Why the beauty of the budget is in the eye of the beholder

Treasurer Scott Morrison and Finance Minister Mathias Cormann have just released the final budget outcome for financial year 2016-17 which saw the deficit come in at a chunky $33.2 billion. It also confirmed that net government debt stood at $322.3 billion or 18.4 per cent of GDP which is the highest recorded since the aftermath of World War Two

Nonetheless, Mr Cormann seemed pretty chuffed that the deficit was a bit lower than estimated in May, noting that “the responsible budget management of the Turnbull Government has brought the Final Budget Outcome in at $4.4 billion better than the forecast in the 2017-18 Budget”.

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Which is true, of course, but for the Finance Minister of the political party that promised to return to surplus and pay down debt, the result is something of an embarrassment.

In the four years the Liberal Party lead Coalition has been framing economic policy settings, the budget deficit has totaled $159.1 billion, driven in large part by government spending being held at 25.0 per cent or more of GDP in each year. Government tax and other revenue have grown every year which has actually helped to contain the budget deficit results.

It is also worth noting that in the 2014 budget, the then Treasurer Joe Hockey was estimating that the 2016-17 budget deficit would be just $10.6 billion. It turns out there was a $22.5 billion error in that estimate as something went wrong with the management of the budget and economic policy.

This is particularly the case given the positive global economic backdrop that Australia is now benefitting from including in the form of higher than expected commodity prices which has flowed directly into company profits and therefore government revenue.

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It gets even more problematic than that. When Treasury and the Department of Finance independently prepared the Pre-election Fiscal and Economic Outlook in the lead into the 2013 election, a small budget surplus was projected for 2016-17.

In terms of net government debt, the story is just as precarious.

When the Coalition won the election in 2013 on a platform of reducing or even paying off government debt, net government debt stood at $159.6 billion which was 10.3 per cent of GDP. In 2016-17, it had doubled in dollar terms which is no doubt why the credit rating agencies are on edge and are ready to downgrade Australia’s triple-A credit rating if things don’t start to turn around.

The next update on the budget outlook will come just before year-end with the release of the Mid-Year Economics and Fiscal Outlook which will present the revised information on government spending, revenue and the deficit for 2017-18 and the next few years of the forward estimates.

It is too early to be sure just how large the deficits will be in these out years with the updated information on employment, wages, company profits and of course government spending to determine how large they will be.

Suffice to say, in a climate of soft wages growth, subdued consumer spending and a probable flattening in growth in company profits, the deficits will still be substantial and evidence that net government debt has stabilised will almost certainly be kicked further into the future.