Coalition must stop gaming budget forecasts if it wants credibility

In recent years, the release of updated budget data has rarely been cause for celebration. Typically, the prime minister and treasurer of the day are forced to front the media and explain how the bad figures in the budget became even worse.

With the Turnbull government struggling in the polls and the marriage-equality survey causing rifts in the Coalition, it was probably a great relief for Treasurer Scott Morrison to be able to announce this week that the final bdget outcome for 2016-17 showed a reduced deficit.

But it’s hardly a reason to break out the bunting: the deficit only reduced $4.4 billion from May’s budget, and is just $3.9 billion better than was predicted in the 2016-17 budget. It is still nearly 2 per cent of GDP.

Predictably, Morrison said this progress was the result of the government’s superior fiscal management. However, most of the improvement came from increased taxation driven by better-than-expected economic conditions, with total receipts up $4.1 billion. Spending fell just $1.2 billion, which was largely a result of a slower-than-expected ramp-up of the national disability insurance scheme and delays in state infrastructure projects.

In other words, the improvement in the bottom line has little to do with government fiscal management.

The government may have made some good strides in reducing spending, particularly in slowing the expected rate of growth of future welfare payments. Yet few people will see or understand this, especially as welfare spending overall continues to grow rapidly with the NDIS coming online.

However, the budget outcome is still good news for the government, provided it can take advantage of it.

Each budget since the 2010-11 one has promised a fairly rapid return to surplus, typically in just a few years. In fact, the last few budgets promised almost exactly the same path back to surplus, with the starting date for improvement in the bottom line pushed out by one year each May.

Both Coalition and Labor pursue a similar strategy: they rely on overly optimistic revenue projections to make the budget look good, while making only cosmetic changes to tax and spending settings. Most of the time, any savings that are found are immediately offset with new spending. Sometimes, the spending happens but the anticipated savings don’t.

Budget after budget has systemically overestimated revenue, and hence understated the depths of Australia’s poor fiscal position. This failure has had consequences: the Treasury’s reputation has taken a hit and the public is now deeply sceptical of budget forecasts.

It’s important to note that Australia’s deficit is largely structural rather than cyclical – meaning the problem is more a mismatch between spending expectations and taxation, than enduring poor economic conditions. An economic boom that boosted tax receipts would mask this problem, not solve it.

Yet each treasurer in turn has largely spurned tough choices, hoping instead to cash their chips on a rebounding economy. Even Tony Abbott’s much-maligned 2014 budget relied on revenue increases to do the heavy lifting.

To date, this strategy has not delivered dividends. With the polls looking worse and worse as we slowly bump along this political cycle, Morrison and Malcolm Turnbull must be starting to worry that a finally resurgent economy will do nothing for them – and instead deliver a newly elected Labor government its first budget surplus in a generation.

The best way for the Coalition to avoid this is not to use the small improvement in the bottom line to spruik its supposed skills in fiscal management, but to restore credibility in its forecasts.

This is key: barring a swift and unexpected revenue boom, a centrepiece of the government’s re-election pitch will be that the budget will return to surplus after the election in 2020. For this pitch to be convincing and effective, the Coalition must demonstrate to voters that its fiscal predictions are reliable.

In short, it needs voters to believe in budget forecasts again. A result where revenue is revised upwards instead of being perennially written down – like the one announced this week – may help restore credibility in these forecasts.

In the long run, this credibility boost may be more important to the Coalition’s chances of re-election than the small reduction in the deficit.

Simon Cowan is research manager at the Centre for Independent Studies.