tag:theconversation.com,2011:/africa/topics/pefo-6675/articlesPEFO – The Conversation2019-04-17T12:26:41Ztag:theconversation.com,2011:article/1156652019-04-17T12:26:41Z2019-04-17T12:26:41ZView from The Hill: Those tax cuts should follow proper process, officials tell government<p>Once again, the public servants are trying to force the politicians to do things by the book. But the government would prefer to cut the inconvenient corner.</p>
<p>The heads of the Treasury and Finance departments on Wednesday warned the government that the first round of its tax cuts - due to be paid within weeks of the election – must be legislated before they can go out.</p>
<p>The edict is in the <a href="http://treasury.gov.au/publication/2019-pefo">Pre-election Economic and Fiscal Outlook </a>(PEFO), the official update prepared in the first stage of the election campaign.</p>
<p>PEFO is presented by Treasury secretary Phil Gaetjens and Finance secretary Rosemary Huxtable and doesn’t have any political input. It’s a rare dose of spin-less numbers in the campaign.</p>
<p>Morrison argues the Australian Taxation Office can act before the tax legislation passes. He said on Wednesday that “what happens traditionally with the Tax Office, is where there is a bipartisan commitment to matters, they can often go ahead and administer the tax arrangements on that basis”.</p>
<p>But in PEFO the officials said that while many of the budget’s tax measures can be legislated later without affecting the estimates, “the immediate relief […] requires the relevant legislation to be passed before the increase to the low and middle income tax offset (LMITO) can be provided for the 2018-19 financial year.</p>
<p>"If not legislated prior to 1 July 2019 the revenue cost of this measure would need to be reassessed,” PEFO says.</p>
<p>Officials have been clear about how they see things since immediately after the budget, when the Australian Taxation Office <a href="https://thenewdaily.com.au/news/election-2019/2019/04/17/pefo-tax-cuts/">told</a> The New Daily: “The ATO requires law in order to deliver the measure as announced, and, as such, it cannot be delivered administratively”.</p>
<p>It isn’t the first time this issue over the process of implementing tax cuts has arisen. Morrison would remember that well – he was treasurer when it happened in 2016.</p>
<p>That year saw a <a href="http://www.petermartin.com.au/2017/01/exclusive-how-tax-commissioner-was-lent.html">prolonged face-off</a> between the Turnbull government and the ATO, as the government pressed for income tax cuts to be delivered ahead of parliament passing them.</p>
<p>It was the same story. The measure (for those earning $80,000 to $87,000) was in the May budget, to come in July 1. There was no time to legislate before the July 2 election.</p>
<p>Turnbull said the tax cuts would be delivered “administratively”. But the PEFO of that year said “the [Taxation] Commissioner has indicated that the […] targeted personal income tax relief measure requires the relevant legislation to be passed before the change will be incorporated into the income tax withholding schedules”.</p>
<p>In the end, delivery was delayed, but it came before the legislation’s passage, when the Tax Office was (sort of) persuaded the cuts had bipartisan support.</p>
<p>The first round of the 2019 tax relief does have bipartisan support in the broad, but there are a couple of twists. Labor proposes more relief for low income earners, and the government’s tax plan is a long term package, with Labor rejecting the later stages.</p>
<p>It is more likely than not the 2019 tax cuts will end up delivered on time. “It’s certainly our intention to legislate them,” Morrison said. Whichever side wins, parliament is expected to sit at the end of June to deal with them. The PEFO stand is just making sure of that. </p>
<p>Unsurprisingly, the PEFO validated the numbers in the budget brought down early this month, including the forecast $7.1 billion surplus next financial year.</p>
<p>A minor adjustment was made in this year’s forecast deficit, from $4.2 billion to $4.3 billion, because of the extension immediately after the budget of the energy payment to those on Newstart and a number of other payments. </p>
<p>In what was in general a groundhog day in the campaign, Bill Shorten on Wednesday said he had used the wrong words when on Tuesday he claimed Labor would not increase tax on superannuation – overlooking the $34 billion of proposed changes the opposition has announced.</p>
<p>His gaffe, leapt on by the government, received wide coverage, marring his first week in the campaign.</p>
<p>“I thought I was being asked, have we got any unannounced changes to superannuation,” Shorten said.</p>
<p>“But obviously we have changes which we outlined three years ago, and of course I should have picked the words better, no question. We have no proposals other than what we’ve already announced previously.”</p>
<p>He also argued that ALP policies closing down concessions and loopholes in superannuation “is not some massive increase in taxation”. </p>
<p>Meanwhile the treasurers of Victoria, Queensland, Western Australia, the ACT and the Northern Territory have written to Treasurer Josh Frydenberg asking him “to confirm that there will be no further funding cuts to hospitals, schools, infrastructure and other essential services.”</p>
<p>This follows analysis undertaken by the Grattan Institute arguing the government’s budget projections would need a cut to spending of about $40 billion a year by 2029-30.</p>
<p>“As we are in the process of finalising our respective budgets, it is imperative that you are transparent about any planned cuts in payments to states and territories,” the Treasurers say.</p>
<p>“States and territories should not be forced to fill funding gaps created by cuts by the Commonwealth Government across our respective hospitals, schools and transport networks.”</p><img src="https://counter.theconversation.com/content/115665/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michelle Grattan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Morrison argues ATO can act before tax law passes. But in PEFO officials said while many budget tax measures can be legislated later without affecting estimates they can often go ahead on that basisMichelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/616442016-06-26T07:45:06Z2016-06-26T07:45:06ZLabor costings pass, but scare tactics detract<p>The ALP have just released their <a href="https://d3n8a8pro7vhmx.cloudfront.net/australianlaborparty/pages/7461/attachments/original/1466908979/160626_Fiscal_Plan.pdf?1466908979">budget costings document</a>. I have mixed feelings - on the one hand it is a necessary feature of “democracy by auction”, while on the other, it is necessary to prevent irresponsible and unaffordable promises hoodwinking the electorate. It is also a game where the government of the day has an inbuilt advantage. </p>
