Today’s speech by Prime Minister Gillard is a good attempt at explaining the Government’s budgetary challenges, but I was unconvinced by this line in the speech:
The Budget will outline the fiscal path for the coming four years, one designed both to take account of the nation’s current circumstances and to shape the nation’s future.
The PM effectively acknowledged in her speech that the Treasury cannot reliably forecast Government revenue several months in advance, let alone four years, so any fiscal path set out in the Budget will lack credibility. Governments need to recognise that, with the heightened economic volatility that will be with us for much of this current decade, the budgetary forward estimates are unreliable and Governments should be very reluctant to commit to expenditures in years beyond the upcoming financial year.
That is, the Government should avoid expenditure measures such as the $1.1 billion over 2012-13 to 2015-16 it provided to boost income support payments in the 2012-13 Budget. While forward estimates budgeting is usually useful, because it forces Governments to think about the ongoing impact of budget measures, it can be problematic if Governments make decisions based on revenue forecasts that are unreliable. Given the undeniable volatility in revenue, Governments should be more careful in what they commit to, in case the funds are not available.
For more on Australia’s budgetary challenges, I recommend the nice piece at the Conversation by one of Australia’s leading economists, John Freebairn:
Regarding Queensland’s budgetary challenges, I’m looking forward to seeing the full Commission of Audit report and the Government’s response tomorrow.