Are budgets worth the paper they’re written on?


In this little exercise I have gone through commonwealth government budgets from 1999‒2000 to 2013‒14 to study changes in the figures.

The figures for each budget can vary quite significantly. For quite a few years now we have had the Mid-Year Economic and Fiscal Outlook (MYEFO) which updates and revises the figures used in the budget as presented on budget night. Even before MYEFO, it was not uncommon for budget figures to be revised during the year and this often became apparent during the process known as ‘Additional Estimates’. Then there is the next budget: while it provides the figures for the coming financial year, it also provides another set of figures for the current financial year — which still has about seven weeks to run at the time of the budget. And each budget also contains projections for the next three years (the forward estimates). To complete the picture, in about September each year, the ‘Final Outcome’ is released which presents the actual figures, the actual revenue and spending, that occurred in the previous financial year (and it compares those final figures not to the original budget but the figures used on the more recent budget night). So, before the Final Outcome, there could have been at least six different sets of figures relating to any single budget.

I will focus on two sets of figures: the budget figures as presented by the treasurer on budget night and the final outcome (which is why I stop at 2013‒14). That will give us an indication of how accurate (or otherwise) the treasury and treasurer estimates of income and spending actually are.

There is also an issue about accrual accounting and cash accounting, and there often seems to be a few billion dollars difference between the two: for example, in 2007‒08 the ‘final outcome’ revenue for the government in accrual terms was $303 billion but $295 billion in cash receipts. (One reason I have commenced in 1999‒2000 is because that was the year that accrual accounting was introduced.)

Accrual accounting assigns income and expenditure when a commitment is made whereas cash accounting only enters money when it is actually received or spent: for example, if the government promises an organisation $100,000 on 10 June this year but doesn’t pay the money until 10 July, it would appear in the 2014‒15 budget under accrual accounting but the 2015‒16 budget under cash accounting. While the budget papers do contain both cash and accrual tables, I have stuck with the figures from accrual accounting as they now seem to provide the headline figures. (Although from my reading it appears that governments may sometimes pick the figure which best suits them at the time.)

In the eight years from 1999‒2000 to 2006‒07, actual revenue exceeded the budget estimate in every year by an average of $6.7 billion (or about $9 billion in constant 2013‒14 prices), varying from $2.8 billion to $13.1 billion, or from 101.5% to 106.8% of the budget night estimate. We might argue that a difference of 1‒2% isn’t too bad when one is trying to predict the future but it was only that close in two of those eight years (and it has been that close only once since). Also, because in those years the mistake was to under-estimate revenue, it wasn’t a problem for the government. (It also helps explain how Costello managed to achieve his surpluses — the cumulative under-estimates for those years amounted to $54 billion.)

The year 2007‒08 was a turning point but initially for a different reason. It was the year the GST was counted in the government’s revenue — before that it was discussed in a separate budget attachment. For that reason, government revenue jumped by almost $57 billion above the original budget night estimate but $44.4 billion of that was the GST revenue. Without the GST, the final outcome for revenue was still $12.6 billion above the budget night estimate. The influence of the GST on the budget can basically be ignored because although it adds to revenue it is simply offset in spending as a transfer to the states. It does mean, however, that the headline revenue figure in the budget is a little misleading: for example, in 2013‒14 the government’s final revenue was $374.0 billion but that included $55.5 billion in GST, which left $318.4 billion for spending on commonwealth government programs (including additional support to the states for hospitals and schools). Despite that I will use the full budget figure as it becomes too time-consuming to re-arrange every budget to remove the GST.

From 2008‒09, the budget night estimates have tended to over-estimate government revenue, with only 2009‒10 under-estimating revenue (by $2.2 billion).

Revenue Budget estimate (billion) Final outcome (billion) Proportion
2008-09 $319.5 $298.9 93.6%
2009-10 $290.6 $292.8 100.7%
2010-11 $356.4 $309.9 87.0%
2011-12 $350.0 $338.1 96.6%
2012-13 $376.1 $360.2 95.8%
2013-14 $387.7 $374.0 96.4%

In dollars terms that amounts to an average ‒$17.7 billion each year. The cumulative total of budget night forecasts for those six years was $2,080 billion but the actual revenue was only $1,974 billion (95%), meaning the Rudd and Gillard governments had available for spending $106 billion less than they were originally told. That also suggests that when treasury over-estimates revenue it does so by more than twice as much as when it under-estimates revenue.

