Jim Chalmers said in his recent pre-election Treasurer’s debate with Angus Taylor that “there’s been a $207 billion cumulative improvement to the budget bottom line. The debt this year is $177 billion less than what we inherited.”
It’s a line he trots out often, but in reality, gross debt has risen $45 billion under the Albanese government and is expected to hit $1 trillion in 2025-26. So what does he mean?
Chalmers is referring to a statement in the March Budget papers: “The underlying cash balance has improved by a cumulative $207 billion over the seven years to 2028–29, compared to the 2022 Pre-election Economic and Fiscal Outlook (PEFO)”, and this “means that gross debt is $177 billion lower in 2024–25 than forecast at the PEFO”.
So his statement that debt is ‘less’ is disingenuous. Something only falls when an actual number at a point in time is less than an actual number at a prior point in time. Not when it is less than a forecast number. Deviating from a guess is not the same as actual movement.
If we unpack the numbers here, $34.9 billion of the $207 billion is a restatement in the budget of the PEFO forecast underlying cash balances over the five years to 2028-29. The rest is actual deviation from the PEFO forecasts for the 2022-23 and 2023-24 financial years. The PEFO projected a combined deficit of $134.4 billion for the two years to 2023-24, but instead there were back-to-back surpluses totalling $37.9 billion.
When actual differs from forecast, it is usually due to government policy decisions and/or external impacts where key forecast parameters vary from reality. In the case of the two surplus years, the windfalls were almost all due to higher-than-expected commodity prices and therefore stronger company tax receipts. And, to a lesser extent, a robust labour market and a higher individual tax take, including some bracket creep.
Note that budget papers and the PEFO forecasts tend to be conservative with commodity price assumptions. They will normally revert to long-term averages quickly rather than persist with, or at least taper, prevailing higher market prices.
The 2022 PEFO was probably even more conservative with key assumptions, at a time when we were just emerging from the volatile Covid period. It surely is outdated for comparison purposes. In any case, had commodity price assumptions been more aligned with the market in the first two PEFO forecast years, the so-called budget windfall would not be as pronounced and would give politicians less to crow about.
How worthwhile is a comparison of actual to forecast budget measures, then? It can be useful but with limitations. In isolation, comparing forecast underlying cash balances to actual is not a good measure of fiscal prudence. But it can have some value if variations can be separated into policy versus external impacts. Are there factors outside of government control? Is there an element of luck?
A comparison can be worthwhile to the extent that forecast assumptions are realistic. If assumptions are too conservative, an apparent windfall might create the illusion of good government and tempt structural spending. Too aggressive, and worthwhile spending programs might be curbed. Forecasts should be as realistic as possible to foster policy and spending discipline, with actual outcomes used to assess policy decisions.
And as to whether a budget is really better off due to an actual versus expected windfall, that will depend on the nature of the gain and how it is used. If temporary, say as a result of a commodity boom, and the windfall is baked into permanent spending, then the budget has not improved. If temporary and used to pay down debt, then yes that translates into improvement. And if the windfall is structural as a result of good policy, then that improves the long-term budget position.
Budget numbers revealed a tax revenue windfall under the Albanese government of nearly $400 billion that contributed to the two surpluses. However, the bulk of that has been locked into spending, leaving just $95 billion to go towards budget repair. Spending as a percentage of GDP is forecast to reach 27.2% in 2025-26, up from 24.4% in 2022-23.
It would seem, then, that the government did not heed the advice of economist Chris Richardson. After the second surplus was revealed, Richardson said that “while it’s very tempting whenever there’s a surplus, we can’t pretend that the good news is forever and make permanent decisions off the back of temporary luck.”
Tony Dillon is a freelance writer and former actuary.