<p>It seems to me that budget costings have to tell a plausible story about policy without being bogged down in gory detail. The ALP failed this test in 2004, while the Liberals failed in 2010. </p>
<p>This time I think the ALP have a good story to tell - I’m just not convinced they tell it well. Quite rightly, they point out that the Tony Abbott-Malcolm Turnbull government have done little to repair the budget damage inflicted by the previous Rudd-Gillard government. </p>
<p>Therein lays the problem - yes, the first two Hockey budgets were poorly conceived and poorly received. That the ALP has managed to convince the electorate that Hockey’s increased spending over Wayne Swan’s last budget somehow represented “unfair” cuts reflects poorly on the government’s communication strategy.</p>
<p>It is true that budget deficits have grown and public debt too. One of the biggest mistakes the Abbott government made was to <a href="http://www.abc.net.au/news/2013-12-04/government-strikes-deal-with-greens-to-scrap-debt-ceiling/5134972">abolish the debt-ceiling</a>. If the ALP wanted to demonstrate its commitment to budget responsibility <a href="http://www.abc.net.au/news/2013-12-10/berg-scrapping-the-debt-ceiling-is-no-victory/5146186">it would commit to re-introducing the debt ceiling</a>. This is one “hard decison” that both the government and opposition could commit to, yet neither does.</p>
<p>An additional criticism of the ALP costings is the petty and trivial examples given in the initial press release. This is “form above substance” politics. The first is to cap at $5000 the cost of managing tax affairs - this excludes small business and is aimed at a very small number of high income individuals. </p>
<p>It will “save” $1.7 billion over ten years (that is $170 million per year or 0.038% of this year’s budgeted expenditure). Then there is the removal of “junk” private health care policies that will “save” $384 million over ten years ($38.4 million per year or 0.009% of this year’s budgeted expenditure). <a href="https://theconversation.com/getting-tax-expenditures-right-is-a-game-of-hypotheticals-24327">These “savings” are highly speculative</a>, but ultimately will make no contribution to budget repair. Why mention them at all? </p>
<p>The ALP does two things well in its budget costings. First it keeps emphasising that it has worked closely with the Parliamentary Budget Office. This office was created expressly for the purpose of providing sound advice to politicians and to allow the electorate to have some confidence in electoral promises. Second, it has invited a distinguished panel of public intellectuals - <a href="https://theconversation.com/labor-costings-alp-deficit-16-5-billion-higher-over-the-budget-period-61643">Robert Officer, Michael Keating and James MacKenzie</a> to evaluate their costings and assumptions.</p>
<p>Importantly for our purposes the panel concludes:</p>
<blockquote>
<p>All of the costings in Labor’s Budget Plan are of a similar quality as budget estimates generally, and therefore represent a reasonable basis for assessing the net financial impact on the Commonwealth Budget.</p>
</blockquote>
<p>Now make of that what you will - <a href="http://press.anu.edu.au/node/1277/download">the Opposition’s costings are just as good or bad as the government’s costings</a>. In one sense that is very pleasing because we can then focus on the substance of the policies and abstract from the numbers themselves. Mind you, the ALP doesn’t reveal its assumptions, it provides long lists of budget estimates (so see for yourself that despite criticising the government on the NBN the ALP won’t be spending anymore on it than the government will). </p>
<p>What is worrying is that both the government and the Opposition have a 10 year plan, and both plan to return the budget to balance in the same year, 2020-21. In other words, a long time from now - after the next election. That is simply not plausible.</p>
<p>The other difficulty is that the policy costings are long on slogans, long on criticism of the government and short on actual budget repair. </p>
<p>To be fair, the Abbott-Turnbull government is easy to criticise. To be even fairer, the Abbott-Turnbull government has failed in precisely the same (economic) area where the Rudd-Gillard government failed. The Shorten opposition don’t address that collective failing anywhere in their budget costings. Why will the ALP succeed now in its economic management, <a href="http://www.theaustralian.com.au/national-affairs/opinion/labor-treasurers-promise-now-surplus-to-requirements/story-e6frgd0x-1226541448399">when it failed so comprehensively in its last term of government?</a> </p>
<p>The ALP tells us it has a six point plan:</p>
<ol>
<li>Investing in people </li>
<li>Building Australia </li>
<li>Driving investment in new industry and renewables </li>
<li>Supporting innovation and startups</li>
<li>Helping small business</li>
<li>Budget repair that’s fair</li>
</ol>
<p>That sounds like the long version of “Jobs and growth”. It is here that the ALP has to engage in scare tactics. <a href="https://www.theguardian.com/australia-news/2016/jun/22/outsourcing-payments-is-not-medicare-privatisation-says-new-ama-head">It is not clear what ‘privatising’ Medicare even means</a>. How are we going to spend <em>even more</em> money on education - last time the ALP were in office we were tearing down perfectly good school halls and then rebuilding them. Let’s rather <a href="https://www.cis.org.au/commentary/articles/improve-education-but-dont-fund-more-waste">focus on increasing the quality of education before increasing the quantity of money thrown at education</a>. So the scare tactics are not serious policy work, they are transparent tactics to detract from the similarity in overall policy. </p>
<p>Of course in a democracy we expect <a href="http://www.nytimes.com/2010/02/07/business/economy/07view.html?_r=0">the government and opposition to converge towards similar policies</a> - and that, I think, is what is happening here. Very similar policies and costings that are as good or bad as each other, however, don’t suggest that a change in government is warranted.</p>
<p>So we have a competent attempt at policy budget costing - that must be good for the democratic process. What is missing, to my mind, is a competent attempt to grapple with the actual budget deficit. Mind you, they are hardly alone in that failing.</p><img src="https://counter.theconversation.com/content/61644/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sinclair Davidson is a professor in the School of Economics, Finance and Marketing at RMIT University. He is also a senior research fellow at the Institute of Public Affairs and an academic fellow at the Australian Taxpayers' Alliance.
He has previously been funded by the Australian Research Council.
