This budget is too good to be true. If you believe Malcolm Turnbull’s luck can turn on a sixpence, this is the budget for you. From now on, everything’s coming good.
This is the blue skies budget. Things will be so good that we can have everything we want. The government can increase its spending on all the things we want it to provide.
It’s the government’s last budget before the next federal election: who won from this budget, and who came out worse for wear?
Spending cuts? Perish the thought. In Scott Morrison’s words, this budget can “guarantee the essential services that Australians rely on, like Medicare, hospitals, schools and caring for older Australians”.
But won’t that mean higher taxes? Gosh, no. Quite the reverse. We can cut taxes, starting in little more than seven weeks’ time, with more in 2022-23 and more again in 2024-25.
Better, the government can now afford to cap the growth in tax collections at 23.9 per cent of gross domestic product. Every year they threaten to hit that cap it’s more tax cuts.
And that’s not the best of it. Despite growing government spending on one hand, and tax cuts on the other, the budget deficit will fall in the coming financial year, return to balance the year after, and then begin a string of ever-growing surpluses.
As a result, the government’s net debt will reach a peak of almost $350 billion by July next year, then start falling continuously for as far as the eye can see.
Did I mention there’s an election in the offing? That’s purely coincidental.
It’s true that, until the financial year just ending, the Coalition government’s economic performance hasn’t been all that wonderful. The economy’s growth has been below-par, repeatedly slower than forecast.
In consequence, the budget deficit hasn’t fallen as far as expected, while government debt has risen faster than expected, repeatedly refusing to reach a peak and start falling.
But not this year. This year the economy has remained slow, held back by year after year of weak growth in wages and, hence, consumer spending.
Even so, there’s been inexplicably strong growth in employment, most of it in full-time jobs. This, plus an improvement in export commodity prices and company tax collections, means that, for once, the budget deficit has fallen by a lot more than expected.
The budget-makers seem to have taken this as a sign that it’s all looking up. From now on everything’s back to normal and the economy will just keep steaming on strongly for another decade.
The economy will return to it’s long-term trend rate of growth in the financial year just ending, then grow faster than trend for the following two years. Treasury’s more mechanical projections keep this above-trend growth continuing for another two years and, presumably, for the rest of a decade.
Much of this rapid return to “the old normal” rests on the government’s forecast that the past four or five years of exceptionally weak growth in wages will end next month. Wage rises will be a lot higher in 2018-19, higher again the following year and still higher, at 3.5 per cent a year, in the following two years and for the remaining years out to 2028-29.
I think this is the basic explanation for the budget’s forecasts and projections, prepared by that well-known Italian economist, Rosie Scenario.
A lesser part of the explanation is that, when you examine it, the government’s seven-year plan for tax cuts is very much “back-end loaded”.
The cuts for low and middle income-earners earning up to $125,000, starting this July and worth up to (read the fine print) $530 a year, won’t increase people’s weekly take-home pay.
Rather, the first they see of the cut billed as helping make up for the weak wage growth, will be when they get their tax refund cheque after submitting their 2018-19 tax return in more than a year’s time.
Over the coming four financial years, the three-part you-beaut tax cut will have a total cost to the budget of a modest $13.4 billion.
That’s because the really big tax cuts – aimed at people earning more than – often, a lot more than – $120,000 a year, don’t start for six years, July 2024.
I think that’s called pie in the sky.
(If you’re wondering how someone earning $125,000 can be classed as low-to-middle, relax. By the time your income has reached $125,000, the $530 has been “clawed back” to zero.)
This budget is too good to be true. All the really good stuff is off in the future – up to a decade into the future.
The forecasts and projections (“projection” is a technical term used by economists to mean “I don’t necessarily believe this stuff, but you can if you want to”) assume the economy will steam on for a decade without missing a beat or encountering any set back.
This further decade of steady expansion will come on top of the economy already being “in its 27th year of consecutive growth”, as the government boasts – surely an interplanetary record.
And this from the forecasters whose predictions have been too optimistic at least since Wayne Swan failed to balance the budget in 2012-13. Until this year, when they were too pessimistic.
They convince me that not even Malcolm Turnbull knows what the future holds.
This article first appeared in fairfax publications