Budget, inaccurate forecasts, Cossie's furphy, oil prices
July 22, 2008
Here are Stephen Mayne's four stories from the Crikey edition on Wednesday, 10 May, 2006.
6. Mixed reaction from the commentariat
By Stephen Mayne
Peter Costello and John Howard shouldn't be very happy with the newspaper reaction to their big spending budget yesterday. Not only have they been knocked off the front page of most papers by the mine rescue story, but the majority of commentators weren't particularly impressed. Compared with last year's high praise, this year the main cause for concern by the commentariat is the sheer scale of the spending.
"This is a gloriously irresponsible, amazingly profligate budget," was how Alan Kohler opened his column today, although this does seem to overlook a projected record $14.8 billion surplus this year, followed by $10.8 billion in 2006-07. Increasing pressure on interest rates is the biggest downside for the government and Kohler believes "the budget has made another interest rate increase much more likely, if not inevitable". Ouch.
The AFR's economics editor Alan Mitchell agrees: "If the Reserve Bank sees the need for further rate rises, these will be rate rises that might have been avoided." Sure, we're still in surplus but the policy switch yesterday went from "mildly contractionary" to "slightly expansionary".
Whilst Labor was claiming the government adopted its own policy at lower end of the tax scales, Mitchell still believes we need "a further major assault on the effective marginal tax rates paid by low-income earners.”
The Age's economics editor Tim Colebatch has never been easy to please and he came out harder than most today, declaring 2006 the worst budget for their times since 1974 because it represented "John Howard vote-buying at full speed".
Ross Gittins agreed that it looked like a pre-election budget in terms of the scale of the spending, but the targeting was about rewarding traditional coalition supporters – the well-off. His biggest criticism was "the lack of effort being put into education and skills training".
Chanticleer also focused on supposed inequities, as the headline on the back of The AFR was “Budget unashamedly for the rich” – right on the paper's demographic.
News Ltd's Terry McCrann didn't get the petrol excise relief he called for last week, but the budget was "as good" as 2005, which was decribed as the "best in 30 years". So good, in fact, that McCrann reckons it guarantees Costello will deliver next year's budget too because why would any Treasurer or PM quit during these amazingly good times.
Unlike The Age, The Australian splashed the budget under the headline "Manna from heaven", but Paul Kelly believes Costello "should have been more ambitious". The paper's economics editor Alan Wood is normally tough on reckless spending, but his piece was headlined "Spree won't push interest rates up".
The Age's Stephen Bartholomeusz latched onto the super reforms as the "Next Big Thing" and seemed quite impressed, agreeing with the Treasurer on the scale of the changes by declaring them "truly radical" and approving the "cleverness", mainly on the grounds of simplifying a hugely complex system.
The AFR's Laura Tingle agreed, declaring "the superannuation changes are the most important reforms".
All up, it could have been better but the Howard government will only suffer from this budget if the Reserve Bank comes straight out and lifts official interest rates – and that isn't likely in the short term.
8. How inaccurate will these forecasts be?
By Stephen Mayne
Finance Minister Nick Minchin was boasting on Lateline last night that Treasury has some of the finest forecasters in the country who can be relied on to get it right.
Sadly, whoever has been in charge of budget forecasting over the past few years, particularly revenues, has been as good as a drunk with a dart board because the overshoots have been big and getting bigger – to the point of embarrassment and public scepticism.
The most perplexing aspect of Treasury's woeful revenue predictions has been that the key revenue driver, economic growth, which has been pretty accurately forecast in recent years.
The following table pulls together the entire budget forecasting record over the Howard and Costello years, including the original forecast in May before a financial year commences, the mid-year update shortly before Christmas, the next year's forecast when there are only seven weeks of a financial year to go, and then the final outcome:
| Year | Budget | Mid-year update | Next Budget | Outcome | Forecasting error |
| 1996-97 | -$5.65bn | not done | -$6.89bn | -$5.28bn | +$370m |
| 1997-98 | -$3.85bn | -$2.75bn | -$1.1bn | $1.17bn | +$5.02bn |
| 1998-99 | $2.69bn | $3.27bn | $2.88bn | $4.34bn | +$1.65bn |
| 1999-00 | $5.21bn | $2.69bn | $7.79bn | $13.06bn | +$7.85bn |
| 2000-01 | $2.84bn | $4.33bn | $2.25bn | $5.97bn | +$3.13bn |
| 2001-02 | $1.52bn | $0.5bn | -$1.19bn | -$1.06bn | -$2.58bn |
| 2002-03 | $2.09bn | $2.14bn | $3.92bn | $7.48bn | +$5.39bn |
| 2003-04 | $3.66bn | $4.64bn | $4.59bn | $8.04bn | +$4.38bn |
| 2004-05 | $2.39bn | $6.21bn | $9.23bn | $13.62bn | +$11.23bn |
| 2005-06 | $8.92bn | $11.5bn | $14.8bn | to come | +$5.88bn |
| 2006-07 | $10.8bn | to come | to come | to come | to come |
| Average | $2.78bn | $3.61bn |
$3.63bn | $5.26bn | +$4.23bn |
Amazingly, the government has only managed to keep its forecasting error below $1 billion once – the first effort way back in 1996-97. The record, which has been deteriorating in recent years, peaked at $11.23 billion in 2004-05 when the commodities boom first started to kick in.
