Coronavirus shows Australia's tax cuts were based on pure fantasy
Right now, such is the level of economic uncertainty, policy makers and investors are struggling to get any grip on what is about to occur. And yet, despite the coronavirus shredding all projections made even just three months ago, the government remains firm in its view that it will deliver its tax cuts – cuts which were not even costed when they are legislated, and which now are based on scenarios of pure fantasy.
Related: Is Australia flattening the coronavirus curve? Look at the charts ...
Just how lacking in certainty are we? The website policyuncertainty.com measures levels of economic uncertainty across the globe, and its latest figures for the US show a level well above what occurred after September 11, or during the GFC:
Here in Australia the uncertainty is clear from the stock market, which is bouncing around like a 10-year-old stuck at home in isolation who has just re-discovered the trampoline in the backyard.
Despite what you might think, generally the stock market is quite dull – it usually goes up or down by only around 0.5% each day.
Over the more than 2,000 trading days in the decade from January 2010 until the end of February this year, the ASX200 moved by more than 3% only 13 times.
It has now done that in 15 of the past 18 trading days:
However, if in these dark times you are in need of a laugh, you’ll find some grim humour by reading last year’s budget papers.
It would be easy of course to laugh at the government’s projections of a $7.1bn budget surplus. But to be honest that estimate based on heroic assumptions was already a joke 12 months ago and was revised down in the December Myefo to $5bn.
No, the real bitter humour lies in the projections that went out to four to 10 years.
The budget did not always have four year projections. If you read some of the old budget papers from before the mid 1990s you’ll see only references to two years – the current one and the year to follow.
By the early 1990s, deep within the budget papers there were “forward estimates” of four years, but they related only to spending based on the “minimum cost of on-going government policy”. Pointedly, they only constituted “a base for future government decision making” and did not “in any sense represent policy targets”.
Now of course we are used to four years of budget estimates being treated with precious seriousness.
But they are for the most part pointless.
They are based around predictions of the economy operating at trend growth of 3% that rarely come to pass, and if they do, it is only by pure luck.
And it is not just in times of crisis that we see this.
The first estimate for 2018-19 was in the 2015 budget. Joe Hockey predicted Australia’s GDP in that year would grow by 3.5%. Alas, we only achieved 2%.
Heck, even last year’s budget delivered less than three months before the end of the financial year overestimated economic growth for 2018-19:
So we can pretty safely treat the current projections for what will happen in four year’s time (they’re predicting 3% growth, would you believe!) with a truckload of salt.
To give you an idea how sketchy these predictions are, in 2018 the RBA was 90% sure the economy would grow this year by somewhere between 0.75% and 5.25%. That is, it was 90% sure the economy was either going to tank or boom.
And while the four year estimates are bad enough, the true budgetary crime that has appeared over the past five years has been the use of decade-long estimates.
Last year’s budget had estimates for GDP growth for the entire 2020s that look magically wonderful and robust:
They of course were complete hogwash even 12 months ago, but now they don’t so much look overly optimistic as truly idiotic.
The need for estimates to go well outside the parameters of the four year budget cycle was because the government locked in tax cuts well beyond those years and thus needed to pretend that they had been fully paid for.
So they came up with wonderful growth figures that would somehow enable equally wonderful levels of tax revenue:
Surpluses as far as the eye can see!
This would not be so bad were the government not continuing to hold fast to the tax cuts. Despite revenue clearly about to collapse to possibly never before seen levels, senator Simon Birmingham told ABC News Breakfast on Wednesday that “we absolutely stand by the tax cuts that we’ve legislated for the future. They will be a key part of our economic recovery.”
And yet they were budgeted to occur not for a period of recovery, but a period of supposedly strong growth.
Already we are seeing signs that should we get past this crisis in the short term, we will hear talk of needing to “tighten our belts” and cut spending to get the budget “back on track”.
I am not one to worry about the level of government debt accrued by the stimulus packages announced thus far, but unless the government plans on never caring again about the budget balance they will need to pay for these tax cuts somehow.
That question deserved to be answered when they were legislated, now it is even more crucial.
Given we are very likely to experience a period of ongoing low revenue, the only way to have the tax cuts be budget neutral is to cut services – and the cuts will have to be much larger than previously expected.
• Greg Jericho writes on economics for Guardian Australia