He lodged a postal vote for the 2016 federal election prior to writing this op-ed.</span></em></p>Labor’s policies, costed by the Parliamentary Budget office, pass scrutiny - but like the Coalition, fail the test of real budget repair.Sinclair Davidson, Professor of Institutional Economics, RMIT UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/595942016-05-22T20:06:27Z2016-05-22T20:06:27ZAustralia needs a better independent fiscal agency<p>The Government’s <a href="http://www.treasury.gov.au/PublicationsAndMedia/Publications/2016/PEFO-2016/HTML">Pre-election Fiscal Outlook (PEFO)</a> was a non-event in one sense but it did underscore two important lessons, the absurdity of a 10 year forecast and the need for a stronger Parliamentary Budget Office. </p>
<p>Coming only 17 days after the 2016-17 budget, PEFO essentially <a href="https://theconversation.com/infographic-pefo-2016-at-a-glance-59668">confirmed the budget numbers</a>. It would have been worrying if it had not done so, considering the PEFO comes from the same Treasury and Department of Finance that produced the budget.</p>
<p>The first important lesson we should draw from the budget and PEFO is the absurdity of costing spending or tax changes over a 10 year period. We are told for instance that the budget cut to the company tax rate to 25% will cost A$48.2 billion over 10 years, while <a href="http://www.abc.net.au/news/2016-05-06/turnbulls-corporate-tax-cuts-under-scrutiny-by-treasury/7389426">Treasury noted that</a> “as with all projections over 10 years these costings have considerable uncertainty attached to them”. Then why produce a number to one decimal point? It conveys an entirely unjustified degree of precision.</p>
<p>This year’s<a href="http://www.budget.gov.au/2016-17/content/bp1/download/bp1.pdf">Federal Budget Paper No 1</a>, Statement 7 is a sobering read. Chart 5, see below, shows the forecast errors for tax receipts, not 10 years out, but one year out. It compares the budget forecast for the forthcoming year with the actual outcome for that year. </p>
<p>In every one of the six years since 2010 the forecasts have been wrong by large margins – but worse, the errors are all in the same direction, that is, receipts have been less than forecast. </p>
<p>This forecasting record calls into serious question Treasury’s stubborn adherence to assumptions that repeatedly turn out to be wrong. The biggest single source of error is company tax receipts which were overestimated last year by A$3.5 billion, which makes a projected number like A$48.2billion over not one but 10 years an exercise in pure fiction, and to give the number to a decimal point is silly.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/123439/original/image-20160522-4478-1m6xwto.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/123439/original/image-20160522-4478-1m6xwto.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/123439/original/image-20160522-4478-1m6xwto.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=350&fit=crop&dpr=1 600w, https://images.theconversation.com/files/123439/original/image-20160522-4478-1m6xwto.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=350&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/123439/original/image-20160522-4478-1m6xwto.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=350&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/123439/original/image-20160522-4478-1m6xwto.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=440&fit=crop&dpr=1 754w, https://images.theconversation.com/files/123439/original/image-20160522-4478-1m6xwto.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=440&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/123439/original/image-20160522-4478-1m6xwto.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=440&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Budget forecasts.</span>
<span class="attribution"><span class="source">Author supplied</span>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<p>The budget forecasts (which apply to the next four years) as distinct from the projections (which extend for a further 6 years) come with “confidence intervals”. For example Treasury can only be 70% confident that tax receipts will turn out to be equal to the budget figure plus or minus A$30 billion (1.8% of GDP) by 2017-18, implying a 30% chance that the budget figure could be wrong by more than A$30 billion. The 90% confidence interval is wider - plus or minus A$50 billion (2.9% of GDP). </p>
<p>These are wide margins considering we are talking about outcomes only three or four years away. These margins get wider the further into the future. So 10 years out we really have no idea.</p>
<p>Perhaps the more important lesson from the budget and PEFO outcomes is the need to elevate the role of the Parliamentary Budget Office (PBO). It needs more teeth.</p>
<p>Its <a href="http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Budget_Office">current role</a> is “to inform the Parliament by providing independent and non-partisan analysis of the budget cycle, fiscal policy and the financial implications of proposals.” This needs strengthening.</p>
<p>Rather than just providing independent analysis of the budget the PBO should independently produce fiscal rules aimed at fiscal sustainability, ensuring that government debt is not set to rise inexorably under current settings and that our AAA credit rating is maintained. A government that breaches the fiscal rules should be called out by the PBO and suffer public censure. </p>
<p>The PBO should take account of the likelihood of the Senate passing legislation, of political compromises, of credit rating changes, and of international economic risks arising for example from commodity prices and China’s economy. The fiscal councils in Belgium, Denmark and Sweden operate rather like this and the <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1467-6419.2008.00556.x/abstract">evidence</a> suggests that they have improved fiscal discipline by increasing the political costs on governments for lack of discipline.</p>
<p>We could go further and allow the PBO to operate like Australia’s independent Reserve Bank which controls the key monetary policy instrument and sets monetary policy independent of government. In that case the PBO would provide the government with a maximum spending limit and a deficit limit, consistent with fiscal targets.</p>
<p>The government would control the mix of spending and taxation consistent with these fiscal targets. Admittedly this is extreme and has not been tried in other countries, but with increasing government indebtedness around the world perhaps it should be.</p>
<p>The federal government’s debt has risen from minus A$45 billion (a net asset position) in 2007-8 to <a href="http://www.budget.gov.au/2016-17/content/bp1/download/bp1.pdf">A$285 billion in 2015-16</a> (or 17.3% of GDP). The global financial crisis and subsequent drop in commodity prices had a lot to do with this.</p>
<p>But now that it is clear the economic cycle is not going to repair the budget, the government should tighten its belt to ensure that future generations are not picking up the tab. This is not currently happening – the budget forecasts net debt in four years’ time to be in fact higher than now, at 17.8% of GDP, and with no reduction in spending as a share of GDP. </p>
<p>A beefed-up PBO, acting as an independent fiscal agency, would call out the government on such a lack of fiscal discipline.</p><img src="https://counter.theconversation.com/content/59594/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ross Guest has received funding in the past from the ARC but does not currently receive funding.</span></em></p>The Pre-election Fiscal Outlook shows two things, the ridiculousness of 10 year forecasts and that we need a tougher Parliamentary Budget Office.Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/596682016-05-20T05:46:50Z2016-05-20T05:46:50ZInfographic: PEFO 2016 at a glance<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/123333/original/image-20160520-4478-1wxultf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/123333/original/image-20160520-4478-1wxultf.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=1451&fit=crop&dpr=1 600w, https://images.theconversation.com/files/123333/original/image-20160520-4478-1wxultf.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=1451&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/123333/original/image-20160520-4478-1wxultf.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=1451&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/123333/original/image-20160520-4478-1wxultf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1823&fit=crop&dpr=1 754w, https://images.theconversation.com/files/123333/original/image-20160520-4478-1wxultf.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1823&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/123333/original/image-20160520-4478-1wxultf.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1823&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure><img src="https://counter.theconversation.com/content/59668/count.gif" alt="The Conversation" width="1" height="1" />
