What budget crisis?
Australians like to think of themselves as an optimistic bunch, with the “she’ll be right" attitude part of the national psyche. Yet judging from the national hand wringing associated with the lingering Federal Budget deficit, this optimism doesn’t extend to our national finances.
I mention this only because the recent swag of negative headlines associated with the deficit, and repeated talk of a “Budget crisis”, risks undermining increasingly fragile business and consumer confidence. It reminds me of the continual talk of a nation-wide house price bubble despite little evidence of significant prices pressures outside of Sydney and Melbourne, and even in these cities home loan affordability remains close to long-run average levels thanks to the step-down in interest rates.
Let’s set the record straight on the Federal Government budget deficit, given the headline writers following the 19 December Mid-Year Economic and Fiscal Outlook (MYEFO) again warned of a “billion dollar blow out” in the nations finances – and the dreaded risk that we could lose our Triple-A credit rating.
It turns out that the projected deficit for this financial year (2016-17) is now expected to be $36.5 billion, or $600 million less than projected in the Pre-Election Economic and Fiscal Outlook (PEFO). That small piece of good news seemed to be completed missed.
As for 2017-18, it’s true that the deficit is now projected to be $28.7 billion, or $2.6 billion more than expected a few months ago. But get this: while that seems a large deficit in dollar terms, it’s still only 1.6% of our $1,973 billion economy.
The upgrade to our deficit was a mere 0.2% of GDP – or practically a rounding error.
Herein lies one of the first misleading aspects of the national budget debate: as it sounds more impressive, our media and politicians continue to focus on nominal dollar amounts, given that a billion here or there seems to really matter – when in large part these are just incremental (or rounding error) adjustments.
The broad outlines of the budget’s trajectory have not really changed – which is to be expected given there’s been few new major policy announcements in recent months, and only incremental changes to the economic outlook.\
Indeed, the economy is still expected to grow at a modestly below trend pace both this financial year and next, before accelerating to an above-trend pace than eventually pushes down the unemployment rate to its “natural” level of 5%. Some may discount this forecast as overly optimistic – but the alternative is to assume the economy is incapable of reducing the higher than desired level of unemployment.
I regard it as a worthy aspiration which should figure most prominently in all budget discussion – indeed, the key budget issue is whether the economy ultimately manages to achieve above trend growth, and what can be done to ensure that it does. Yet the political and media obsession remains whether the budget balance in 2020-21 – in five years’ time – falls a few million dollars either side of the zero line.
But again given the size of the economy, whether the budget is in small surplus or small deficit (i.e. plus or minus 0.1% of GDP) in five years’ time is hardly material. Yet the Turnbull Government has staked it economic credentials on achieving even the most minuscule surplus.
Even more at fault are the rating agencies, who reckon our credit rating should also depend on whether we can credibly inch back into surplus in five years’ time, even though a modest short-fall should not really make that much difference to the level of debt.
While on the subject of debt, note also that even with the latest budget projections, net-debt is still forecast to peak at only 19% of GDP by 2018-19, up only 0.9% from the 18.1% ratio expected this financial year. In short, today’s budget deficit is still less than 2% of GDP and net-debt less than 20% of GDP.
Given this is being achieved at a time of sluggish growth and spare capacity, I’d argue it’s not that bad. Of course, it could be better - and to my mind the biggest budget challenge we face is stopping the revenue haemorrhage caused by the growing black economy and rampant tax dodging by multi-national companies.
It's not the fault of those on welfare or those living off their retirement savings. Either way, our budget position is certainly not worth all the hand wringing and misplaced talk of crisis, which threatens to make the economy even weaker than it is at present.
We are not in budget crisis – but we could easily talk ourselves into one.
Published: Wednesday, December 28, 2016