Monday, 5 May 2014

Has the Government doubled the budget deficit? - Fact Check - ABC News (Australian Broadcasting Corporation)

Has the Government doubled the budget deficit? - Fact Check - ABC News (Australian Broadcasting Corporation)

Has the Government doubled the budget deficit?

1 hour 55 minutes ago

Treasurer Joe Hockey is the "Masterchef of cooking the books" according to his Opposition counterpart
Chris Bowen, who has repeatedly accused the Coalition of using "voodoo
economics" to create a sense of crisis to justify dramatic spending cuts
in the May 13 budget.
"Now what's happening here is that Joe
Hockey has doubled the deficit, adding $68 billion to the deficit by
changes to Government spending and changes to Government assumptions,
and now he's asking the Australian people to pay for it", Mr Bowen told journalists in his electorate on April 27.

ABC Fact Check examines whether this statement is correct.

  • The claim: Chris Bowen says Joe Hockey has doubled the deficit by changes to Government spending and changes to Government assumptions.
  • The verdict: Since
    the election, the official forecast deficit has doubled. The economic
    assumptions are different from those used before the election, and
    spending decisions have been made that were not in the previous
    forecasts. Mr Bowen's claim checks out.

Two sets of forecasts

Mr Bowen's office told
Fact Check the statement was based on differences between two budget
forecasts, one prepared before the Coalition came to power and one
prepared afterwards.

The first, the Pre-Election Economic and Fiscal Outlook (PEFO),
was released in August by Treasury. It was based on a "no policy
change" scenario, using assumptions and fiscal rules underpinning
medium-term projections adopted by the former Labor government.

The second, the Mid-Year Economic and Fiscal Outlook (MYEFO)
was released in December by the Government. It was based on assumptions
adopted by the Coalition, following advice from Treasury.

During a Senate Estimates hearing in February, Treasury Secretary Martin Parkinson
was asked whether forecasts and projections in the MYEFO were
ultimately the decision of Treasury or Government. He replied: "It is
always a decision of Government. PEFO is the only document that the
Treasury and the Department of Finance have their names on. In fact, it
is not even Treasury and the Department of Finance; it is the two
secretaries. All other documents are documents of the Government."

forecasts contain figures for the standard budget projection period,
known as the forward estimates period, which is four years.

Has the deficit doubled?

August PEFO said the underlying cash balance in 2013-14 would be a
deficit of $30.1 billion. The following year's balance would be a $24
billion deficit, and in 2015-16 a $4.7 billion deficit, before returning
to a surplus of $4.2 billion in 2016-17.

These forecasts total a deficit of $54.6 billion over the four-year forward estimates.

December MYEFO estimated the underlying cash balance for 2013-14 would
be a deficit of $47 billion. The projections for the following three
years were deficits of $33.9 billion, $24.1 billion and $17.7 billion.

These total $123 billion over the four years of the forward estimates.

difference between the two projections is $68 billion. The combined
projected deficit in the coalition's MYEFO is more than double the
corresponding number in the PEFO. Mr Bowen is correct on this figure.

PEFO (August 2013)-30.1-24-4.74.2-54.6
MYEFO (December 2013)-47-33.9-24.1-17.7-122.7

Have there been changes to Government spending?

MYEFO released by the Government states that since the 2013 PEFO,
policy decisions, which includes spending and revenue decisions, has had
a $13.7 billion negative impact on the underlying cash balance over the
forward estimates.

In relation to spending, the MYEFO said:
"Essential steps have been taken to address unresolved issues inherited
from the former Government, which have contributed to the deterioration
in the budget position since the 2013 PEFO."

This includes:

  • spending measures associated with repealing the carbon tax ($2.8 billion over four years);
  • land transport infrastructure programs ($5.6 billion over four years);
  • implementation
    of border protection policies ($2.1 billion over four years of which
    government says $1.2 billion is directly attributable to insufficient
    funding provided previously for the PNG and Nauru facilities);
  • a boost to funding for the Students First package ($1.2 billion over four years); and
  • an $8.8 billion grant paid to the Reserve Bank of Australia.
states deterioration of about $2.9 billion was attributed to removing
what is described by Mr Hockey as "uncertainty" in relation to about 100
announced, but unlegislated, tax and superannuation measures. Mr Hockey
maintains that the budget "blow-out" Labor keeps pointing to is a
direct result of the Government needing to fix inherited problems and
paying for policies initiated but not legislated for, under the previous
government, rather than it being all new spending. He also says
the Government has brought forward new spending that Labor "buried"
beyond the four years of the forward estimates. Labor disagrees.

The most significant single payment across the four years is a grant of $8.8 billion given to the RBA this financial year.

that payment was clearly made by the Coalition, there is debate about
whether the cost itself was new, or whether it was money that should
have been paid to the Reserve Bank while Labor was in government.

Mr Hockey told the ABC Insiders
program on April 13 that: "The $9 billion should have gone under
Labor... when they took out dividends from the Reserve Bank..."

Opposition maintains it was never asked for a lump sum payment of that
size and released formal advice from Treasury to then treasurer Wayne
Swan in April 2013, which warned that a cash grant could trigger market
speculation about the RBA's stability and stated that there was no legal
basis to make a capital injection. The Opposition has also said the
Government's decision to provide $8.8 billion to the RBA was not in
response to a specific request from the bank.
While the payment
should be considered as new spending, it is worth noting that while the
RBA did not make a formal request for a cash grant, Governor Glenn Stevens
told the Standing Committee on Economics in February 2013 that the RBA
would have preferred that Mr Swan had not depleted the bank's capital by
withdrawing $500 million in dividends ahead of schedule to pay down the
government deficit.

Other spending measures - such as on land
transport infrastructure, and compensation measures associated with
repealing the carbon tax - are examples of spending that would not have
been required under Labor policies.

It is clear that changes to Government spending have contributed to the doubling of the deficit.

Have the economic assumptions changed?

MYEFO said that over the forward estimates a $54.3 billion
deterioration in the projected combined deficit since the PEFO was
caused by "parameter and other variations" changes.

These included:

  • changes
    to the parameters for determining tax receipts, which will result in
    the government receiving $37.8 billion less over the forward estimates
    than forecast in the PEFO;
  • a change to the terms of trade
    methodology, reducing economic growth forecasts, causing a $2 billion
    hit to the bottom line over the forward estimates;
  • a change in the projected unemployment rate, leading to higher benefits payments totalling $3.7 billion extra
Bowen accurately quotes the MYEFO in stating that the economic
assumptions have changed, with a resulting negative effect on the budget

The biggest single change between the PEFO and the MYEFO
is the projection that lower government revenue from tax will add $37.8
billion of the $68 billion increase to the deficit over the forward
estimates, which is approximately 55 per cent. Thanks to a gloomier
outlook for economic growth, the MYEFO contains downward revisions to
forecasts of wage growth and corporate profitability.

softening in the economic outlook has resulted in significantly lower
nominal GDP, which has largely driven the reduction in tax receipts by
more than $37 billion over the forward estimates," the MYEFO said.

changed outlook is reflected in these reductions in forecast growth in
gross domestic product for the forward estimates in the PEFO and the

PEFO (August 2013)3.75%4.5%5.25%5.25%
MYEFO (December 2013)3.5%3.5%4.75%4.75%
main difference between the PEFO and the MYEFO was a more pessimistic
view about the impact on the economy of the end of the mining investment
boom. The MYEFO said the fall in resources investment was expected to
be sharper than previously forecast, while recovery in the non-resources
sector was expected to be more gradual.

Are they 'Government' assumptions and projections?

the MYEFO was released in December, Labor ministers have repeatedly
stated that the economic assumptions were "deliberately" adopted by the
Coalition Government and Mr Hockey in order to manufacture a budget
crisis. In his April 27 press conference, Mr Bowen said the projections
were based on the Government's assumptions: "Not even the Treasury or
Department of Finance's assumptions; [Mr Hockey's] own personal
forecasts as the Treasurer of Australia," he said.

It is difficult
to ascertain whether Mr Bowen has specific knowledge about what
information passed between Treasury and Mr Hockey, and how much
influence each had on the downgraded forecasts for economic growth. This
change underlies the doubling of the deficit. 

Mr Hockey has
repeatedly rejected Labor's allegations by telling Parliament that the
Government relies on economic projections modelled by Treasury. Mr Hockey said in Parliament
on March 18: "The fact of the matter is that we want to have the most
accurate forecast possible; that is what Treasury recommended, and that
is what we accept," he said.

He suggested Labor was to blame for
the need for changed assumptions. "The methodology that they [Treasury]
have used in MYEFO actually confirms the fact that Labor left the legacy
of increasing deficits to $123 billion..."

He also suggested
Labor' growth forecasts had been too optimistic, saying Labor had "no
sense of shame that they left a slower economy".

As set out above,
Treasury Secretary Martin Parkinson says forecasts and projections in
the MYEFO are ultimately decided by the Government.

The verdict

Mr Bowen accurately quoted changes totalling $68 billion in the Mid-Year Economic and Fiscal Outlook.

MYEFO forecasts a budget deficit twice as large as it was in the PEFO.
The economic assumptions in MYEFO are different from those used in the
PEFO, and there is spending in the MYEFO that was not in the previous

It remains to be seen how the two sets of forecasts stand the test of time, but as of today, Mr Bowen's claim checks out.

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