Like what you've read?

On Line Opinion is the only Australian site where you get all sides of the story. We don't
charge, but we need your support. Here�s how you can help.

  • Advertise

    We have a monthly audience of 70,000 and advertising packages from $200 a month.

  • Volunteer

    We always need commissioning editors and sub-editors.

  • Contribute

    Got something to say? Submit an essay.


 The National Forum   Donate   Your Account   On Line Opinion   Forum   Blogs   Polling   About   
On Line Opinion logo ON LINE OPINION - Australia's e-journal of social and political debate

Subscribe!
Subscribe





On Line Opinion is a not-for-profit publication and relies on the generosity of its sponsors, editors and contributors. If you would like to help, contact us.
___________

Syndicate
RSS/XML


RSS 2.0

The Budget: getting the big calls right?

By Geoff Carmody - posted Thursday, 23 May 2013


Why is an official 'structural'/cyclical split excluded? The Budget Papers argument that 'it's too hard to measure' is a cop-out answer, really. Besides, an IMF structural Budget estimate is used for international comparison purposes (Budget Paper No. 1, pages 4.29-4.31, and Chart 11).

Cynics will conclude its exclusion suits governments. Boom-time Budget surpluses can be claimed as 'proof' of good Budget management, or used for tax cuts and increasing other entitlements even though these might be unsustainable over the full economic cycle.

The current Government's label for such profligacy is 'sharing the benefits of the mining boom'. Nonsense. Booms are temporary. Their Budget benefits should be used for temporary purposes, especially delivering surpluses to offset Budget deficits when the bust follows. Creating expectations of permanent increases in entitlements financed by forecast revenue increases is even more irresponsible.

Advertisement

Without estimates of the cyclical/'structural' split, governments can have it both ways on the downside too.

The current Government says slowing growth in revenue is structural when much of it is cyclical. To add to the confusion, some Ministers call this a revenue 'contraction'. Then it's argued taxes need to increase. Some Ministers call these increases 'structural saves'. Claiming the tax/GDP ratio is lower than the boom-inflated ratio under the Howard Government is also used to 'justify' tax increases.

By also saying revenues will recover, the Government implies (i) the revenue slump is cyclical, and (ii) boom-time revenues are cyclically average! The structural credibility deficit rises.

The current Government also claims revenue shortfalls were unexpected. Really? Australia's terms of trade have been falling for nearly two years now. This is likely to continue, and more than the Budget forecasts. Globally, the mining industry shows the classic demand-price-supply responses of the 'hog cycle' studied by economics 101 students for well over half a century. As a commodity exporter, Australia has weathered commodity price cycles for centuries.

Besides, basic risk management dictates preserving boom time surpluses to cover busts, even if the timing of the latter cannot precisely be foreseen. Spending the boom's present and expected proceeds – and more – on supposedly permanent entitlement increases is the antithesis of responsible fiscal housekeeping.

The Budget papers should give priority and prominence to the structural Budget balance. That way, we get a fix on the cyclical Budget position over time as well.

Advertisement

The Treasurer says his job is 'to get the big policy calls' right. Quite so. For this, having the right navigation tools is essential.

The 'structural' Budget balance is both policy guide and public justification for fiscal discipline. It's the Budget's GPS.

Without it, the big policy calls can be wrong, and governments can go off course, in one year – or ten.

The 'pathway to surplus' can become a 'runway to ruin'.

  1. Pages:
  2. 1
  3. Page 2
  4. All

This article was first published in the Australian Financial Review.



Discuss in our Forums

See what other readers are saying about this article!

Click here to read & post comments.

12 posts so far.

Share this:
reddit this reddit thisbookmark with del.icio.us Del.icio.usdigg thisseed newsvineSeed NewsvineStumbleUpon StumbleUponsubmit to propellerkwoff it

About the Author

Geoff Carmody is Director, Geoff Carmody & Associates, a former co-founder of Access Economics, and before that was a senior officer in the Commonwealth Treasury. He favours a national consumption-based climate policy, preferably using a carbon tax to put a price on carbon. He has prepared papers entitled Effective climate change policy: the seven Cs. Paper #1: Some design principles for evaluating greenhouse gas abatement policies. Paper #2: Implementing design principles for effective climate change policy. Paper #3: ETS or carbon tax?

Other articles by this Author

All articles by Geoff Carmody

Creative Commons LicenseThis work is licensed under a Creative Commons License.

Article Tools
Comment 12 comments
Print Printable version
Subscribe Subscribe
Email Email a friend
Advertisement

About Us Search Discuss Feedback Legals Privacy