The forecasts in the ‘forward estimates’ in each budget also provide a picture of how treasury thinking changes over time. (The figures are billions of dollars on an accrual basis and start at 2001‒02 because I would need to go back earlier than 1999‒2000 to get the full three-year forecasts for previous years and those earlier years are cash accounting).

Government revenue Forecast 3 years earlier Forecast 2 years earlier Forecast 1 year earlier Budget night Final outcome
2001‒02 $153.8 $161.2 $158.8 $162.5
2002‒03 $163.1 $171.1 $164.9 $169.6 $175.0
2003‒04 $183.3 $175.5 $179.6 $178.3 $187.6
2004‒05 $185.7 $189.4 $185.0 $193.2 $206.2
2005‒06 $199.3 $194.2 $201.4 $214.5 $221.9
2006‒07 $204.7 $212.2 $222.9 $231.7 $237.1
2007‒08 $223.1 $233.4 $240.7 $246.8 $303.7*
2008‒09 $245.3 $252.1 $260.7 $319.5* $298.9
2009‒10 $265.6 $274.6 $336.9* $290.6 $292.8
2010‒11 $287.3 $350.9* $294.8 $321.8 $309.9
2011‒12 $366.9* $320.8 $356.4 $350.0 $338.1
2012‒13 $349.7 $381.9 $383.1 $376.1 $360.2
2013‒14 $407.2 $405.2 $402.2 $387.7 $374.0

* First includes the GST, which was not included in revenue figures in previous years

If you wonder why Labor had problems in its last budget, check out that last line of figures. The final outcome was below all of the previous forecasts, the only time that has happened since 2000 (although it also appears likely to happen to Hockey’s 2014‒15 budget but we won’t know for certain until September). The previous two years were above only one forecast, the one made two or three years earlier. In contrast, the Howard government during the 2000s saw the final outcome above all previous forecasts.

You can also see that treasury became a little uncertain between 2001 and 2004 after the ‘tech bubble’ burst and adjusted forecasts up and down and that has happened again in recent years, although for 2013‒14, and now for 2014‒15, each subsequent forecast has been lower: for 2014‒15 the figures run:
  • $425.8 billion forecast in 2011‒12
  • $424.8 billion forecast in 2012‒13
  • $411.6 billion forecast in 2013‒14
  • $391.3 billion estimated on budget night (which was reduced to $385.9 billion in the MYEFO)
The forecast three years out tends to be lower than the final outcome: that was the case in 11 of those 13 years. Leaving aside the change that the inclusion of the GST caused for the forward estimate for 2011-12, the only year in which that forcast three years out has been higher was in 2013‒14. That suggests the obvious: that revenue normally grows and it is difficult to predict by how much it will grow (which can also be influenced by inflation as these are ‘nominal’ dollars not adjusted to ‘constant’ or ‘real’ dollars). If you check the above table, you will see that revenue grew in all but two years (2008‒09 and 2009‒10) and, even with the problems since, has continued to grow although not as much as forecast.

Individuals’ income tax and company tax are the two biggest sources of revenue for the commonwealth government. The final outcome for individual income tax revenue was around 102% to 104% of the budget night estimate from 1999‒2000 to 2006‒07, with the exception of 2002‒03 when it fell to 98.1%. The year 2007‒08 was a good one for the government with individual income tax coming in at 105.5% of the estimate but since then the budget night estimates have been very good to poor: for four years (2008‒09 to 2011‒12) the individual tax income was between 99.3% and 100.4% of the budget night estimate, but in 2012‒13 it fell to 98.5% and in 2013‒14 to only 95.8%.

