Australia markets open in 1 hour 10 minutes

    +42.80 (+0.59%)

    -0.0065 (-0.93%)
  • ASX 200

    +40.70 (+0.58%)
  • OIL

    -0.76 (-0.85%)
  • GOLD

    -0.80 (-0.04%)

    -125.96 (-0.37%)
  • CMC Crypto 200

    -2.02 (-0.38%)

Has Turnbull overestimated the strength of the Aussie economy?

This is arguably the most extraordinary chart that Treasury has ever produced.

Not so much because of how the budget bottom line is influenced by swings in nominal GDP growth, but from the bars that show the impact on the budget bottom line from either policy decisions of the government (the blue) or changes in the so-called economic parameters (red).

The policy decisions bar is pretty self-explanatory. If the government of the day cuts taxes or lifts spending, the impact on the budget is negative – that is, the blue bar is below zero. If it cuts spending and hikes taxes, the blue bar is positive as the deficit is lowered or surplus is increased.

Also read: Winners and losers from the government's compromise on superannuation

For economic parameter variations, the budget bottom line can improve if the economy is strong or there is a windfall from, say, a term of trade lift which boosts company profits and tax receipts for the government. When the red bars are positive, it means the economic parameters were stronger than Treasury was forecasting, when negative, it was economic conditions was weaker.

There are some curious political issues in this chart.

The stand out is the fact that the Howard government took policy decisions in every year between 1997-98 and 2007-08 that cost the budget money making the surplus smaller or deficit larger. In each of the last 5 years Howard was in office, the tax cuts and spending increases amounted to an average of a staggering 1 per cent of GDP, which is about $17 billion in today’s dollar terms.

The Howard government was able to get to budget surplus because in every year but one, 2001-02, Treasury underestimated the strength of the economy and therefore it underestimated the revenue that flooded into the budget bottom line. Again, the errors were substantial, especially in the least four years Howard was in office.

Also read: Malcolm’s achievements as PM are better than you think

The Rudd/Gillard years were characterised by the stimulus measures and bad luck from the economic parameters associated with the onset of the global financial crisis. 2008-09 stands out when policy decisions (the stimulus packages) and economic parameter variations (the global recession and slump in Australian GDP growth) added nearly 3 percentage points to the budget deficit.

There was some hangover of the stimulus measures into 2008-09 but in the last three years of the Labor government, fiscal policy tightening meant that the budget deficit was smaller. In other words, the temporary GFC stimulus measures faded and actually turned into a fiscal policy tightening as they were removed from the budget figuring. Labor had bad luck with the economic parameters, with weaker than expected economic activity adding to the budget deficit in every year but one when it was in office, 2010-11, when the economy gained some momentum.

The picture for the Abbott/Turnbull government is enlightening. It, like Rudd/Gillard, has had on-going bad luck with the economic parameters – the terms of trade have weakened, growth and inflation has generally been lower than expected and this has driven the budget deficit to be wider than it would otherwise be.

After the tough 2014 budget from former Treasurer Joe Hockey, which saw policy decisions reduce the deficit, the next two budgets have had a slightly negative effect on the budget bottom line. They have made the deficit bigger. This makes something of a mockery of the claims of Prime Minister Turnbull about their strategy for budget repair.

Also read: Has the gloss finally worn off the Aussie economy?

The end point is that the budget bottom line has two drivers – policy decisions and the state of the economy. Against the conventional wisdom, it’s the Coalition that implements policies that blow up the structural position of the budget and that Rudd/Gillard did a reasonable job of implementing policies to reduce the deficit and move the budget towards surplus.

Stephen Koukoulas is a Yahoo7 Finance expert with 

more than 25 years experience as an economist in government, as Global Head of economic and market research, as Chief Economist for two major banks and as economic advisor to the Prime Minister of Australia.


Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting