Today's the day the snake oil assumptions that created the budget 'emergency' should be washed away and the true position of the long run fiscal settings will be revealed.
A vital element of the bottom line of the 2014-15 budget and the forward estimates will be the extent to which changes in the economic parameters are the driver of the return to budget surplus.
Most people seem to have forgotten that in the independently prepared PEFO document released during the election campaign in August 2013, the budget was on track to return to surplus in 2016-17. The PEFO used a range of conservative and near consensus forecasts. No serious economist took issue with the numbers underpinning the PEFO estimates.
This changed with the MYEFO in December 2013 when the Treasurer's office forced a range of unduly pessimistic forecasts onto a meek Treasury and as a result, the budget was smashed to the point where never again would Australia record a budget surplus.
With today's $700 million borrowing by the Abbott government, the cumulative total of all borrowing since the election stands at $70.95 billion. Not bad for a government that prior to the election was hell bent of paying off debt but to date has only had policies in place to increase borrowing.
The $70.95 billion of borrowing includes funds to cover maturing bonds and T-Notes, as it always does, as well as covering the Commonwealth government's budget deficit which at the time of MYEFO was assumed to be $47 billion in 2013-14.
Allowing for the borrowing to cover maturities, gross government debt has increased by $46.7 billion since the 2013 election to now stand at $319.925 billion.
This article first appeared on the ABC's The Drum. It is also at https://www.percapita.org.au/01_cms/details.asp?ID=711
Joe Hockey's policy prescriptions along with stronger economic parameters could have the budget heading towards a surplus in 2016-17 and beyond, writes Stephen Koukoulas.
The budget will comprise thousands of pages of documents, perhaps a million words, and many hundreds of tables and charts. No one will read it all, not even the Treasurer Joe Hockey or his trusty sidekick, Finance Minister Mathias Cormann.
That matters little, because from a macroeconomic perspective, which looks at the total impact of the policy decisions that will be taken in the budget, it is thankfully possible to focus on less than a dozen pages and just a few tables.
The big picture view will boil down to a comparison of the new data within the budget with that presented in the Mid-Year Economic and Fiscal Outlook (MYEFO) in December 2013 and the Pre-Election Fiscal Outlook (PEFO) in August 2013.
The April labour force data reinforce the political fudge that was imposed on Treasury by Treasurer Joe Hockey when the Mid-Year Economic and Fiscal Outlook was prepared in December 2013.
One of the factors behind the budget non-crisis revealed by Hockey in the MYEFO was driven by Treasury using much weaker economic projections than those used in the independently prepared Pre-Election Fiscal Outlook. This had the effect of reducing revenue and increasing outlays. As the MYEFO noted, the use of artificially weaker economic parameters accounted for $55 billion of the deterioration in the budget botoom line.
One of the biggest fudges occurred with the employment outlook.
Another decent chunk of job creation in April, with employment up 14,200 in the month and a nice 106,500 since the end of last year. The unemployment rate was steady at 5.8 per cent, suggesting that the peak in the unemployment rate has probably passed. That peak was 6.0 per cent in January and February 2014.
All of which means the economy is clearly travelling at or above trend, and certainly fast enough to see a decent and sustained lift in employment and for the unemployment rate to be flat to lower over time. The export boom, surging housing construction and decent household consumption growth and swamping any fall away in mining investment.
The Liberal Party has published a booklet about the 'mess' created by six years of Labor government.
It is on odd publication, as it cherry picks a few bits and bobs and tries very hard to make things look bad. I am surprised they failed to note that under Labor, South Sydney did not win a premiership things were so poorly managed.
It is an off time for such a document to be released, when the trash talking of the economy and crisis and emergency narrative surrounding the preparation of the budget from the government has seen consumer confidence smashed in recent weeks and serious questions are being raised by a range of market economists about whether the budget will see the nice growth momentum in the economy in recent months reversed.
In the face on a raft of positive news on the economy and rising inflation, the RBA has seen fit to leave the cash rate at a super-stimulatory 2.5 per cent.
It appears to have done so because its forecasts are suggesting inflation will soon decelerate and that there will be a reversal of the raft of recent good economic news as it expects the fall in the terms of trade to dampen overall economic growth.
Specifically, the RBA notes that for the global economy, "there are reasonable prospects of a better outcome this year".
It goes on to say "Financial conditions overall remain very accommodative. Long-term interest rates and most risk spreads remain low. Equity and credit markets are well placed to provide adequate funding".
The staggering swing in the polls in recent months and weeks now have Labor ahead of the Coalition by between 4 or 10 points. Despite this change in form, there has not been even a one cent move in election betting markets.
The Coalition are still hot $1.45 favourites to win the next election (presumably in 2016) while Labor are as much as $2.75. This suggests a couple of things about the polls and indeed, the betting markets themselves.
Importantly, the election is still around 28 months away and the Labor need to gain around 20 seats to win the next election. Time and the size of the Abbott majority make a Labor win unlikely no matter how poorly the government is travelling at the moment.
Ahead of tomorrow's RBA meeting, a flow of local data locks in generally good news on the economy and a still troublesome rate of inflation.
According to the TD-MI monthly inflation gauge, prices rose 0.4 per cent in April, after increasing 0.2 per cent in March. The annual increase rose to 2.8 per cent and remains dangerously close to the top end of the RBA's 2 to 3 per cent target band, especially with monetary policy so loose and the wealth effect from rising house and share prices still very powerful.
The number of building approval was a touch weaker, falling 3.5 per cent in March, after a 5.4 per cent fall in February, but were still 20 per cent higher than a year earlier. While slightly softer, it appears that the housing construction boom remains in place with 2014 likely to see a record number of new dwellings constructed. This vital aspect of the rebalancing of economic growth away from mining investment towards construction appears to be locked in.
In a vital sign for the health of the jobs market, the number of job advertisements, as measured by the ANZ series, rose 2.2 per cent in April and in trend terms, has been rising for six straight months, This bodes well for strong job creation in the months ahead and indicates that the unemployment rate should continue to fall over the near term at least.
In light of the humbug of the 'budget never returning to surplus unless we cut the tripe out of spending', I though it interesting to revisit the sensitivity of budget forecasting to small changes to the economic parameters.
The Commission of Audit finding that Australia will be dogged by perpetual deficits is based on a range of economic projections which assume the economy maintains an output gap over the next decade (real GDP growth never above 3%), nominal GDP growth averaging 4% for the next three years and then only rising to 5.5% thereafter, the unemployment rate remaining at 6% for the next decade and a falling particpation rate.
These forecasts may be right, they may not.
My simple budget forecasting spreadsheet shows that if we change slightly some of those projections and in two of the next three years, real GDP growth hits 3.5% as the output gap closes, if nominal GDP is 0.75% higher in those two years, and the unemployment rate ticks down to 5.5% within a year and then drops to 5% by 2016-17, there are surpluses within three years and that surpluses remain and get larger out to 2023-24.