Take away the budget snake oil and what are you left with?

Tue, 13 May 2014  |  

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.

Given the flow of economic news in the past six months on GDP growth, inflation and employment, it appears the parameters underpinning PEFO were pretty close to the mark and the MYEFO numbers were fudges.

The Budget today is likely to revert to the more realistic PEFO numbers which will no doubt provide a windfall for the bottom line and will lock in the return to surplus in about 2016-17 (depending on the spending plans of the government).

Perhaps the biggest fudge when the budget emergency was concocted in the MYEFO documents and carried through in the Year 10 economics work done by the Commission of Audit was an assumption that the unemployment rate would remain at 6 per cent from now through to the mid 2020s.

This change smashed revenue and created the deficits and broke with the assumption used by Peter Costello when he was Treasurer and used by Wayne Swan that the unemployment rate would revert to 5 per cent in the long run.

This 1 percentage point difference in the unemployment rate compounded the hysteria that the budget would never return to surplus.

A lift in the nominal GDP forecast will give a windfall to the bottom line of the budget as will the return to an assumption of 5 per cent for the long run equilibrium unemployment rate.

Why the MYEFO and Commission of Audit used 6 per cent is clear – to make the budget look bad.

If the return to budget surplus is largely the result of parameter changes based on a stronger economy and the use of uncooked economic parameters, the fiscal fraud of the past few years will be exposed.

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