Government takes a punt on rubbery forward estimates, while ignoring tax reform agenda

Despite the notorious unreliability of forward estimates, the government has included projections for a 10-year period in this year’s federal budget. Image from www.shutterstock.com

When assessing some of the assumptions underpinning Wayne Swan’s 2013 federal budget, two things spring to mind: the Henry Tax Review and the notorious inaccuracy of forward estimates.

History shows it might be foolhardy to rely on the accuracy of forward estimates. And meanwhile, the repercussions of failing to undertake structural economic reform by amending our taxation system will continue to weigh on our economic fortunes.

So what is the link between the Henry Review and the forward estimates? One was timely but ignored; the other has time against it.

Henry Tax Review

Despite Treasurer Wayne Swan’s earlier promise to return to surplus for the 2012-13 year, a deficit of A$19.4 billion has now been announced. As such, this year’s budget represents an absolutely critical one for Australia as it makes especially visible the underlying structural deficit that has faced Australia now for many years.

In the five years to 30 June this year, Australia will have had budget deficits totalling in excess of A$190 billion. Moreover, the less-than-expected receipts from the mining and carbon taxes and increased spending on, for example, the National Disability Insurance Scheme and the Gonski education reforms will have future budgetary impacts. The current budget therefore highlights the need to examine decisions made to address the underlying structural deficit.

The Henry Tax Review’s 138 recommendations effectively represent a blueprint to guide reform. Given Australia’s current budgetary position, it would seem timely to examine budget measures in the context of the review’s recommendations. However, the government has chosen — to a very large extent — to ignore the report.

Given the effort and cost that went into the report’s preparation, it seems logical for the government to provide a comprehensive statement on whether the review’s recommendations will be seriously considered and how its recommendations will be implemented.

The current version of the mining tax serves as a stark example. It was not set up as envisaged by the Henry Review, and its ineffectiveness in raising tax revenue has now become obvious.

Accuracy of forward estimates

For many years now, the Commonwealth budgets have included estimates for the ensuing financial year and for three further forward estimate years. Given that a budget surplus was not delivered for 2012-13 as originally promised, and given the revised commitment to return the budget to balance in 2015-16 and surplus in 2016-17, it is worth examining the accuracy of forward estimates provided in budgets.

The latest year for which we have an actual budget outcome figure is the 2011-12 financial year. If we examine the budget released in May 2008, the forward estimate was for an A$18.9 billion surplus for 2011-12.

A year later, in May 2009, the forward estimate for the 2011-12 year had turned around by the not inconsiderable amount of A$63.4 billion to become a A$44.5 billion deficit. This was then revised to a lower deficit of A$13 billion in the May 2010 budget, followed by a revision to an increased deficit of A$22.6 billion in the May 2011 budget. The actual outcome, released in September 2012, was a deficit of almost A$44 billion.

Another example from last night’s budget is the estimate that the budget deficit for 2012-13 is now expected to amount to A$19.4 billion. The earliest budget that contained a forward estimate for 2012-13 was released in May 2010, where the estimate was for a surplus of A$5.4 billion. This therefore represents a forecast error of some A$25 billion.

The surplus was revised down to A$1.5 billion in last year’s budget, and a forecast error of over A$20 billion has arisen over the space of one year.

These examples point to the notorious unreliability of forward estimate figures — not just for estimates four years into the future, but also for periods as short as one year.

It is interesting to note the government has included certain significant projections in the budget for a ten-year period. A chart in the budget papers presents “long-term savings”, totalling A$121 billion for the ten-year period through to 2023-24.

Federal Budget 2013-14

Another chart presents projections for the level of net government debt through to 2023-24, showing the paying down of net debt to nil over that period.

Given the past unreliability of four-year forward estimates, one wonders how forward estimates for a ten-year period can be taken seriously — especially given the forthcoming September election and at least three further elections within that timeframe.

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