Henry Ergas explains why the budget is in deficit.
In 2008-09 and 2009-10, Labor massively increased government spending, taking it to a higher share of GDP than at any time since 1993-94. That surge was meant to be wound back once the economy recovered; but though growth was well above trend by 2011-12, the increase was never reversed, with new spending programs being ramped up as stimulus measures were phased out.
As a result, since Labor was elected, per capita government expenditure has increased by 3 per cent a year in real terms, more than double the rate at which it grew under John Howard.
Financing such a binge was never going to be easy. But the 2008-09 budget was not unreasonable in estimating it would take revenues six years to catch up. So prolonged a deficit, however, didn’t suit the government’s electoral strategy.
With the 2010 election looming, it announced it would “bring this budget back to surplus in three years, three years early”, thanks to an 11.8 per cent surge in expected revenues.
That forecast surge was never plausible: it involved tax collections increasing more rapidly than at any time since 1986-87, when an overheating economy and raging inflation produced a 13 per cent increase in revenues.
I have a piece coming out in the next IPA Review that more or less tells the same story.
First look at the table – it sets out actual and expected tax revenue from recent Budget Papers and the latest MYEFO. (Remember – tax revenue is not total revenue).
At the height of the GFC, in early 2009, the government was busy preparing its 2009-10 Budget. That Budget forecast taxation revenue out to 2012-13 – this financial year. At that time the government expected to raise some $321 billion in tax revenue. The latest MYEFO indicates that the government now expects to raise some $339 billion in tax revenue this year.
So, in fact, tax revenue is above expectations that were formed at the depths of the GFC.
Expected tax revenue was ramped up in the 2010-11 Budget and again in the 2011-12 Budget. While actual tax revenue grew in those years, it didn’t meet expectations. Yet the government based spending decisions on expected tax revenues that disappointed two years in a row.
So the government didn’t learn from its mistakes. Those mistaken expectations were formed after the GFC – so it is bit difficult to blame them on the GFC itself.
On the spending side, the 2009-10 Budget forecast some $365 billion in spending for this financial year. The latest MYEFO indicates that the government now expects to spend some $363 billion this financial year. So the spending cuts work out to be $2 billion or so (with rounding errors) on expectations.
So, as Henry suggests, the argument
Spending, it claims, has been squeezed so hard you can hear the pips squeak, but slow world growth has held back revenues. Simply put: “The international economy ate my homework.”
is simply not correct.