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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The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

For many people, the cost of the fires is immeasurable. 

Or irrelevant. 

They have lost loved ones, precious possessions, businesses and dreams and for these people, what lies ahead is bleak.

Life has changed forever.

As the fires continue to ravage through huge tracts of land, destroying yet more houses, more property, incinerating livestock herds, hundreds of millions of wildlife, birds and burning millions of hectares of forests, it is important to think about the plans for what lies ahead.

The rebuilding task will be huge.

Several thousands of houses, commercial buildings and infrastructure will require billions of dollars and thousands of workers to rebuild. Then there are the furniture and fittings for these buildings – carpets, fridges, washing machines, clothes, lounges, dining tables, TVs and the like will be purchased to restock.

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What's ahead for the Australian economy and markets in 2020

Thu, 02 Jan 2020

What's ahead for the Australian economy and markets in 2020

Happy New Year!

2020 will be a year where Australia’s annual GDP will exceed $2 trillion, our population will get very close to 26 million people and we will clock up 29 years with no recession.

It is also a year where the economy will be a dominant issue for policy makers, will drive what happens to interest rates, will help drive investment returns and will feed into the well-being of the Australian community. 

2020 kicks off with relatively good news in terms of economic growth, even though the labour market is likely to remain weak, with wages growth struggling to lift and inflation remaining below the RBA’s 2 to 3 per cent target. The Reserve Bank may have one more interest rate cut in its kit bag, but by year end, the market is likely to price in interest rate increases, albeit modestly.

The ASX, which had a great 2019 is set to be flatten out, in part driven by the change in the interest rate outlook, but it should get a boost from better news on housing and household spending.

In terms of the specifics, I have broken down the 2020 outlook into a range of categories and given a broad explanation on the issues underpinning the themes outlined.

GDP Growth

It’s a positive outlook. A pick-up in GDP growth from the current 1.7 per cent annual rate is unfolding, with the only real issue is the extent of the acceleration.