PBO blows up Budget

Via the PBO:

This fourth edition of the Parliamentary Budget Office’s (PBO’s) medium-term projections report shows that ongoing government spending restraint, combined with lower public debt interest payments, are driving an improving fiscal position…

The underlying cash balance is projected to improve over the next decade to a surplus of 1.6 per cent of gross domestic product (GDP) by 2029–30. This is projected to result in a significant reduction in government debt, with net debt projected to have peaked in 2018–19 and to then decline to 1.6 per cent of GDP by 2029–30.

The improvement is driven by a decline in spending over the next decade of around 1.0 per cent of GDP, to 23.9 per cent of GDP, largely reflecting the ongoing impact of policy changes to tighten eligibility and constrain payments growth in a number of major programs, along with declining public debt interest payments as debt is paid down.

…with significant personal income tax cuts offsetting much of the impact of bracket creep…

Personal income tax receipts are also projected to contribute to an improving fiscal position, driven by bracket creep, although this effect is somewhat offset by cumulative tax cuts worth around 1.6 per cent of GDP in 2029–30.

Even with the tax cuts, average tax rates are projected to continue to increase with growth in incomes, particularly for low- to middle-income groups (those with a taxable income in the range of $20,000 to $58,000). In contrast, the average tax rate for the top 20 per cent of income earners (those with a taxable income above $90,000) is projected to be little changed.

…but this has removed the buffer against adverse revenue shocks…

Until recently, tax receipts were projected to exceed the government’s tax cap, so the budget position was partly shielded from the risk of adverse economic shocks. That is, there was an in-built allowance for unspecified tax cuts that could be adjusted depending on how economic conditions evolved. The effect of the government’s personal income tax cuts has been to remove this buffer, so any weakness in tax receipts before 2029–30 would directly affect the budget balance.

…and significant risks to the fiscal projections remain.

The projected surpluses over the medium term are predicated on above-trend economic growth for much of the period and a return to close-to-trend wages growth by the end of 2022–23. Weaker than-projected economic circumstances, such as lower-than-assumed commodity prices, would deteriorate the budget position. On the other hand, stronger-than-expected economic activity would improve the budget position.

The spending restraint seen over the past few years may be increasingly difficult to maintain over coming years given the length of time over which restraint has been applied, the pressures emerging in some spending areas, and the potential need for fiscal stimulus, noting that the projected improvement in the budget balance is mildly contractionary.

Notwithstanding these risks, these projections do not include predictions about the possible future direction of government policy. This is not the role of the PBO. Rather, these projections inform Parliament and the general public about the underlying trajectory for the budget balance under current policy settings, which provides a baseline against which future decisions can be compared.

This is stupid budget strategy at every level:

  • Why tax those with the higher marginal propensity to consume when you face a demand deficit in your economy? That is both politically and practically stupid and only possible given a government of genuine “trickle down” belief.
  • This outlook will never happen anyway. The growth projections are hilarious. Since the GFC, Australia has managed just 13 out of 43 quarters of 3% or above annualised growth. Forget about it. The average has been 2.6%, and arguably that is too high given it has been falling throughout.
  • Australia’s terms of trade are going to revert to mean over the next decade as China goes ex-growth meaning nominal growth will severely under-perform and the impact on the Budget will be even worse.
  • That ensures no rebound in wages growth, along with the mass immigration economic model, blowing up income tax receipt assumptions.
  • We are clearly at the tail end of the global business cycle so there will be cyclical problems for venue as well, not to mention cost blowouts.

In short, the Government’s Budget is another pure fantasy in both theory and practice that jeopardises the national interest over the short, medium and long term while claiming to be the finest of economic management.

The full report is here but, honestly, you’d be better off reading Harry Potter. It has more truth in it.

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the fouding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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