Don’t worry, be happy: another mid year report

From yesterday’s AFR.

It is the week before Christmas. Political programs such as the ABC’s Insiders have ended and John Clarke and Brian Dawe have retired for the year to join an audience distracted by the summer. But this inattentive season is also the time for ministers to release an occasional report in the hope that it will miss the scrutiny it deserves.

One of the papers – to be published tomorrow – is the Commonwealth’s mid-year report on the state of the economy and budget. The equivalent reports of prior years have been released as early as November. It seems the date of publication is influenced by political factors. With a general election due in 2007, we can suspect that the delayed release of the 2006-07 Mid-Year Economic and Fiscal Outlook means it contains information which Peter Costello would rather not highlight.

One of the issues which should not go unobserved is the Commonwealth’s revenue take for the year. We know that Treasury has consistently under-estimated revenue collections. In the last six years, it underestimated receipts by a total of $40 billion. The errors ranged from a barely tolerable 1.2 per cent in 2002-03 to an insufferable five per cent in 2004-05. The weighted average under-estimate for the six years was 3.7 per cent.

Access Economics – an economic consulting business based in Canberra – recently speculated that Treasury might this year have over-corrected its modelling and it prophesised that the government’s revenue estimates might for once be optimistic. But higher than expected employment and a continuing resources boom allows the alternative view: another material under-estimate.

Treasury has confessed to technical problems in their revenue estimating but it also faces political pressures. The Prime Minister, John Howard, has made it clear that he prefers seeing higher than budgeted revenues than the obverse. Such a hint, it could almost be taken to be a direction, is more than enough to shape behaviour, even if it only leads to a sub-conscious response to prepare estimates conservatively, rather than unbiasedly.

But poor estimating can take the shine from the government’s fiscal policy. Although it has never been clearly articulated, the Howard government has adopted a trinity of fiscal policies much along the lines of the Hawke government’s 1984 trilogy. The Hawke trilogy promised to hold the level of taxation and spending to a specified share of Gross Domestic Product. In 1984 the government was still grappling with the budget deficit inherited from the Fraser government – amounting to around $36 billion in today’s terms.

In its 2006-07 budget documents, the Howard government re-stated its aim to deliver budget surpluses (while growth prospects are sound) and to hold overall tax burdens to 1996-97 levels. The minister for finance, Senator Nick Minchin, added the third leg to the policy when he said at senate estimates hearings in October that the government wanted to limit government spending so that it maintains its share of the economy.

The receipt of unexpectedly large taxation revenues – sometimes of more than one per cent of GDP – can disrupt fiscal policy. But since 2000-01, the government has kept cash taxation receipts below the 1996-97 figure of 22.8 per cent of GDP. Mind you, the Howard government figures ignore GST, about four per cent of GDP.

The government also excludes the taxation which it used to raise, before GST, in order to support state budgets. In 1999-2000, general revenue assistance from the commonwealth to the states was equivalent to 1.5 per cent of GDP. If this were included in budget figures, the government would have failed more often than not to meet its fiscal goals.

Under-estimating revenues also endangers fiscal policy as it relates to expenditures because the government cannot help but spend much of this taxation windfall. Over the six years to 2006-07, new policies announced outside of the budget amounted to nearly $18 billion. But by excluding GST and equivalent payments, and by benefiting from having no interest payments and no costs of recessions, spending as a share of GDP is about three percentage points lower than the level in 1996-97.

When we see the mid-year report this week, we shall doubtless see a continuation of this relaxed fiscal attitude. When you are the rule maker and the umpire, it is easy to win. But we might also see another revenue error. We shall certainly see profligate spending.

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JC
JC
14 years ago

Tony

What have they actually done to change the forecasting system used by previous administrations. Until we know that we can’t pass judgement. Maybe the economy has changed so much the old system isn’t keeping up with it. Who knows? Maybe they have made changes that still don’t get them much closer.

To be perfectly honest being up or down 3.5% in an enterprise that takes 30 odd % of the economy sounds pretty good to me.

Without knowing this, my bet is that the economy has got so much bigger than previous that they are very much likely to have bigger rates of error.

China growing at 15% per year and India doing almost as well could very well change a good part of the economic pattern here.

The real question we ought to be asking is what the hell are these guys doing running annual surpluses of $15 bill. This is grotesque.

The old Hawke, promise seems pretty good to me.

Chris Lloyd
Chris Lloyd
14 years ago

But if the error is consistently in the same direction then it is rectifiable. We rely on government departments to provide the best private and public analysis possible. It seems they are not doing it.

As for the $15b surplus, the government philosophy is to run a balanced budget over the business cycle. With the accumulated surpluses, yhey must be expecting a hell of a recession…