Your at a glance guide to all the figures in the Pre-election Financial and Economic Outlook statement for the 2016 election.Helen Westerman, Business + Economy EditorWes Mountain, Social Media + Visual Storytelling EditorLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/589962016-05-20T05:31:17Z2016-05-20T05:31:17ZQuestioning the assumptions underlying the Pre-Election Economic and Fiscal Outlook<figure><img src="https://images.theconversation.com/files/123331/original/image-20160520-4466-6b840n.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Major economic indicators have not changed since the federal budget.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/betta_design/7439292302/in/photolist-ckojqo-rdQyK-ezy7uW-shXeD-5cN6qV-738xJh-aoPXm5-sKrNo-6sMpCF-5XtmDd-fAaYES-8A3HU-nx64fK-6CqCX3-eLoVG8-82ypMQ-82ytib-oBHYt1-7BYqyW-7BUCzT-2aQxKP-ejQ3vY-orrhf5-7GL489-7BUCzr-fPxGqz-mLdAPK-76ScsJ-aSheV2-67vc1K-pUTaZT-eix6Fm-aSheP6-cw7peQ-aShaJB-oBJagL-82yq1d-obYzGS-Thth9-ThtgJ-7BNZiU-daWGUM-daWJQJ-otc6ak-cugF1E-c5eMfJ-obYmcL-nni3V8-jYtsQJ-f41xnj">Flickr/Francisco Martins</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>Coming just weeks after the federal budget, the Pre-Election Economic and Fiscal Outlook (PEFO) was unlikely to reveal anything new. </p>
<p>And in general this is the case, with the projected deficit for 2016-17 remaining at $37.1 billion (although the underlying cash balance for the current year has decreased by $1.8 million). </p>
<p>Forecasts for other indicators for growth, inflation and unemployment remain basically unchanged. However, the PEFO papers provide an opportunity for voters and commentators to cast aside the “what’s in it for me” reaction to the Budget to more closely examine the estimates and forecasts of the key economic indicators on which the Budget position is based.</p>
<p>The expected or assumed trends in economic growth, inflation and unemployment feed into the Budget bottom line and government debt into the future. If these expectations and assumptions are wrong, then the estimated deficit and debt numbers will also be wrong. </p>
<p>If these assumed trends are based on optimistic assumptions about the growth of our trading partners, the strength of our currency, the pace of innovation and improvements in labour productivity, then the expected Budget deficit will be lower and the public debt higher than if more conservative assumptions are made. So how realistic are they?</p>
<p>The May 2016 Federal Budget assumes the Australian economy would continue to grow by 2.5% in the next two years increasing to 3% in the following year. This is below the previous trend of 3.1% but higher than the average (excluding 2012) of more recent years of 2.4%. Why would we expect trend growth to increase from 2017/18? The short answer is that we wouldn’t and we shouldn’t.</p>
<p>More than ever before, Australia’s economic growth is tied to what is happening globally. Influences such as renewed volatility in financial markets, uncertainty over the long term growth in the Chinese economy and continued post-global financial crisis slow growth in many developed countries. So if, as PEFO affirms, global economic growth remains slow then Australia too is likely to experience slower growth. </p>
<p>What about our sensitivity to changes in commodity prices? Here PEFO confirms that the risk to economic growth forecasts from commodity price falls mentioned in the Budget papers is unchanged with averages and spot prices showing conflicting pressures on prices. </p>
<p>What about domestic demand? This could be an issue as PEFO queries the expected pick-up in non-mining investment within Australia. If this does not materialise then the economic growth figures are likely to be down by 0.5%, possibly settling at a new trend of 2% per annum for a number of years. Still higher than labour productivity growth of 1.4%, so good growth - but not what Australia is used to. </p>
<p>The outlook for jobs growth, which relies on overall economic growth forecasts, is confirmed by PEFO to have plateaued with only slightly lower unemployment rates into next year. </p>
<p>For the Federal government, lower than expected economic growth means lower than expected tax receipts and higher welfare payments both of which mean higher, not lower, deficits and debt. Unless a new impetus for growth is found. The answer here could be a re-structured economy based on private business growth and diversification, and growth in services. </p>
<p>In the case of business, the Budget recognises that the majority of businesses in Australia are small and half of these are owner-operated. Tax incentives that encourage these businesses to grow and diversify should increase the deficit in the coming year but contribute to tax revenue and lowering the deficit over the long haul if they remain in place and if these businesses respond in the expected way. Two big ‘if’s.</p>
<p>Growth in services, two thirds of the value of our national output, is likely to continue. The growing middle class in countries like India and China will seek overseas education and Australia is well placed to deliver this. More tourists than ever before are travelling to Australia which is a desired destination due to its stable government and attractive exchange rate as well as its tourism hot spots. Population growth as well as an ageing population will also contribute to services growth. </p>
<p>When the Australian economy is doing well, annual inflation runs at about 3%. If quarterly figures suggest that the annual rate is picking up, the Reserve Bank increases the cash rate to dampen business and household spending. However, if the inflation rate is hovering below 2%, then there is little the Reserve Bank can do. </p>
<p>It may lower the cash rate as it decided to do at its May 2016 meeting. But, as we found with the May 2015 decision which also cut the cash rate by 0.25%, it is unlikely to provide sufficient incentive to encourage consumers and businesses to throw caution to the wind and increase their spending. Having low borrowing costs might invite debt-fuelled expenditure but households and businesses also need assurance that that the economy is strong and worth getting into more debt for.</p>
<p>Whether the Budget fulfills the promises of jobs and growth without jeopardising our credit rating, only time will tell.</p><img src="https://counter.theconversation.com/content/58996/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Margaret Giles receives funding from Australian Research Council. She is affiliated with National Tertiary Education Union.</span></em></p>Treasury is standing by the assumptions made in the federal budget.Margaret Giles, Senior Lecturer in the School of Business, Edith Cowan UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/378512015-03-06T02:24:52Z2015-03-06T02:24:52ZTime to rethink the Charter of Budget Honesty<p><a href="http://www.comlaw.gov.au/Details/C2012C00230/Html/Text">The Charter of Budget Honesty</a>, passed when Peter Costello was treasurer in 1998, introduced a number of innovations to fiscal reporting and strategy. The Pre-election Economic and Fiscal Outlook (PEFO), regular intergenerational reports (IGRs), and a medium-term fiscal strategy were all included in the Charter. After 17 years, are these measures supporting sound fiscal policy? There’s plenty of room for improvement.</p>
