long trend-decline (which is what RBA Gov Stevens has been warning of)
Instead, the top of the error band is a silly ‘super-cycle’ assumption cooked up by Deloitte-Access Economics. They assume that the terms of trade will sit just below the all time high forever. They may be right, but i bet it is not — and in any case, assuming such good fortune lasts forever is imprudent. The bottom is a reasonable OECD assumption that the terms of trade rests at the 25yr average, or about 10% above the pre-boom average (this would have been my upside case).
We can make a back-of-the envelope adjustment for this – nudging the terms of trade down to the long run average suggests a structural deficit of about 3.75% of GDP in 2012-13 and ~3.5% of GDP in 2013-14.
Any way you cut it, there is a lot of fiscal tightening left to do – and due to the fact that there is no reason to think that nominal GDP will ‘bounce back’ to the prior growth path (as the terms of trade are unlikely to bounce back to prior peaks) it must be done. We can not assume that the deficit will shrink as the economy recovers.
I expect that a long period of tight fiscal policy and low interest rates is ahead of us!