Federal Treasury has again been too optimistic with its latest budget forecast.
Federal Treasury has again been too optimistic with its latest budget forecast.
The federal government’s recent Economic Statement has forecast a surplus in 2016-17.
However, the May budget’s very optimistic nominal GDP growth forecast for 2012-13 of 3.25 per cent (we were at 2.25 per cent) was always going to be revised. That nominal growth forecast for 2012-13 has now been pulled down to 2.5 per cent, while Treasury’s estimate for 2013-14 is now at 3.75 per cent from 5 per cent.
These downward revisions to nominal growth have resulted in a significant revenue loss. To offset this and preserve the forecast surplus in 2016-17, the government is planning to introduce a range of savings measures and revenue increases. The net of all this is a deficit of $30.1 billion in 2013-14 (1.9 per cent of GDP), with a surplus of $4 billion forecast for 2016-17 (0.2 per cent of GDP).
We believe Treasury is again too optimistic.
While Treasury’s (new) nominal GDP growth forecasts look appropriate in our view, we think that the revenue forecasts remain a little optimistic.
Specifically, Treasury has lowered its nominal GDP growth forecasts by a total of 2.5 percentage points over 2012-13, 2013-14 and 2014-15.
Note that it is the final quarters of 2012-13 that are affected, with the revenue loss associated with weaker growth in that year therefore likely to show up in 2013-14.
Using the sensitivity analysis in the May budget papers, those revisions to nominal growth should (roughly) lead to a peak yearly $14 billion loss in revenue (on the basis there are no policy changes). This compares to the peak yearly loss of $9.6 billion Treasury estimates in this statement.
Further, the budget figuring remains based on the carbon price doubling from $6 per tonne in 2014-15 to $12/t in 2015-16, with a further increase to $18/t come 2016-17. Such an increase in carbon prices would appear, in our view, to require significant policy change in Europe (the Australian carbon price is effectively ‘linked’ to the European price). An alternative forecasting approach of assuming an unchanged spot price (which Treasury does for a range of other variables) would result in a $2.25 billion loss to revenue in 2016-17 alone.
Overall, we would expect total budget revenues to fall about $6 billion short of Treasury’s forecasts in 2016-17.
On the basis of current policy settings we therefore do not see the budget returning to surplus over the forward estimates period.
Smokes up
We have argued for some time that the federal budget is in significant structural deficit. In our view, structural problems require structural solutions. Unfortunately, however, fiscal policy in Australia has been caught in a six-monthly cycle of overly optimistic forecasts, inevitable revenue shortfalls, and a procession of policy responses offsetting those shortfalls and preserving the forecast of a surplus.
This process is not, in our view, producing ‘high policy’. After all, the big-ticket item in the November 2012 Mid-year Economic and Fiscal Outlook was a bring-forward in the company tax. In this statement, higher taxes on cigarettes are one of the key revenue/savings measures.
