Is the Government's Budget surplus just pure luck?

Wed, 09 May 2018  |  

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/governments-budget-surplus-just-pure-luck-003443629.html 

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Is the Government's Budget surplus just pure luck?

 The Treasurer Scott Morrison was all smiles on budget night, when he announced a budget surplus in 2019-20, a year earlier than previously forecast.

As it stands, it will be the first budget surplus since 2007-08 and if it is delivered, it will mark the start of the long process of reducing gross government debt which is still on track to hit a record high around $600 billion in 2020-21 before it starts to fall. According to the budget documents, net debt is on track to decline from next year and if all goes well in the economy, it will keep falling through to at least 2028-29.

In looking at how this about turn on the budget and government debt occurred, it is important to understand that it had nothing to the policy finesse of the government.

Indeed, the return to surplus is wholly the result of Treasury forecasting errors which as recently as December last year, were projecting a deficit of $2.6 billion for 2019-20, and that was before the extra spending and tax give-aways that Mr Morrison was also delighted to announce. Amid the thousands of pages of budget documents, there is a table in Budget Paper 1, Statement 3 which shows how the budget deficit 0f 2019-20 morphed into a surplus in five short months.

Table 5 of that Statement (if you care to dig it up) shows that for 2019-20, in the five months between the Mid Year Economic and Fiscal Outlook and the budget, the government took policy decisions that reduced revenue by $950 million and added $599 million to spending. In total, these measures actually added $1.549 billion to the deficit.

But this is where the government got lucky.

As a result of the Treasury forecasting errors and the economy overshooting expectations, tax and other revenue was revised higher, by a thumping $7.995 billion in 2019-20 which was partly offset an extra $1.517 billion of government spending. These forecasting errors deliver a combined $6.421 billion to the budget bottom line.

All of which means that even allowing for the tax cuts and extra spending, the budget deficit turned into surplus.

Talk about lucky.

But before we get too carried away, the $2.2 billion surplus in 2019-20 is a forecast that almost inevitably will be wrong. The government is hoping the economy continues to pick up momentum and the Chinese and others importers keep buying a lot of iron ore and coal from Australia and in doing so, pay a high price for it. It is also hoping that the unemployment rate tracks lower, wages growth accelerates and real GDP growth comfortably hits 3 per cent.

It is folly to quibble with the Treasury forecasts because they are, for now, a reasonable estimate of what’s ahead. In a world where forecasts are rarely met, a reasonably benign alternative scenario where the iron ore prices edges even a few dollars below the Treasury assumption, wages growth fails to accelerate and the global economy falters for any reason, the surplus will quickly revert to a deficit.

Not that there would be anything wrong with that from an economic perspective. Indeed, if the economy is weaker than forecast it would be prudent.

The problem might be political, with the government pinning its re-election strategy on tax cuts plus a return to surplus and a promise of reduction in government debt.
The next budget update is scheduled for December when the next Mid Year Economic and Fiscal Outlook will be released. But if, as appears increasingly likely, the election will be before then, Treasury and the Department of Finance are required to produce a budget update in the Pre Election Fiscal Outlook 10 days after the writs are issued for the election.

If the economy is even a touch weaker, the 2019-20 surplus will vanish which would be an interesting interjection as the election campaign hots up.

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