Three ways that Chalmers’ budget fiddled with the numbers

There is nothing new in Treasurers stretching the truth to justify their claims to gold-medal fiscal management, but the latest federal budget is a sharp reminder that we should never take these claims at face value.

Exhibit 1 is Treasurer Jim Chalmers’ boast that budget expenditure is increasing by an annual average of just 0.6 per cent in real terms over the five years to 2026-27. What better proof of the Albanese government’s fiscal rectitude, given that this growth rate has typically been much higher? There is no more important indicator in the budget, as it is the key to holding down the deficit and the tax burden.

The first warning that there might be something suspect about that slender 0.6 per cent growth rate is that it is an average over five years, when governments usually talk about four years. Indeed, on closer inspection we see that the low average depends heavily on the current year, 2022-23, when expenditure is estimated to shrink by an inflation-adjusted 4.3 per cent.

The 4.3 per cent shrinkage in 2022-23 has nothing to do with the current government’s efforts. In fact, it is less than the 5 per cent decline estimated by the previous government in its final budget. There are many moving parts in the revision from minus 5 per cent to minus 4.3 per cent, but one is that the current government’s policy decisions have actually added $3.7 billion to expenditure this year.

Mind you, neither could the previous government lay claim to tight expenditure management, as the real decline in spending in 2022-23 was nothing more than a part-reversal of the extraordinarily inflated pandemic-related spending of 2019-20 and 2020-21. That reversal was always going to happen, but even after two years in decline real spending in 2022-23 is still 14.6 per cent above its pre-pandemic 2018-19 level. That is an average growth rate of 3.5 per cent a year.

Exclude 2022-23 and the four-year average becomes plus 1.8 per cent. However, this consists of a 3.7 per cent increase in the budget year, 2023-24, followed by three years when it averages 1.2 per cent.

We should give much more weight to the number for the budget year than for the following three years. This is the budget for 2023-24, not for the four years to 2026-27. The forward estimates assume there will be no more new spending, but of course there will be. In its first two budgets the government has already added $57 billion to spending over four years, and it is itching to do more.

Exhibit 2 is the claim to have produced the first budget surplus in 15 years. But this is not a product of the 2023-24 budget – it is a revised estimate for the current year, 2022-23. It is highly likely that a re-elected Morrison government would also have presided over a small surplus in that year, as it resulted from an upsurge in tax revenue from employment growth and commodity export prices being much higher than assumed.

For 2023-24 and later years, the latest budget estimates a return to deficits.

But even the surplus in 2022-23 is dubious, as it is the so-called ‘underlying cash balance’, which excludes the money this and previous governments have put into off-budget vehicles such as for the NBN, the inland railway project and the current government’s housing fund. If this funding is included in the calculation of the budget bottom line, the resulting ‘headline cash balance’ is still in deficit in 2022-23 as well as in all subsequent years. The average ‘headline’ deficit in the five years to 2026-27 is $34 billion, some $12 billion more than the average ‘underlying’ deficit that gets all the attention.

Exhibit 3 is the revelation that the cost of the Stage 3 personal income tax cuts has been revised up yet again, this time to $69 billion in the first three years. This is an absurd statement, not because it is factually incorrect but because it is empty of policy relevance. But it does play into the hands of those who would grab any straw that passes their way to help build a case against the tax cuts. It is absurd because the upward revision of the cost is entirely due to an upward revision of personal income tax revenue.

The revenue cost of the tax cuts is about 6.5 per cent of what revenue would be without the cuts. This in itself is probably an overstatement, but leaving that to one side, the ‘cost’ will automatically go up every time personal income tax revenue is revised up and will go down if revenue is revised down. If revenue is revised up by say $20 billion because of higher employment and wages then the ‘cost’ of the tax cuts will be revised up by about $1.3 billion, but revenue is still better off by $18.7 billion.

At least Albanese and Chalmers have finally found something positive to say about the Stage 3 cuts – that they start at $45,000 and that correcting for bracket creep can be a good thing – and not just that the government is stuck with a promise. That’s progress, of sorts.

Robert Carling is a senior fellow at the Centre for Independent Studies and a former World Bank, IMF and federal and state Treasury economist.

Photo by Naim Benjelloun