Given the average surplus has been $6.72 billion more than forecast over the past four years, does this mean we'll finish with a record 2006-07 surplus of $17.52 billion? With an election due next year, it's safe to assume any trend in this direction would be quickly redistributed in the traditional pre-poll spending spree.
There's only been one year, 2001-02, when the budget outcome was worse than the original forecast. This suggests that both Treasury and Peter Costello are inherently conservative, which isn't such a bad thing, although it would be nice to have more confidence in the projections.
9. Cossie continues the debt free furphy
By Stephen Mayne
Don't say you weren't warned. Peter Costello was back pushing his debt free furphy yesterday. Yet when you look at the detail of the budget, such as this chart, you'll see that taxpayers have about $5 billion in debt falling due in each of the next nine years, making $45 billion in total.
If we're really no longer paying Labor's $8 billion a year in interest, then why does this table show interest payments will average $4 billion a year over the forward estimates?
So, does Cossie have $45 billion in cash sitting around, thereby sustaining his claim to be "net debt free"? Err, no. The $30 billion that will soon be in the Future Fund cannot be netted off against government borrowing, because that money is actually owed to past public servants, but is still massively short of the mark given that the unfunded superannuation liability is projected in table two here to continue soaring as follows:
2005-06: $95.9bn
2006-07: $99.6bn
2007-08: $103.4bn
2008-09: $106.8bn
2009-10: $110.5bn
Even Enron didn't try to claim its debt didn't exist because there was money set aside for employee pensions. Monday's Four Corners story on the Westpoint collapse demonstrates the point well, because this is what receiver Mark Korda said:
We very quickly came to the view that Westpoint was hopelessly insolvent. And we advised ASIC the next day. Westpoint had $4,000 in the bank and had payroll due of $1.6 million and hadn't even paid the employees' superannuation for many employees for 12 months.You see, only the most crooked companies like Westpoint don't provide for past superannuation liabilities – yet that's exactly how the Howard Government has cooked the books to the tune of $27 billion over the past decade, given that they inherited a $69 billion unfunded super liability in 1996.
However, despite this ruse it is true to say that "worth something day" has now officially made it into the forward estimates because this is what the government is now predicting it will be worth over the next five years (last year's forecasts are in brackets):
2005-06: -$21.77bn (-$25.42bn)
2006-07: -$9.4bn (-$17.62bn
2007-08: $634m (-$10.38bn)
2008-09: $12.13bn (-$2bn)
2009-10: $25.36bn
Yes, by June 2007, if the Commonwealth Government was a listed company, it would no longer be insolvent. But its market capitalisation of $635 would still leave it out of the ASX 200. However, by June 2010 we're talking serious net worth of $25 billion and that would be a fine achievement, albeit still well below the net worth of our two richest states, NSW and Queensland.
10. Creaming the profits from sky-high oil prices
By Stephen Mayne
"There wasn't one group missed," a triumphant Grahame Morris declared on Sky News last night when asked about the largesse the Howard Government dished out yesterday on the back of record tax revenue.
However, the PM's former chief of staff must have missed the continued bleatings of Family First senator Steve Fielding, who has been banging the drum for weeks about the government's failure to cut fuel excise. Besides a continued failure to invest in education, failure to provide relief for struggling motorists was the biggest gap in the budget.
Peter Costello produced the normal defence on The 7.30 Report when he stressed that federal petrol excise is fixed at 38c-a-litre no matter what people pay at the bowser. Indeed, petrol receipts are only forecast to rise from $7.28 billion this financial year to $7.31 billion in 2006-07.
However, a continuing huge oil windfall is coming Canberra's way from the Petroleum Resource Rent Tax, which is levied at 40% of profits from all offshore oil and gas fields, excluding the North West Shelf.
The PRRT only generated $791 million in 1995-96 and $1.46 billion in 2004-05, but this is budgeted to soar to $2.5 billion next year and $4 billion by 2010. Therefore, over 15 years PRRT will go from barely 10% of petrol excise revenue to more than 50%.
With a projected surplus of more than $10 billion in 2006-07, even after $6 billion in personal income tax cuts, there's plenty of wiggle room for further relief in next year's pre-election budget. Don't be at all surprised if that includes a 3c-a-litre cut in fuel excise to 35c-a-litre, costing the government only $1 billion a year in revenue because that would be less than the PRRT windfall coming from record high oil prices.
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