<h2>Pre-election Fiscal and Economic Outlook</h2>
<p>The PEFO is produced by the Treasurer’s advisers. It is intended to provide an apolitical view of the fiscal and economic situation at the time of federal elections. Although it does not get the attention it deserves in the election campaign, and afterwards, it serves a useful brake on some of the more extravagant claims of government and opposition.</p>
<h2>Intergenerational Reports</h2>
<p>By contrast, the IGR is the Treasurer’s document. In providing 40-year projections, Mr Hockey can choose which measures to include in the projections, which issues to discuss, and the assumptions to make regarding demographic change, economic growth, and so on. As a result, projections in successive reports can vary widely, reflecting political requirements of the time.</p>
<p>Political messaging sometimes gets the better of even short-term forecasts – Agriculture Minister Barnaby Joyce’s forecast of a A$100 leg of lamb after the carbon tax provides a colourful illustration. When it comes to 40-year projections the effects of even a small degree of political influence can lead to major changes to long-term outcomes.</p>
<p>The effects of massaging could be reduced by following New Zealand, where the long-term projection model is a <a href="http://www.treasury.govt.nz/government/fiscalstrategy/model">public document</a> and analysts can use it to test alternative assumptions.</p>
<p>But this is not the only problem.</p>
<p>Given the uncertainty involved, a 40 year time horizon is far too long. The impact of fiscal policy changes can only be effectively assessed over a much shorter period.</p>
<p>Second, the federal IGR is silent on the implications of the projections for the financial position of the States. Over long time horizons, federal and state governments are joined at the hip. It is misleading to treat them as being independent. For example, the present IGR assumes that from 2017-18 onwards, real per person funding from the Australian government for public hospitals will remain constant. The burden falling on State budgets is likely to rise rapidly. What appears to be a positive outcome for the federal IGR is a negative long-run outcome for the States.</p>
<p>A related point concerns the treatment of infrastructure. For example, the accounting treatment in the IGR excludes funding for NBN Co. It also effectively excludes infrastructure spending funded by the Commonwealth but undertaken by the States – these are treated as current spending in the Commonwealth accounts.</p>
<p>The treatment of infrastructure is important because, as popularly conceived, equity requires that future generations don’t pay for our day-to-day spending. The golden rule of fiscal policy requires current generations to pay for day-to-day spending, including depreciation of infrastructure and interest on debt. Additions to long-lasting infrastructure which yield a return greater than the cost of capital (giving benefits to future generations) are financed by issuing debt.</p>
<p>It would be helpful, therefore, if the IGR focus on net debt were supplemented by data on infrastructure spending by, or on behalf of, the Commonwealth.</p>
<h2>Medium-Term Fiscal Strategy</h2>
<p>The third innovation in the Charter was to set the objective for fiscal strategy of “achieving budget surpluses, on average, over the economic cycle”. This sits oddly with the requirement to produce an intergenerational report. Were the medium-term strategy to be achieved, there would be no need for an IGR, at least from a budgetary point of view.</p>
<p>The medium-term strategy should be strengthened and given more emphasis than the IGR. A fixed time horizon should be chosen – say ten years. This would overcome the problem that the length of an economic cycle cannot be predicted with any accuracy and, even in hindsight, cycles are not unambiguously defined.</p>
<p>A classical economic cycle measures the interval between two recessions; in turn, a recession is indicated by two consecutive quarters of negative real GDP growth. The current, incomplete, cycle in Australia began in March 1992, an interval of 23 years. Since then, there have been quarters in which growth has fallen well below trend, but none in which real GDP has declined.</p>
<p>Alternatively, a “growth cycle” measures the interval between two periods in which real GDP growth falls below trend. Taking the 25-year average as a measure of trend, there have been five and possibly six cycles since 1992.</p>
<p>Adopting a fixed, policy relevant, time horizon would avoid these problems. Making the projection model publicly available would promote apolitical analysis. Distinguishing between current and capital expenditure would help discussion of intergenerational equity. One last problem – how to produce fiscal projections in a federation. That’s a tough one.</p><img src="https://counter.theconversation.com/content/37851/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Graeme Wells does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Forecasts released under the Charter of Budget Honesty are on the wrong time horizon and need greater transparency.Graeme Wells, University Associate, School of Economics and Finance, University of TasmaniaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/176002013-09-01T20:44:08Z2013-09-01T20:44:08ZCoalition climate figures don’t add up<figure><img src="https://images.theconversation.com/files/30222/original/bp877dwk-1377760702.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Cuts to Australia's clean energy programs don't make the promised savings, and threaten our low-carbon future.</span> <span class="attribution"><span class="source">AAP Image/Penny Bradfield</span></span></figcaption></figure><p>Shadow Treasurer Joe Hockey and shadow Minister for Finance, Andrew Robb, <a href="https://www.liberal.org.au/latest-news/2013/08/28/update-coalitions-responsible-savings">have announced</a> A$7.5 billion in planned budget savings from scrapping key elements of the Government’s Clean Energy Future package. By abolishing the price on carbon, a Coalition government would need to plug a hole in the budget estimated in the <a href="http://www.treasury.gov.au/PublicationsAndMedia/Publications/2013/PEFO-2013">Pre-Election Fiscal and Economic Outlook</a> at A$9.7 billion over the three years from July 2014.</p>
<p>The savings are outlined in the Coalition statement, “<a href="https://www.liberal.org.au/latest-news/2013/08/28/update-coalitions-responsible-savings">Our Plan to get the budget under control</a>”. Let’s break down the statements in turn and see how they stack up. </p>
<h2>Discontinuing business compensation</h2>
<blockquote>
<p>Discontinuing the business compensation measures introduced to provide partial relief to selected sectors and industries for the hit from the carbon tax ($5.1 billion). </p>
</blockquote>
<p>These measures include the instant asset write-off threshold, the Jobs and Competitiveness program, the Steel Transformation Plan, the Clean Technology Program, the Coal Sector Jobs Package and other measures. </p>
<p>Let’s look at each in turn.</p>
<blockquote>
<p>Removal of the increase in the instant asset write-off threshold to $6,500 ($0.2 billion)</p>
</blockquote>
<p>The <a href="http://www.cleanenergyfuture.gov.au/clean-energy-future/securing-a-clean-energy-future">instant asset write-off threshold</a> (pp. 58-59) was already increased from A$1,000 to A$5,000 from 2012-13 with the passage of the Minerals Resource Rent Tax legislation. The further increase from A$5,000 to A$6,500 was intended to make it easier for small businesses to invest in new assets, including energy efficient equipment. It was originally costed at “foregone revenue of A$200 million over the period to 2014-15” (p. 122).</p>
<p><strong>Verdict</strong>: The A$0.2 billion quoted seems about right.</p>
<blockquote>
<p>Discontinuing the Jobs and Competitiveness Program ($4.0 billion)</p>
</blockquote>
<p>Assistance under the <a href="http://www.cleanenergyfuture.gov.au/clean-energy-future/securing-a-clean-energy-future">Jobs and Competitiveness Program</a> (pp. 55 & 114) is in the form of free Australian carbon permits, not cash handouts. That means this measure represents revenue foregone rather than actual savings from the budget bottom line.</p>