Company tax is more volatile and the forecasts rarely get it right. In the nine years from 1999‒00 to 2007‒08, the company tax came in at 98‒102% of the budget night estimate on only three occasions but, otherwise, it was generally under-estimated (coming in at 117.5% of the estimate in 2002‒03). Since the GFC, however, the estimates have failed to foresee the slowness of the recovery. In 2007‒08 it had come in $210 million above the budget night estimate but collapsed to 82.6% of the estimate in 2008‒09 (‒$12.8 billion). The estimate was better in 2009‒10, although actual revenue was lower — only $53 billion compared to $61 billion in 2008‒09. In the last four years (2010‒11 to 2013‒14), however, the estimate has been wrong every year and has over-estimated company tax by a cumulative $29.1 billion. It has provided as much as 25% of government revenue but in 2013‒14 was down to 18.4% (since 1999 it has averaged just over 19%).

The Howard government claimed to be low taxing but it achieved the highest revenue as a proportion of GDP in 1999‒2000 when it took 26.4% of GDP from the economy (it’s budget night estimate had been a high 25.9%). It did try to lower its GDP take in the following years aiming for 22.5% to 23% of GDP but generally its final take continued to be a little higher (most often just over 23%). Based on the budget night estimates, Labor also aimed for about a 23% take of GDP (other than during the GFC when it estimated 25.5% but actually took 24.9%). Since then the government’s take has been lower, and lower than the budget night estimates, falling to 21.7% in 2010‒11 and even in 2013‒14 was 22.7% (after predicting 23.5% on budget night). The Hockey budget of 2014‒15 estimates a take of 23.6% of GDP. It does seem odd that in the last few years as revenue growth slowed it also became a lesser proportion of GDP: one would think that it would remain more consistent and that revenue would fall if GDP fell or grow at a similar rate to GDP but that doesn’t appear to be the case. (If anyone can explain this, please do in a comment.)

Now I turn to spending forecasts. They could be more difficult as they are subject to government decisions that are taken after budget night and in that sense treasury can’t always be blamed if they are wrong. For example, the Rudd government decisions during the GFC boosted ‘social security’ spending by $22.1 billion above the budget night estimate and education by $3.8 billion. That would not have been the problem it became if the original revenue forecast had been accurate. Even with the increased spending, the total actual expenditure was only $5.1 billion above the revenue estimate on budget night: it was the fact that revenue came in $20.5 billion below that estimate that turned what should have been about $5 billion added to the deficit to over $25 billion. (Although, obviously, that additional expenditure was made because it was becoming apparent that the economy was in danger and revenue was falling.)

Health and social security are two of the government’s bigger expenditure items. While spending has continued to increase over the years (the reasons for that are a separate issue), the estimates of spending have been relatively good. Health, in particular, achieved 98‒102% accuracy in 11 of the 15 years from 1999‒00 to 2013‒14 and social security still managed to achieve 10 years despite the extra spending in 2008‒09. That makes sense because the spending is actually estimated by each line department, not treasury, and they basically know what they will spend under prevailing policies — major changes generally occur only when policy is changed during the year. In this context, I am taking no account of whether or not a government is spending more than it receives in revenue, only that the forecasts of spending are reasonably accurate.

Estimates and forecasts of revenue are important. Governments base their policy and spending decisions on them. When governments introduce new spending proposals, they do so on the basis of forecasts over the forward estimates — they usually allow that the future costs can be met within those revenue forecasts. But when the forecasts are wrong, and over-estimate future revenue, everything goes wrong: the government is locked into expenditure that no longer fits under the available revenue and that leads to deficits. That is a reason that deficits are sometimes considered acceptable when revenue growth slows, as at present — as long as government can foresee better revenue growth in future years.

While I have suggested that a +/‒2% estimate isn’t too bad as an estimate, it can still make a difference to the government in dollar terms. Even with the smaller budgets back in 1999‒2000 a 2% variation in total revenue would have amounted to $3.3 billion and in 2013‒14 would have been $7.8 billion (about three-quarters of the amount raised by the Medicare levy, so it is significant). So getting revenue forecasts and estimates right is important — but it never happens. It demonstrates how little control the government actually has over the economy. The economy moves to its own pace, influenced by many factors, including overseas events, and even the ‘expert’ treasury officials can’t predict it accurately, not even one year ahead.

It is not a problem when the economy is going well because then the errors tend to be under-estimates and every government would be pleased to see more in its coffers than it anticipated. But when the economy is in the doldrums, as now, faulty estimates and forecasts put additional pressure on government programs that are meant to provide services to all of us.

I do wish treasury could get it right but, given the economic reality within which it operates, I won’t hold my breath. And I don’t think this week’s budget will be any different.

