As has been written elsewhere (including by Sinclair and Henry Ergas), this year’s Budget included numerous fiddles to reach an apparent surplus. As I noted on 25 April, the subsidies provided by the Government to make the NBN commercially viable should be included in the Budget bottom line, thus ensuring a deficit.
Other fiddles include the bringing forward of expenditure to this financial year (it would be interesting to run an analysis of how many assets the Commonwealth has replaced before the end of their useful life this financial year) and deferring projects. Both are not savings. The only saving from a deferral is the interest cost of the debt that would otherwise be accrued.
Putting all of that aside, the reconciliation tables tell another story.
There are two ways to represent the policy decisions taken by the Government (which is the correct way to examine Wayne Swan’s claim to be running a tight Budget – parameter variables are exogenous): the fiscal balance (based on accrual budgeting) and the underlying cash balance (cash accounting) the latter being the standard measure of the budget bottom line.
A key difference between accrual budgeting and cash budgeting is the treatment of commitments not yet paid, and prepayments.
In cash accounting, a prepayment is accounted in the year which it is paid. In accrual accounting it is accounted in the year for which it is intended (a later year).
Anyhow the policy decisions taken by the Government in this year’s Budget under the two measures are:
- Table 5, page 3-10 in Budget Statement 3 (also in Budget Statement 6)
- Table 5, page 3-10 in Budget Statement 3: underlying cash
- Table 2, page 6-4 in Budget Statement 6: accrual
- In interpreting: a positive number in expenses reduces the bottom line (ie: it is a net additional spend). A positive number in revenue improves the bottom line: it increases revenue.
If we use table 5, the net impact on the Budget bottom line of the Government’s policy decisions is:
|Budget bottom line impact||-2701||2924||3933||2491||6647|
- A positive number improves the Budget bottom line; a negative number worsens the Budget bottom line. Another way to view this: a positive number represents a stimulatory budget; a negative a contractionary budget.
And if we use the table on page 6-4 we get the net impact on the Budget bottom line of the Government’s policy decisions as:
|Budget bottom line impact||-1875||1820||2907||1820||4620|
Whichever method one uses, it is clear that the policy decisions to increase revenue dominate in benefitting the Budget bottom line and hence to achieve a forecast surplus. The accrual accounting method (which is arguably better): in it, the Government has done the opposite of what it claims: it is increasing expenditure in each of the four years. That is, new programs more than offset the savings it claims to achieve by cutting programs (and spending).
If the Government did not increase revenue, it would be an expansionary Budget.
Over the four years, the Government has increased spending by $4 billion (underlying cash) or $6 billion (accrual). This is offset by increased revenue over the four years of $10.7 billion.
Clearly, the Government is relying entirely on the revenue side to reduce its borrowing requirements.
Further, $2.2 billion of the $10.7 billion revenue is from compliance measures. In other words, a magic pudding of the ATO collecting more revenue from the existing law. That’s more than 1/5 of the increased revenue coming from compliance measures.
Wayne Swan: you have not delivered a tight budget. You have simply increased taxes and other revenue.
Since its election in November 2007, the Rudd and Gillard Governments have taken policy decisions which increase revenue by $34.9 billion and which increase Government spending by $132.1 billion. The Government has thus detracted from the Budget bottom line by $97.2 billion.