<p><strong>Verdict</strong>: Technically, judgement here hinges on whether it is appropriate to use an accruals or cash accounting basis for this “saving”. Foregoing revenue from permits that would no longer exist cannot be said to be a budget saving in the sense of making cash available in order to reduce the underlying cash deficit. Cash accounting gives a more accurate picture here and so real savings are overstated by A$4 billion.</p>
<blockquote>
<p>Discontinuing the Steel Transformation Plan ($0.1 billion)</p>
</blockquote>
<p>Originally the <a href="http://www.cleanenergyfuture.gov.au/clean-energy-future/securing-a-clean-energy-future">Steel Transformation Plan</a> (p. 133) was budgeted at A$300 million over five years with figures for FY2013-14 and 2014-15 of A$75 million each. The <a href="http://www.innovation.gov.au/AboutUs/Budget/Documents/PortfolioBudgetStatementsDIICCSRTE2013-14.pdf">portfolio budget statement</a> (p. 38) shows budget of A$136 million for FY2014-15 and FY2015-16.</p>
<p><strong>Verdict</strong>: Allowing for funds already committed, this announced saving of A$0.1 billion appears to be in the right ball park.</p>
<blockquote>
<p>Discontinuing the Clean Technology Program ($0.4 billion)</p>
</blockquote>
<p>The <a href="http://www.cleanenergyfuture.gov.au/clean-energy-future/securing-a-clean-energy-future">Clean Technology Program</a> (pp. 56-57) is made up of the Clean Technology Investment Program, the Clean Technology - Food and Foundries Investment Program, and the Clean Technology Innovation Program. </p>
<p>In its <a href="http://www.budget.gov.au/2013-14/content/bp2/html/bp2_expense-16.htm">May budget</a>, despite “reprofiling” some funding, the Government maintained that the Clean Technology Program “will still provide A$1.2 billion over seven years from 2011‑12” (p. 213). In its August <a href="http://www.budget.gov.au/2013-14/content/economic_statement/download/2013_EconomicStatement.pdf">Economic Statement</a> however, the Government announced “rephasing $200 million of funding from the Clean Technology Program and returning $162 million of unallocated funding to the budget” (pp. 39 & 60).</p>
<p>We know that the majority of funds in the Clean Technology Programs is <a href="http://www.ausindustry.gov.au/programs/CleanTechnology/CleanTechnologyInvestment/Pages/CTIP-Grantee.aspx">already committed</a> in the forward estimates period. An <a href="http://www.ausindustry.gov.au/programs/CleanTechnology/CleanTechProgram-FactSheet/Pages/default.aspx">update</a> was published in 16 July and more has been committed since then.</p>
<p><strong>Verdict</strong>: The various changes to the three programs make it difficult to assess the accuracy of the Coalition’s announced A$0.4 billion saving. What can be said though is that the figure appears to include “savings” from funds that have already been committed and contracted. The proposed changes would also make it more expensive for small businesses and trade-exposed firms to invest in technologies that will enable them to save on their power bills. Unless one believes that our industries will never have to face a price on carbon, these changes simply increase their future vulnerability.</p>
<blockquote>
<p>Discontinuing the Coal Sector Jobs Package ($0.3 billion) </p>
</blockquote>
<p>The <a href="http://www.cleanenergyfuture.gov.au/clean-energy-future/securing-a-clean-energy-future">Coal Sector Jobs package</a> (pp. 133-135) originally allocated A$1.3 in cash assistance over six years from FY2011-12 to the most emissions-intensive coal mines.</p>
<p>Cuts had already been announced by the Government in its <a href="http://www.budget.gov.au/2013-14/content/bp2/html/bp2_expense-21.htm">May budget</a> (pp. 68 & 250): “The Government will reduce funding by $274.2 million over two years from 2015-16 for the Coal Sector Jobs package to reflect the projected carbon price. The program will now provide funding of $763.5 million over four years from 2013‑14.”</p>
<p>Further changes were announced in the Government’s August <a href="http://www.budget.gov.au/2013-14/content/economic_statement/download/2013_EconomicStatement.pdf">Economic Statement</a> (p. 39): “updating the Coal Sector Jobs package allocation in 2014-15, consistent with lower expected carbon prices, saving $186 million” (Actually A$186.4 million, Table B2, p. 62).</p>
<p>Total budget for FY2013-14 and the following three years implied: A$763.5 - A$186.4 = A$577.1 million total.</p>
<p><strong>Verdict</strong>: The multiple changes to this package make figures hard to estimate, but with funds already committed for this financial year, an estimated saving of A$0.3 billion over the next three years is about right.</p>
<blockquote>
<p>Discontinuing other small Clean Energy Future business compensation measures including the Energy Efficiency Information Grants, the Clean Energy Skills package, and the Clean Technology Focus for Supply Chain programs</p>
</blockquote>
<p>Implied savings as the balance remaining from the A$5.1 billion subtotal: A$100 million.</p>
<p><a href="http://www.cleanenergyfuture.gov.au/clean-energy-future/securing-a-clean-energy-future">Energy Efficiency Information Grants</a> (pp. 58 & 87) are to “help small businesses understand the implications of the Government’s clean energy plan and how they can reduce energy costs.” Cost: A$40 million program over four years.</p>
<p>The <a href="http://www.cleanenergyfuture.gov.au/clean-energy-future/securing-a-clean-energy-future">Clean Technology Focus for Supply Chain</a> (p. 59) initiative is an additional A$5 million over four years for the delivery of programs to small and medium businesses in clean technology industries to “enhance the clean technology focus of industry supply chains, which will help local businesses secure contracts for major projects”.</p>
<p>The <a href="http://www.cleanenergyfuture.gov.au/clean-energy-future/securing-a-clean-energy-future">budget</a> (p. 131, fn 6) for Energy Efficiency Information Grants & Clean Technology Focus for Supply Chain programs is:</p>
<figure><table><thead><tr><th>Financial Year</th><th>Amount</th></tr></thead><tbody><tr><td>FY2013-14</td><td>A$21 million</td></tr><tr><td>FY2014-15</td><td>A$19 million</td></tr><tr><td>Total</td><td>A$40 million</td></tr></tbody></table></figure>
<p>We also know that the great majority of funds under the grant schemes <a href="http://ee.ret.gov.au/energy-efficiency/news-article/clean-energy-package-improve-energy-efficiency">have already been committed</a>, and so it is hard to see how some of the proposed savings could be made without breaking contracts.</p>
<p>The <a href="http://www.cleanenergyfuture.gov.au/clean-energy-future/securing-a-clean-energy-future">Clean Energy Skills package</a> (p. 131, fn 6) “has been allocated $32 million over four years, which is to be fully offset from existing resourcing.” This implies zero additional funds from the budget.</p>
<p><strong>Verdict</strong>: Savings here seem to be overstated by A$60 million.</p>
<h2>Energy market compensation</h2>
<blockquote>
<p>Discontinuing energy market compensation measures which will no longer be needed once the carbon tax has been scrapped ($0.5 billion).</p>
</blockquote>
<p><strong>Verdict</strong>: Compensation measures are generally in the form of free carbon permits so again, this would not be a saving from the budget bottom line. Real savings are overestimated by around A$0.5 billion.</p>
<h2>Land sector initiatives & cuts to departments</h2>
<blockquote>
<p>Discontinuing various land sector initiatives which Labor has already slashed, as well as bureaucracies like the Climate Change Authority ($0.4 billion).</p>
</blockquote>
<p>The <a href="http://www.innovation.gov.au/AboutUs/Budget/Documents/PortfolioBudgetStatementsDIICCSRTE2013-14.pdf">budget of the Climate Change Authority</a> (p. 11) is:</p>
<figure><table><thead><tr><th>Financial Year</th><th>Amount</th></tr></thead><tbody><tr><td>FY 2013-14</td><td>A$8.707</td></tr><tr><td>FY 2014-15</td><td>A$8.776</td></tr><tr><td>FY 2015-16</td><td>A$8.854</td></tr><tr><td>FY 2016-17</td><td>A$9.241</td></tr><tr><td>Total</td><td>A$35.578 million</td></tr></tbody></table></figure>
