Forward estimates budgeting needs rethinking in more volatile economic times

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:

Federal Budget 2013: Why our unsustainable structural deficit must be tackled

Regarding Queensland’s budgetary challenges, I’m looking forward to seeing the full Commission of Audit report and the Government’s response tomorrow.

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4 Responses to Forward estimates budgeting needs rethinking in more volatile economic times

  1. bp says:

    I must say if we get back to $11B deficit in 2012-13 then we’re heading in the right direction and this whole massive structural deficit matter does seem a little overblown. Not saying some additional fiscal prudence is not required just currently seems we are talking ourselves into a great panick over not that much. A turnaround from a 45B deficit to a 11B deficit is satisfactory. Not sure about the state government finances though. Some serious tax reform is required there potentially.

    thoughts?

    • Gene Tunny says:

      I agree we shouldn’t panic over the size of the deficit, but we clearly need to rein it in, and get back to surplus eventually, which the Government itself acknowledges. Its problem is that it can’t figure out how to do that without losing lots of votes or killing the economy. It must really be awful to work up at Parliament House these days.

      Tax reform would be worth exploring in Queensland, particulary a shift in the tax mix from stamp duty to more efficient taxes such as land tax.

      But that’s a longer term fix, and in the short-term I think we’ll need to rely on asset sales. Unfortunately the ratings agencies won’t give us back a AAA credit rating unless we pay down a lot of debt, and I can’t see how that’s feasible without major asset sales. As long as the economic regulation is right, there’s no need for Governments to own public utilities.

      • bp says:

        Land tax is an economists dream! We tried that here in the ACT (we actually tried something useful on the tax front!) and the lab party nearly got axed for trying something that made some sense. A problem with it is that there are lots of losers (small $ amounts) for a few winners (large $ amounts) so all the losers go silly. there are probably clever ways around all this. ie. only a few pay stamp duty but most would pay land tax. Stamps have collapsed cos people are realising that property isn’t quite what it used to be.

      • Gene Tunny says:

        Haha, it certainly is an economist’s dream, like a resource rent tax. Good point on the politics of it.

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