It has only been seven months since the last budget in October, when Treasurer Jim Chalmers delivered his first budget out of sync. And despite the abbreviated interstice, this budget reports one of the biggest revenue forecast misses in the history of budgets.
The government — whoops! — expects to collect an astonishing $42 billion more than it expected to this financial year and will deliver a surplus.
A little while ago, budgets were forecasting deficits for eternity. And then zip, bam, pow, we find ourselves with a surplus nestled neatly in the palms of our hands. A small one, admittedly, at just $4 billion in 2022-23, but still, a most surprising result. The government has called it an “extraordinary fiscal turnaround”.
Of course, the financial year still has two months to go. At the current error rate of $42 billion per seven months, Treasurer Chalmers could find another $12 billion down the back of the sofa by June 30!
So where did the money come from? The budget papers tell a tale of error and artifice, a tapestry of deliberately conservative forecasts and genuine surprises.
Chance v plans
The first thing to know is this is not about government rectitude.
Labor is patting itself on the back for not spending all the revenue upside, but to be honest, doing so would have required spending money very fast.
Changes in the economy — labour force strength and high commodity prices — meant revenues were far higher than the government thought they would be. An extra $146.5 billion is expected to come in over the next five years. The government allocated $20.6 billion of that to higher spending.
The biggest single source of all this surprise money is company tax. Profits are higher than expected, especially in the resources and mining sectors. Company profits are taxed at 30%, so the success of big miners is dumping money into Treasury coffers.
The next big source of upside is income tax. When unemployment is low and wages are rising, income taxes increase. The good times in the labour market are also good times in the treasurer’s office.
What an unbelievably great election to win. The preelection fiscal outlook predicted a $80 billion deficit, which has been upgraded to a $4 billion surplus. Imagine the text messages Scott Morrison is sending to Josh Frydenberg now. All the things they could have promised us but didn’t because Treasury stuffed up the forecasts!
Another thing driving the revenue upside: population. In the latest budget, the population has been revised up by 1.5% — not population growth, the actual population of Australia is 1.5% higher than expected last October. On a base of 25 million, that’s another 325,000 people that are here now, unexpectedly.
Coal and gas
The government is still assuming the price of Australia’s major exports will fall too, as this next chart shows. It puts Treasury’s conservatism on show; the department likes to assume that any upside will go away.
Is this incompetence? Or is it competence?
It may be one way the treasurer keeps the insistent wheedling of other cabinet ministers at bay and controls the fiscal situation. It is better to show charts depicting ongoing deficits and then be “surprised” by the revenue upside. Imagine the defence minister’s appetite if he knew how high revenue might actually be!
It also gives the treasurer the possibility to deliver surprise surpluses. Chalmers has perhaps learned a vital lesson from his mentor Wayne Swan, who was haunted by his infamous line about “the years of surpluses I deliver tonight”. Better to underpromise and overdeliver.
Surplus fetish
I was in Treasury the last time it was like this — back in the dying days of the Howard government.
Treasurer Costello oversaw a budget that each year found itself with more money to spend than it knew what to do with. He and John Howard invented whole new types of spending while at the same time claiming credit as extremely serious people who placed fiscal rectitude first.
Their success created a culture of surplus fetishisation that continues today — not least in the person of Treasurer Jim Chalmers. He was in the treasurer’s office when Wayne Swan announced and failed to deliver a string of surpluses, a decade ago.
Swan’s experience shows that revenue surprises are rarely a one-year event: they come in waves. If there’s revenue upside this year, there probably will be next year too.
I’d be surprised if this is the last time Treasurer Chalmers gets a revenue “surprise” that lets him deliver a surplus.
