Saturday, May 18

Budget charts

Some quick charts from the 2013-14 Budget papers. First, the revenue forward estimates and projections look far more plausible than they have in a long time. The last time the Budget revenue estimates have looked this plausible was MYEFO in 2009.

While there has been quite a bit said about the size of revenue write-downs since the GFC, these observations should be contextualised with an assessment of the plausibility of past estimates and projections.

On the expenditure side, I am less convinced by the forward estimates and projections. Actual expenses in 2011-12 were $377.7b. The Budget last year projected $376.3b for 2012-13 (you may recall a whole heap of 2012-13 payments were prepaid from 2011-12 to achieve this "no growth" result). This week's Budget papers have the estimate for expenses at $381.4b for 2012-13, up $5.1b. Notwithstanding the $5.1b growth in expenses this year, the out-year estimates and projections in this year's Budget papers are the same or less than they were in last year's Budget papers.

So let's look at the balance statements.

Much is made of Treasury independence and expertise in framing Budget estimates and projections. Do not be fooled by these statements. Budget papers are profoundly political documents: they frame an important narrative for any government in respect of its economic competence. For this reason, they are not left to bureaucrats alone to write. The estimates and projections in the Budget papers are based on hundreds of parameters that are the subject of intense, iterative discussions between senior officials in the Treasury and the Department of Finance and the government of the day (regardless of its hue).

These negotiations are a fine balance. The government wants to maximise its narrative without over-reaching on its immediate and longer-term credibility. This process follows the rules of repeated games under game theory. The need for a government to retain the public's confidence from one year to the next means that Budget parameters and estimates typically lie within a reasonable (market expected) range, with an occasional upside or downside bias. Cumulatively these biases are designed to benefit the narrative of the government of the day.

Earlier in the week, we saw Peter Costello admit that when he was the Treasurer framing his Budget papers, he opted for the conservative estimates for revenue growth from a range presented to him by Treasury. I am unaware of any public statements on Wayne Swan's biases, but my guess is that up until now they have been on the upside for revenue growth.

It will be interesting to see how these estimates and projections are reported when the Pre-election Economic and Fiscal Outlook (PEFO) comes out on or before 23 August 2013. Unlike the Budget papers, the PEFO estimates and projections are not based on parameters negotiated between the Treasury and Finance officials and the government of the day. Indeed, it may have been the possibility of a significant PEFO contradiction that prompted the more conservative estimates of revenue growth over the out years in this year's Budget papers compared with previous years.

Having said that, I do not expect a significant contradiction between the Budget and PEFO. But I will be looking for the odd 25 basis point movement in parameters here and there that cumulatively contribute to a headline movement in the expenses and balance charts above.