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.
PEFO was forecasting employment growth of 1 per cent in the year to the June quarter 2014. MYEFO revised this lower to just 0.75 per cent. It doesn’t sound like a big change but the difference is approximately 30,000 in employment. That is 30,000 people working, producing GDP, spending their wages and of course paying income tax and GST whenever they shop.
Employment has to fall by 15,000 in both May and June for the MYEFO number to be correct. This may happen, but it would have a very low probability. Even if employment is up just 5,000 a month in the next two months, the PEFO numbers will be spot on. The recent trends suggest even PEFO may be too pessimistic.
There is also the problem that these dreadfully gloomy forecasts in MYEFO fed in the Commission of Audit report which concluded that there would be budget deficits every year for the next decade. This is another fiscal fraud as it used the extraordinary assumption that the unemployment rate would be 6 per cent in every year of the next decade. That level of unemployment, as opposed to the 5 per cent rate assumed in Treasury projections used elsewhere, implies a massively smaller workforce and because of that, there is a huge impact on the budget bottom line. Already the unemployment rate is 5.8 per cent and is on track to test lower as the economy chugs along near trend.
If Treasury were to plug in realistic forecasts and projections, not only would the budget ‘problem’ be remarkably smaller, there would be fiscal riches in the budget. The budget would be in surplus by 2016-17 without tax hikes, fuel excise increases, Medicare co payments or the other nasties that will inevitably be in the budget.
What most if not all commentators have missed in addition to the rubbish forecasts underpinning the MYEFO and Commission of Audit snake oil, is that the cuts in spending and hikes in taxes are going to be there to cover the cost of the pet projects of the Coalition and not reduce the deficit.
Getting rid of the mining tax and carbon price, the paid parental leave scheme and increasing defence spending to 2 per cent of GDP are costing the budget bottom line at least $10 billion a year and this is growing to above $20 billion a year in period beyond 2020.
Abandoning this set of policies and using realistic forecasts for the economy would all of the sudden not only see large budget surpluses in place, but it would mean net government debt is eliminated by about 2020. The deficit ‘crisis’ is of the Coalition’s making.
This is the emergency – it is in the half baked policy priorities and dodgy economic parameters.