<p>This implies that some A$364 million will come from “various land sector initiatives” and other “bureaucracies”. That’s not good news for the environment – though the vast majority of the <a href="http://www.environment.gov.au/cleanenergyfuture/biodiversity-fund/index.html">remaining Biodiversity Fund money is already committed</a> as are funds for the <a href="http://www.daff.gov.au/climatechange/carbon-price-mechanism-land-sector-package">Carbon Farming Future program</a>, and the <a href="http://www.environment.gov.au/cleanenergyfuture/regional-fund/">Regional Natural Resource Management Planning for Climate Change Fund</a>.</p>
<p><strong>Verdict</strong>: The only verifiable figure here is less than 10% of the supposed A$0.4 billion in savings, allowing a great deal of wiggle room and a black box of major cuts to other important energy and environment initiatives, some of which are already committed and contracted.</p>
<h2>Other measures</h2>
<blockquote>
<p>Abolishing other measures linked to the carbon tax that are wasteful or will no longer be required once the carbon tax is abolished ($1.5 billion).</p>
</blockquote>
<p>The <a href="http://www.arena.gov.au/">Australian Renewable energy Agency (ARENA)</a> seems to be the target here, as <a href="http://www.businessspectator.com.au/article/2013/8/29/renewable-energy/do-hockeys-clean-energy-cuts-add">Tristan Edis</a> has outlined.</p>
<p><strong>Verdict</strong>: A$1.5 billion is an enormous figure to state with no detail on what is being targeted. The implications for Australia’s renewable energy future would appear grave.</p>
<h2>Conclusion</h2>
<p>The claim to save the budget bottom line A$7.5 billion with these measures significantly overstates the practical reality, primarily because of the misclassification of A$4.5 billion under the Jobs and Competitiveness Program and energy market compensation measures. A more accurate figure for the total cash saved by this set of measures is more like $3 billion – nowhere close to the loss of A$9.7 billion in revenue from abolishing the price on carbon.</p>
<p>These cuts also have serious adverse implications for Australia’s preparedness to tackle climate change in the future, since they discourage investment in renewable energy and energy efficiency and imply drastic cuts to vital climate adaptation funds.</p>
<p><em>I am grateful for the assistance of Claire Maries, Climate Change Campaigner with the Australian Conservation Foundation in the preparation of this article. Any errors are my own.</em></p><img src="https://counter.theconversation.com/content/17600/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Brett Parris is an Adjunct Research Fellow in the Department of Econometrics and Business Statistics at Monash University and the Senior Economist at the Australian Conservation Foundation. </span></em></p>Shadow Treasurer Joe Hockey and shadow Minister for Finance, Andrew Robb, have announced A$7.5 billion in planned budget savings from scrapping key elements of the Government’s Clean Energy Future package…Brett Parris, Adjunct Research Fellow in Econometrics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/176392013-08-30T04:34:24Z2013-08-30T04:34:24ZElectoral promises of both parties hang on precarious PEFO forecasts<figure><img src="https://images.theconversation.com/files/30221/original/qkscnxsw-1377760630.jpg?ixlib=rb-1.1.0&rect=8%2C47%2C983%2C700&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The economic costings from both parties rely on wildly optimistic PEFO figures.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>The economic promises of both the Coalition and the ALP rely on two “big taxes”: the mining tax and the carbon tax. </p>
<p>This week, the Coalition revealed what it believes it will save from abolishing them both; $4.7 billion from the mining tax and $7.5 billion from the carbon tax over the next four years. </p>
<p>In contrast, the Labor party would rely on revenue raised from the sale of CO<sub>2</sub> permits once it moves to an emmissions trading scheme as an important source of revenue to fund its promises, as well as the 22% mineral resource rent tax (MRRT) on iron ore and coal. </p>
<p>Just how realistic are either of these outcomes for both parties? To answer this, it is necessary to revisit the four year revenue forecasts for both taxes outlined in the <a href="http://www.finance.gov.au/budget/budget-process/pre-election-economic-and-fiscal-outlook.html">Pre-Election Economic and Fiscal Outlook</a> (PEFO), released by Treasury Secretary Martin Parkinson and Finance and Regulation Secretary David Tune in early August. </p>
<p>In fairness, the PEFO document explicitly states there is much uncertainty about these revenue forecasts, and they report some sensitivity evaluations. </p>
<p>But I would argue that the PEFO revenue forecasts and projections for the next four years are very much on the optimistic side. Lower revenue outcomes will have wildly different impacts for each party: it would add to the budget deficit bottom line for Labor and improve it for the Coalition policy package.</p>
<h2>Carbon Pricing</h2>
<p>In one of his first acts upon resuming the prime ministership in July, Kevin Rudd announced Labor would replace the current fixed price emissions tax on CO<sub>2</sub> with a variable price emissions trading scheme. Australian polluters would also have the right to purchase European tradable permits leading to a similar price for Europe. One consequence of the policy shift forecast by PEFO is a large drop in the carbon price from $24.20 to about $6 a tonne of CO<sub>2</sub> from July 2014. </p>
<p>PEFO then forecast a doubling of the carbon price to $12.50 in 2015-16 and further increases to $38 by 2019-20 (page 55). The carbon prices and expected revenue reported in PEFO are below:</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/30172/original/jz7zxbbr-1377744201.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/30172/original/jz7zxbbr-1377744201.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=212&fit=crop&dpr=1 600w, https://images.theconversation.com/files/30172/original/jz7zxbbr-1377744201.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=212&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/30172/original/jz7zxbbr-1377744201.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=212&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/30172/original/jz7zxbbr-1377744201.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=267&fit=crop&dpr=1 754w, https://images.theconversation.com/files/30172/original/jz7zxbbr-1377744201.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=267&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/30172/original/jz7zxbbr-1377744201.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=267&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Sources: PEFO (2013), Table 5 for revenue and page 55 for prices.</span></span>
</figcaption>
</figure>
<p>But such rapid increases in the price of carbon, and the associated increases in government tax revenue are simply not credible.</p>
<p>The sharp fall in carbon price recognises a shift to an emissions trading scheme with an integrated European and Australian market. The larger European market largely sets the price, and Australia becomes a net purchaser of cheaper European permits to pollute.</p>
<p>Highly arguable is PEFO’s assumption that the joined European-Australian permits market will result in very sharp price increases over the next few years. </p>
<p>The high price increases are predicated on modelling reported by Treasury in its 2011 “<a href="http://www.ret.gov.au/energy/facts/white_paper/appendix/frameworks/growth/Pages/index.aspx">Strong Growth, Low Pollution</a>” report. While the model and derived prices for carbon are logical for the assumptions, the assumptions do not accord with reality. </p>
<p>The modelling assumes a target of holding the global stock of CO<sub>2</sub> to under 550 parts per million and that there is a global agreement to meet this target. Realistically, the probability of a binding global agreement in the next few years is almost zero. The assumption of a comprehensive base for pricing carbon also is unrealistic. For example, Europe places a price on less than a half of its emissions and Australia only 60%.</p>
