A field guide to the 2015 Federal Budget

The Conversation    | 28 April2015

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When the 2015-2016 federal budget is released on May 12 there will be much analysis of specific measures and all sorts of claims and counterclaims about deficits and debt will be made. The following  “field guide” to the federal budget by Richard Holden, UNSW Australia Business School  attempts to provide a taxonomy of the issues and help make some sense out of the sea of numbers to come.

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Legislation

The most obvious thing about the budget is that most components of it — especially the big-ticket items – require legislation. And as we saw last year, it’s far from obvious that in this polarised political climate that even issues that have support from the Labor Party will be passed. That’s a shame, and it leaves in the wind the Greens, who can’t even get behind indexing petrol excise to inflation — a policy which is perhaps the most economically sensible that this government has proposed. It’s good economics and good for the environment. But the Greens are against it. So basically the budget is what lawyers call “an invitation to treat”. It’s the starting point of a negotiation.

Forward Estimates

The budget papers will contain estimates of the budget surplus or deficit over four years. This is the so-called forward estimate period. This requires making assumptions about a bunch of macroeconomic variables that are far from certain. What will GDP growth be? What will the exchange rate be? What will inflation be?

You might ask why that last item, inflation, matters. That’s because it affects “bracket creep” where higher nominal incomes lead to higher taxes, despite no inflation-adjusted (or “real”) benefit. I have said elsewhere that this is a fiscal pillow for lazy treasurers because it delivers an inbuilt tax increase every year. So if there looks like there’s some good news in years three and four that’s probably because the government is: (a) assuming growth will be higher than it’s likely to be; and (b) because they are raising your taxes.

Unfunded mandates

It’s important to understand any shifts in what the federal government says it is going to pay for and what it’s going to require the several states to pay for. That was a contentious issue last year with state premiers because of shifts in education and health responsibilities, and for good reason. The federal government said words to the effect of “we’re not going to pay for $80 billion of stuff that everyone knows some tier of government will have to pay for, but we’re booking the savings.” This is a classic trick: yanking money for something the states have to pay for—and it could well be used again this year.

Net debt, gross debt, the Future Fund, Reserve Bank and all that

One of the things emphasised in last year’s budget was the federal government’s “gross debt”. That is roughly what the federal government owes others. But, of course, others owe the federal government, too. Deducting this yields the “net debt”. This is the only sensible thing to care about. Would anyone with a $500,000 mortgage but $200,000 in the bank think they had $500,000 of financial obligations? Only net debt matters.

Then there is the way that the Future Fund and the RBA are treated. Here the treatment is pretty sensible. The Future Fund is there to pay for future government superannuation obligations. Or as the feds put it:

Under the Future Fund Act 2006, earnings are required to be reinvested to meet the Government’s future public sector superannuation liabilities. The Future Fund becomes available to meet the Government’s superannuation liabilities from 2020. In contrast, net Future Fund earnings are included in the fiscal balance because superannuation expenses relating to future cash payments are recorded in the fiscal balance.

The RBA is sort of “same, same, but different”. But the basic treatment is pretty sensible. It’s hard to bury too many bodies in these areas.

An admonition

I’m fond of quoting the great American baseball player Yogi Berra and the particle physicist Niels Bohr, who are both credited with the aphorism “it’s difficult to make predictions, especially about the future.” We can’t expect the budget to be a perfect predictor of debt and deficits — not even one year ahead. But we should at least make sure we’re not conned by the treasurer, or commentators. We should not be tricked with headline numbers that hide the facts.

Richard Holden is Professor of Economics at UNSW Australia Business School.  This article was originally published on The Conversation.