What do you think?
After reading Ken’s piece, do you still think we should always blame the government for the financial mess or should treasury share the blame for giving the government faulty advice? Should governments only spend 95% of what treasury tells them they have so as to allow for treasury’s mistakes? We look forward to your comments — and answers.

Next week 2353 looks at a different approach to homelessness in ‘Hope for the homeless’.

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10/05/2015Ken Thank you for another fact-filled piece that explains the tortuous process of federal budgeting and how difficult predictions have proved to be over the years, especially revenue predictions, which are subject to external global factors beyond the control of local officials. Given that Treasury officials are well aware of the perils of prediction, and that politicians are able to inform themselves about these perils, it is surprising that they continue to make wild predictions, even promises such as bringing the budget back to surplus in the first term of the Abbott government, only to see such a promise rapidly recede, so that to use one of Hockey’s favourite mantras during the Labor years, deficits will continue ‘as far as the eye can see’. I have learned a lot reading your erudite exposition. Thank you.

Ken

11/05/2015Ad Yes, Treasury are well aware of the problems of forecasting. There are many pages of information in the Budget papers that explain the 'dangers' to the estimates and forecasts at many levels. They may explain potential problems in the international economy (such as a possible slow-down in China), potential issues in the Australian economy that could affect revenue and spending forecasts. The main problem seems to be that little attention is given to all these 'provisos' and, as you say, politicians come out and make assertions about the budget as if these issues don't exist.

Ken

12/05/2015Matters Not Glad you enjoyed it. As you point out, Treasury is not very good at matching the economic cycle. As I point out, it is not very good even at achieving a 98% accuracy. They do achieve a 95% accuracy more often but 5% of over $300 billion makes a significant difference to revenue.

TalkTurkey

15/05/2015Greetings Comrades First, Sorry I haven't deleted the odd troll here and on TPS Extra - Can't log in for some reason. I'd be pleased if someone else would wipe them ..? And Sorry too that I am so rarely around TPS these days. I feel like I've dried up when it comes to writing in any depth. Not exactly. What it is is, I am outraged by Abborrrrrt and his gang SO MANY times in any week that to comment on any one issue seems to ignore all the others. The bastard has forever branded *J*U*L*I*A* a liar for what never was a lie, just ONE alleged lie, while he lies and lies, and lies about his lies and the MSM NEVER calls him out. The whole game is so loaded against progressive policies, so dominated by Big Money and Murdoch, it feels as though we can never win. Remember the hundreds of thousands of people, not all mad Lefties, who have marched time and again and again in protest against all manner of anti-fairness legislation since 2013? Remember the MILLIONS who marched in 2003 in an attempt to prevent our disastrous forever-war on Iraq? We might all as well have gone fishing. Partly our own fault, since the "organisers" have never tried to take names & contacts, co-opt those with real organisational skills, or collect fighting funds, even like a gold coin apiece. On the contrary, they have steadfastly resisted doing any of that. There is no continuity AT ALL. But remember the DOZENS of RW haters in the Anal-Jones-inspired, MSM-conflated Convoy of No Confidence who protested against Labor's "Carbon Tax"? - You bet you do, how could you forget! Albo hilariously called it the Convoy of No Consequence, but it gained far more Media coverage than all our genuinely popular protests ever did, and was therefore more consequential than they have been. The only action that would have any real effect on the Right would be Strike. But Australians are too intimidated, too comfortable, too gutless, too self-interested, too busy, too apathetic, and in many cases too perfidious, ever aqain to strike. So we never now have consensus - Murdoch and his minions are always there fracturing the People. They have managed to keep the People so ignorant that enough of them believe the shock jocks and the terrible newspapers that keep them ignorant that we never now have consensus. If You See What I Mean. Ignorance and Bigotry have killed the NBN, Gonski, CPRS, all that stuff that could have made Australia truly clever. Australia now distinguishes itself by its meanness and stupidity. And the whole English-speaking world is infected with the same disease. UK. Canada. NZ. The USA. And because of that, the West's entire action on climate change, biocatastrophe, poverty, world population, everything, is Mickey Mouse. And so I have great trouble now being upbeat, and if not that, well I don't like to write downer stuff like this. One thing though: I did like Bill Shorten's Reply to the Budget last night. I could wish that he take elocution lessons, so he doesn't sound as though Dear Oh DEAR Oh Dear in most sentences, but at least last night he had a bit of fire. Which is what so many have been longing for. Come on Bill. VENCEREMOS!