<p>An important result of the modelling by Treasury, and as argued in the Garnaut reports of 2008 and 2011, is if one allows banking of permits to pollute over time, the price of permits will rise by about the long-term interest rate. </p>
<p>In short, the PEFO forecasts for a doubling of price from 2014-15 to 2015-16, and then a further 50% increase in the next year has to be a finance arbitrager’s easiest opportunity to become an over-night millionaire.</p>
<h2>Mining Resource Rent Tax</h2>
<p>As a tax on economic rent, revenue from the MRRT will vary widely over time and large forecast errors are inevitable. Higher revenue will be associated primarily with high prices for iron and coal. </p>
<p>Increased production also adds to revenue, but since less well-endowed mines with higher unit costs and lower economic rent come on line the MRRT revenue gains are constrained. Further, the states have first call on royalty revenues, and they have shown a willingness to increase royalty rates, with resulting less MRRT revenue in good times.</p>
<p>The table below shows the estimates provided in PEFO of MRRT revenue and the terms of trade, with prices of mining products being an important (but far from the only) driver.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/30175/original/jkw88hfc-1377744318.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/30175/original/jkw88hfc-1377744318.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=240&fit=crop&dpr=1 600w, https://images.theconversation.com/files/30175/original/jkw88hfc-1377744318.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=240&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/30175/original/jkw88hfc-1377744318.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=240&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/30175/original/jkw88hfc-1377744318.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=301&fit=crop&dpr=1 754w, https://images.theconversation.com/files/30175/original/jkw88hfc-1377744318.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=301&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/30175/original/jkw88hfc-1377744318.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=301&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Source: PEFO (2013), terms of trade from Box 1, page 3, and revenue Table 5, page 13</span></span>
</figcaption>
</figure>
<p>Current prices of coal and iron ore are still well above historical levels, at least double those of the early 2000s, but also below the peak prices around 2011, according to figures from the <a href="http://www.bree.gov.au/documents/publications/req/req-2013-06.pdf">Bureau of Resources and Energy Economics</a>. </p>
<p>Extra production from the mining investment boom across all producers, and not just Australia, is only beginning to add to supply and push prices down to lower levels. A cyclical downturn of China and other large Asian importers, or the usual cob-web over-supply experienced with previous commodity cycles, which would push prices much lower for a period, cannot be ruled out.</p>
<p>As shown in <a href="http://www.treasury.gov.au/PublicationsAndMedia/Publications/2013/PEFO-2013/Report/Appendix-D">Appendix D of PEFO</a>, a further fall in the terms of trade of just another four percentage points would reduce resource rent taxes revenue in the forecast years by about a half of the revenue shown in Table 2.</p>
<p>Concluding: future returns from the carbon price and MRRT will be variable, and difficult to estimate; the PEFO estimates for the next four years are optimistic, and lower returns than the PEFO projections detract from the Labor policy budget bottom line and improve for the Coalition policy package.</p><img src="https://counter.theconversation.com/content/17639/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Freebairn does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The economic promises of both the Coalition and the ALP rely on two “big taxes”: the mining tax and the carbon tax. This week, the Coalition revealed what it believes it will save from abolishing them…John Freebairn, Professor, Department of Economics , The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/169492013-08-12T20:18:20Z2013-08-12T20:18:20ZExplainer: Pre-election Economic and Fiscal Outlook<figure><img src="https://images.theconversation.com/files/29059/original/hqwnphqy-1376289624.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The Pre-election Economic and Fiscal Outlook, to be released today, began during John Howard's term in government.</span> <span class="attribution"><span class="source">AAP/Bluey Thomson</span></span></figcaption></figure><p>The Pre-Election Economic and Fiscal Outlook report (PEFO) is a recent development in Australian politics. It emerged as part of the Charter of Budget Honesty Act 1998 during the first term of the Howard Coalition government with the primary goal of committing governments to sound fiscal management. It came <a href="http://www.themonthly.com.au/issue/2007/october/1274939034/andrew-charlton/comment">as a response</a> to what the Howard government termed the budgetary “black hole” that it argued was left by the outgoing Keating government.</p>
<p>While the act appears to be borne from noble democratic ideals, there was a significant political reason for the government to introduce the act; it believed the act would strengthen its claim as being the stronger manager of the economy, especially when compared with Labor.</p>
<p>The act commits the Treasurer to provide the PEFO within 10 days of the issue of the election writs. The PEFO itself is an independent, non-political report prepared by the secretaries of the departments of Treasury and Finance. It is often referred to as the “state of the books” and provides updated estimates of the budget. </p>
<p>Another important feature of the PEFO is that it constructs a level playing field for the government and opposition by costing their promises and providing citizens with an accurate picture of how both parties’ policies would impact on the budget.</p>
<p>While these mechanisms appear to enhance transparency, they are subject to challenge by the parties. This year, for example, <a href="http://www.abc.net.au/news/2013-07-26/hockey-casts-doubt-on-treasury-figures/4845502">it has been reported</a> that the Coalition would not trust the PEFO. According to the shadow treasurer, Joe Hockey, the Coalition would not be able to rely on the estimates in the PEFO as it believed the government would try to “bully the public service into a set of numbers” that did “not properly represent the state of the budget”.</p>
<p>Another very important addition to the framework overlooking budgetary promises is the Parliamentary Budget Office which was established by the Gillard government in 2012. This body is responsible for costing the policies announced during an election campaign upon request by the political parties. Establishing the PBO was part of Labor’s agreement with the Greens that led to the formation of the minority government in 2010.</p>
<p>Interestingly, the Coalition <a href="http://www.bendigoadvertiser.com.au/story/1692288/pre-election-economic-statement-out-on-tuesday/?cs=8">has indicated</a> that it would rather use the PBO, as well as a range of other sources, instead of the PEFO to construct its budgetary basis.</p>
<p>This approach has been ridiculed by the government. Treasurer Chris Bowen and finance minister Penny Wong <a href="http://www.abc.net.au/news/2013-07-26/hockey-casts-doubt-on-treasury-figures/4845502">have suggested</a> that the Coalition was avoiding the use of PEFO as the basis for its costings for dubious reasons.</p>
<p>The PEFO has the potential to make a very positive contribution to the political debate and can be a valuable document. Its effectiveness, however, is limited by how the political actors use it.</p><img src="https://counter.theconversation.com/content/16949/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Zareh Ghazarian does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Pre-Election Economic and Fiscal Outlook report (PEFO) is a recent development in Australian politics. It emerged as part of the Charter of Budget Honesty Act 1998 during the first term of the Howard…Zareh Ghazarian, Lecturer, School of Political and Social Inquiry, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.