Budget Statement 4 (in Budget Paper 1) has traditionally been a ‘think piece’ by Treasury looking at contemporary economic concerns principally from a macroeconomic perspective, but also microeconomic.
The practice commenced in the 1997-97 budget as Budget Statement 3 (Structural Change: Recent Developments, Benefits and the Role of Policy)
The various topics since have been:
1998-99: The Current Account Deficit: Structural Improvements
1999-00: Economic Policy Reform and Australia’s Recent Economic Performance
2000-01: Maintaining Low Inflation and Strong Growth
2001-02: (Budget Statement 4): A More Productive Australia: Policy and Technology
2002-03: Australia’s Terms of Trade: Stronger and Less Volatile
2003-04: Sustaining Growth in Australia’s Living Standards
2004-05: Maintaining Low Unemployment in Australia
2005-06: Prosperity and Sustainability
2006-07: Australia in the World Economy
2007-08: Australia’s Labour Force Utilisation
2008-09: Boosting Australia’s Productive Capacity: the Role of Infrastructure and Skills
2009-10: Assessing the Sustainability of the Budget
2010-11: Benefiting from our Mineral Resources: Opportunities, Challenges and Policy Settings
2011-12: Opportunities and Challenges of an Economy in Transition
2012-13: Building Resilience through National Saving
A noticeable change occurred from 2009-10. The statements became far more polemics and political documents. Previous statements, including Swan’s first, were in the traditional analytical mould, eschewing partisan politics.
But starting from Swan’s disgraceful attempt to show faster spending growth under the Coalition in the 2008-09 Budget by using the CPI rather than the accepted non-farm deflator to calculate real growth in spending (which failed), Swan has moved to capture BS4 and turn it into a highly partisan and political document (he of course also started to refer to tax increase as ‘savings’.
So, for example, the 2010-11 BS4 was an attack against the mining sector in pushing for the RSPT. And the 2012-13 BS4 was to push for the increase in the superannuation guarantee from 9 to 12 per cent.
But the latest BS4 takes the cake in gutter politics. Titled “Fiscal Policy in the Current Economic Environment” it is an unashamed defence of Swan and attack on Costello and Howard.
There is no sign of humbleness when it comes to forecasting, or admitting any errors in the policy since the 2007 election.
Take for example
Australia is much better placed to achieve the right balance in setting fiscal policy, due to a track record of prudent fiscal policy, robust financial regulation and strong macroeconomic management and performance, in particular during and since the GFC.
In hindsight, while Australia’s fiscal position in 2007-08 was clearly strong by international standards, the structural position was less robust than the headline numbers implied as these were based on economic, commodity and financial market conditions that were not sustained and are unlikely to be repeated in the foreseeable future. Tax cuts and new spending, funded by temporary increases in the terms of trade and capital gains, led to deterioration in the structural budget position in the lead-up to the GFC. Moreover, by not allowing budget surpluses to increase significantly as revenues surged, government decisions prior to the GFC meant that interest rates had to be higher than otherwise to control inflation in an economy that was showing signs of over-heating.
Policy changes can also affect the tax-to-GDP ratio. One series of policy changes that is
having a particularly large impact on the tax share is the successive large cuts to
personal income tax rates implemented between 2005-06 and 2009-10. The average
personal income tax rate fell from over 23 per cent of taxable income in the early 2000s
to less than 20 per cent in 2009-10 — which meant that the personal income tax system
delivered around 15 per cent less revenue for each dollar of taxable income.
While personal income tax collections as a share of GDP are expected to return to early
2000s levels by the end of the forward estimates period, revenue forgone in the interim
will have been substantial. For example, tax receipts would have been $14 billion
higher in 2012-13 had the average personal tax rate remained at its 2005-06 level,
abstracting from any impacts the tax cuts may have had on the personal income tax
Most of the statement attempts to justify the deficits and stress how important the present government’s efforts to fiscal sustainability have been – including the many ‘savings’ (ie tax increases such as the increase to the medicare levy).
This is a poorly written document with high-school level research and analysis. It will be a pleasure for Joe Hockey as the new Treasurer to order Treasury to write BS4 for the next budget. A title such as
Correcting five years of policy error
might be appropriate.