The usually excellent ABC Fact Checking Unit has made an elementary error in its assessment of Australia’s debt and deficit position.
In particular it says that Treasurer Joe Hockey is “correct on Australia’s debt, spending”.
The link is here: https://www.abc.net.au/news/2014-03-13/joe-hockey-correct-on-australia-debt-and-spending/5310736
On 6 March, Mr Hockey said on ABC radio that “Of the 17 top surveyed IMF countries, Labor left us with the fastest growth in spending of anyone in the world… and they left us with the third highest growth in debt of anyone in the top 17”.
Mr Hockey added, “the fact of the matter is they’ve left a whole lot of landmines in the budget. We need to carefully remove those landmines and put us back on a path that gets us away from $123 billion of deficit, and starts to pay down the logjam of $667 billion of debt.”
As a source of its fact checking, the ABC FCU relied on the Mr Hockey’s own document, the Mid-Year Economic and Fiscal Outlook and the 2014 IMF Staff Report, which based its assessments of Australian debt and deficit on the MYEFO data.
See the problem?
The MYEFO, which was released on 21 December 2013, is not a reflection of the debt and deficit position that “Labor left us with”.
The most obvious reason why this is the case and something the ABC FCU ignored is the fact that the MYEFO included additions to the budget deficit in every year of the forward estimates because of “policy decisions” taken by the Abbott government (Table 3.4 of MYEFO). Over the four years up to and including 2016-17 (as far as the data go in MYEFO), Mr Hockey’s MYEFO indicates that “policy decisions” added $13.7 billion to the budget deficit compared with data in the Pre-Election Fiscal Outlook doucment which was prepared without any politicial involvement during the election campaign in August 2013. These policy decisions of the Abbott government boost real government spending by around 0.5 per cent.
If the IMF data used by the ABC FCU are adjusted to take account of the Abbott government policy decisions (noting I have had to make some assumptions as I am not privy to the full data set), the change in real government expenditure from 2012 to 2018 sees Australia drop below Korea and the US, and in terms of debt increase, Australia move s down one or possibly two steps.
But that is only part of it.
At the time MYEFO was delivered, it was obvious that Treasury used unduly pessimistic forecasts for the economy to come up with its revenue and spending data. These pessimistic forecasts or so called parameter changes added a thumping $54.4 billion to the deficit and debt when compared to the forecasts used in PEFO. There was scuttlebutt at the time that Mr Hockey’s office over-ruled the Treasury forecast from PEFO to make things look as bad as possible from a debt and deficit perspective.
The data flow since MYEFO confirms that scuttlebutt and has soundly discredited those MYEFO forecasts. GDP growth in 2013-14 – both real and nominal – will be stronger, employment growth strong and inflation higher than assumed in the MYEFO. Data on tax receipts through to December confirm higher receipts from company tax and income tax collections, a sure sign Treasury was too pessimistic with its MYEFO forecasts. In fact, the economy is performing more in line with the PEFO forecasts which of course should be the benchmark the ABC used for its fact check.
The point is if we are to assess what sort of debt and deficit position Labor left for Mr Hockey, the only fair assessment is the PEFO numbers.
When these are plugged in to the IMF comparisons, Australia drops to around the middle of the pack in terms of change in real government expenditure and change in net debt. No more, no less.
And this middle of the pack is with the starting point for the comparison 2012, which ignores a couple of years of spending and debt data which were presided over by the Labor government. Had the data started from 2014, the picture would have been remarkably different given the very slow growth in real government spending in the PEFO document and the fall in net government debt over the course of the next decade.
All of which suggests the Pre-Election Fiscal Outlook was the reliable comparison the ABC FCU should have used rather than highly politicised MYEFO numbers which were also used in the IMF data base.