Ross

15/05/2015Thanks for an excellent post Ken. We've had the budget announced but I'm still confused about this mania for a budget surplus. The little research I've done says taxes do not fund government services. Why should they when the government simply creates the Fiat currency it uses. The budget is a theoretical zero sum game, the government creates the funds it needs, expenditure, in one column and gets taxes back, revenue, in the other column. The end result should equal zero, although this rarely happens in real life. If the budget is in deficit it means there is more funds available to the private sector, a surplus means a negative amount available to the private sector. In fact federal budgets are rarely in surplus because it would contract the private sector. Why then all the hullabaloo about getting the budget into surplus and keeping it there indefinitely. Any clues? Ross

Ken

15/05/2015Ross Thank you for your kind comment. What you are talking about seems to fit with 'modern monetary theory', something I do not claim to understand. 2353 understands it a little better and may wish to comment if he reads your post. As to deficits meaning there is more money in the economy that seems to be true to the extent that the government is putting back (spending) more than it is taking in. But the traditional economic argument is that it actually takes money from the economy that should otherwise be available to businesses: that is argued on the basis that the government is 'borrowing' money and so sucking money from the 'capital market'. Don't ask me whether that's true or whether it works but I do know that is the argument. We are not yet printing extra money (quantitative easing) as is being done in America and Europe but that is an option we should keep in mind and, as you say, also a means of paying or avoiding debt. I should say that the other point that relates to the government borrowing from the capital market is that the money is borrowed for 'government purposes', and is therefore not available for 'market purposes'. Of course, the Liberals believe that only the market can make good decisions so therefore anything that reduces or over-rides that has to be 'bad'.

Bacchus

15/05/2015Ken If you can find an hour of your life when you're not writing your excellent articles for TPS, Steven Hail does an excellent job of explaining MMT in a more easily digested manner. https://www.youtube.com/watch?v=qBpm5sVmGYc Interestingly, it was the "crowding out" claim of government "borrowing" that got me looking further in the first place. In theory, interest rates were supposed to increase when the government "borrows" in the market, crowding out private borrowers. What we found when we had an actual example of increased government borrowing was that interest rates dropped and conversely when the Howard government was running huge surpluses (and hence had very low borrowing), interest rates rose dramatically. Also interesting in the Howard era they decided they weren't going to borrow any more - the markets went beserk and demanded they continue to issue debt (bonds) even though they had "paid off the debt".(http://evatt.org.au/papers/bond-traders-take-costello.html) When you look, you see that governments don't "borrow" on capital markets as such - the AOFM issues bonds, which are highly sought after by financial markets, especially the banks. Also relevant is what they do with their borrowings - they spend it into the economy with private suppliers - increasing money available in the economy, not sucking it out. They control the amount of money in the economy (and inflation) with taxes. I'm sorry, my ability to explain this stuff is woeful at best - that's where Steven Hail comes in. *smile*

Ken

15/05/2015thanks Bacchus Even though I have read some of the MMT stuff I still have trouble getting my head around it. As to interest rates and the need for government's to borrow, there was a statement by Hockey a few months back (don't ask me where now) that government would continue to borrow 13% of requirements (including capital costs, or Hockey would prefer all of it as capital costs) to help maintain financial markets. So, definitely yes, that government borrowing is not the issue it is sometimes made out to be but government 'not borrowing' IS a big issue.

Ken

15/05/2015I just thought in relation to my earlier comment: "Of course, the Liberals believe that only the market can make good decisions ..." That when Liberal governments are in power that is probably true!!!

