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Sunday, 17 June 2018

Is the Budget built on a bed of lies?

Truth table

Being variously occupied with other things, this year's Australian Budget came and went with nary a comment from me (except briefly in passing here). 

A Budget effectively in balance is forecast for 2019-20, and a solid surplus of $11.5 billion or 0.5 per cent of GDP is now forecast for 2020-21. 

The 2017-18 underlying cash balance was the strongest since the financial crisis, and so too was the estimate for 2018-19.

Rose-tinted outlook?

It's apparently become something of a tradition to lambast the Treasurer for the Budget forecasts.

In fact, last year it was variously claimed that the Budget was built on a bed of lies, in part because of the apparently optimistic iron ore price projections.

This year's main point of contention is wages growth being forecast to rise to 3½ per cent by 2020-21.

Looking at the latest wages numbers you'd have to agree that this is an optimistic forecast.

But the counter-point from the Treasurer would doubtless be to look at the improvement in the Budget over the past few years. 

Don't forget the Budget was ridiculed beyond measure last year - when it estimated an underlying cash balance for 2017-18 of a $29.4 billion deficit or 1.6 per cent of GDP.

Not only did this prove to be a conservative estimate, this year's Budget documents estimated that the 2017-18 underlying cash balance would annihilate forecasts with a deficit of $18.2 billion.

Don't forget the economy is much bigger than it was a decade ago too, so that would only equate to about 1 per cent of GDP.

Just to re-emphasise that point - even with nominal wages growth stuck at low levels - the Budget is being repaired remarkably quickly.

Moreover, the latest available figures suggest that cash receipts continue to power ahead of forecasts, with a rolling annual deficit for the financial year to 30 April 2018 of under $15 billion, or just 0.7 per cent of GDP, which is miles ahead of the mid-year estimates. 

'Emergency' over

This puts the the Budget in the best nick in almost a decade. 

Company profits are at a record high thanks to a timely boost to commodity prices, while jobs growth even hit a record high in 2017, and this has helped to see the budget swing back towards a balanced position.

Thus, if there ever was a Budget emergency in Australia, there isn't now. 

And finally, the reason wages haven't grown faster? 

Scott Sumner is under no illusions: still-too-slow nominal growth in GDP, while money's been too tight.

I made a similar point recently during the Devils and Details podcast at Business Insider.


On a related note, Stephen Koukoulas of Market Economics and the BI boys discussed our latest market reported on negative gearing on this week's podcast.

I listen to it in the car.

Well worth a listen, as always - tune in!