MYEFO mystery – weird negative contingency reserve continues

I share the skepticism of many commentators about the budget forecasts in today’s Mid-Year Economic and Fiscal Outlook (MYEFO). Certainly the revenue grab from increasing the frequency of company tax payments seems tricky, and I wonder if it really will yield $8 billion in extra revenue over the forward estimates. But the weirdest thing in today’s MYEFO is the continuation of the negative contingency reserve, now at -$2.8 billion in 2012-13 (see p. 69).

Now the contingency reserve should be positive, because it is supposed to act as a buffer – it reflects the long-observed tendency of Governments to end up spending more money than they originally budgeted. Indeed, the contingency reserve is forecast to be positive from 2013-14 onwards.

The negative contingency reserve in 2012-13 is convenient for the Government as it helps generate the budget surplus, as the negative contingency reserve subtracts $2.8 billion off estimated Government spending and the surplus is only $1.1 billion.

In explaining the negative contingency reserve in response to a question on notice at the Budget Estimates hearing earlier this year, the Treasury observed:

The Contingency Reserve balance is negative in the budget year primarily owing to the inclusion of revised economic parameters received late in the Budget process which reduced overall spending.

Given the timing, these adjustments were not able to be allocated to individual agencies or functions. This is consistent with longstanding practice.

A negative Contingency Reserve balance in the budget year has a precedent in the MYEFO publications, but it has not previously occurred in the Budget since at least 2000-01.

Will Treasury offer the same explanation this time? If it does, what confidence can we place in budget estimates if it can’t revise expenditure figures in time to reflect the latest economic forecasts?

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