Ross

15/05/2015Ken, thanks for your reply. To me traditional economics seem to relate back to when Australia was on the gold standard. Time has moved on and Modern Monetary Theory would be more relevant to the understanding how today's Fiat economy actually works. As opposed to what politicians and the MSM tell us how it works Although I might add I'm certainly no economic expert, and maybe Bacchus would agree, Bill Mitchell, Steve Hail and a few others make sense out of what is to most of us voodoo science. The Guardian article below is worth reading. http://www.theguardian.com/commentisfree/2015/feb/11/a-sustainable-budget-surplus-is-beyond-the-governments-control-as-joe-hockey-has-come-to-realise Ross

Ken

16/05/2015Ross Thanks for the link to the Guardian article. As I commented earlier, I still have problems getting my head around this stuff but the concept that the total dollars are 'fixed' and one group having surplus means someone else must have a deficit is interesting. Even that a trade surplus actually becomes someone else's deficit. And I agree strongly that it is largely about the financial institutions. I have been aware for years that when a government is 'bailed out' (as Greece at the moment) it is not really to benefit the government but to benefit the bond holders - to ensure they get paid!!!

Patriciawa

16/05/2015Talk Turkey thinks he has ......."dried up when it comes to writing in any depth." Join the club, TT, and ditto to all that you had to say up there. I think it's partly a generation thing some of we older Swordsters share, but for all that I feel there is the sense of lost joy on our national scene since they hounded Julia out of office. By 'they' I mean not just the Opposition but the ALP underminers and fans of the vengeful Rudd. How could so many lefties have been so foolish as to imagine that someone so obviously working for his own ends rather than the good of the Labor Party would ever make a suitable candidate for national leadership? I tried to post these lines a few days ago. Apologies, if it's a repeat, but I just had to take the opportunity, to remind myself of those truly happy few years with FPMJG. JULIA! J is for Julia and the Joy she gave. U is for Us, so Useless to save Labor while staying Loyal to her, In spite of our Instinct that never Again could we Australians be so proud of our name.

Ken

16/05/2015patriciawa and TT I think it's not just the Labor party that has lost the passion but the Left generally. As TT has pointed out, the demonstrations against the Abbott government seemed to peter our and did not appear well organised for follow-ups. One or two marches aren't enough: people have to come back again and again and try to create even bigger demonstrations and marches each time they come back - as was done many years ago in the anti-Vietnam war marches. In those days some Labor members actually broke the law to stand up for matters of principle - would any Labor member do that now? We need a new more active Left outside mainstream politics to drive popular protest but where that will come from now I have no idea. It is somewhat disheartening. Some of the best organised protests in recent years have come from rural communities protesting against issues like fracking and coal mining. They're not exactly Lefties but they have been effective.

patriciawa

17/05/2015Watching Insiders earlier today I found it oddly comforting that Laura Tingle stated very clearly, not once but several times, about how confused she is with whatever it is the government (Abbott, Hockey and Cormann?) are trying to achieve with this second Budget. I am too, and thought my own confusion was somehow age related. But no, I think she was saying that these Budget papers weren't about finance or the nation's economic well being, but more about the politics of planning for the next election. Otherwise there is no sense at all in any of it. Tony Abbott is here in WA today where we have very stormy weather and grey skies, so one wonders what sort of photo-ops he'll get with so many of us tucked up warm inside our homes. I guess FIFO visits from Prime Ministers are in vogue here in the mining state. But what and where will he be making appearances and announcements that won't be rained on this very wet weekend? Are programs and itineraries for himself, the Premier and Senator Cormann (aka Federal Finance Minister) being hastily re-arranged? Perhaps they can make something out of Tony Abbott's generous captain's call for Curtin's new medical training college. But I've just read the AMA don't want it here at all. So, no turning of sods by our muscular PM under our usually brilliant blue skies. He certainly wouldn't get many out to watch and applaud anyway. There's hardly a soul out out this morning except a few sturdy walkers and their dogs in a literally howling gale with sporadic if heavy showers adding to the excitement. Coffee at South Beach Cafe had some of the regulars smiling congratulations at each other as we enjoyed breakfast with a particular sense of entitlement. Sorry, shouldn't have used that last word. I meant that we all enjoyed the feeling that our lattes and doggie treats were very well earned!

Ken

17/05/2015patriciawa I think congratulations are in order that you even took your dog for a walk given your desciption of the weather - and , in those circumstances, 'entitlement' is probably appropriate and well-earned. As to the West's weather 'raining on Abbott's parade' so to speak, it couldn't happen to a more deserving person!!
I have two politicians and add 2 more; how many are there?