Key features


Budget Review 2009-10 Index

Budget 2009 10: Key features

Scott Kompo-Harms

Introduction

The second Rudd Government Budget was handed down on 12 May 2009. The Budget was framed amid a sharply deteriorating world economy and the first serious downturn in Australian economic activity since the early 1990s. The Government has changed the methodology for its forecasts and projections in order to provide a more realistic indication of the Budget position in future years. Considerable attention has been paid to the impact of discretionary fiscal stimulus on the economy and declining revenues as a result of the recent decline in commodity prices. The Government is forecasting real Gross Domestic Product (real GDP) to be stagnant in 2008–09 and to decline by ½ of a per cent in 2009–10.  Employment is forecast to fall by ¼ of a per cent in 2008–09 and by 1½ per cent in 2009–10.  This is expected to result in a peak unemployment rate of 8½ per cent in the June quarter 2011. 

The Government is forecasting an underlying cash deficit of $57.6 billion (and a fiscal deficit of $53.1 billion) in 2009–10. The (estimated) underlying cash balance for 2008–09 has gone from a forecast surplus of $21.7 billion in May 2008, to a forecast surplus of $5.4 billion in November 2008, to a forecast deficit of $22.5 billion in February 2009 and finally to a deficit of $32.1 billion for the 2008–09 financial year.[1] The budget is not expected to return to balance during the next four years. 

Key announcements in the Budget were:

  • an increase in some pension rates for singles and couples, along with changes to eligibility conditions in future years 
  • a number of infrastructure projects, particularly metropolitan road and rail facilities
  • introducing means-testing to the private health rebate and increasing the Medicare levy surcharge for higher income earners
  • changes to tax concessions related to superannuation contributions
  • changes to indexation arrangements and thresholds for family payments
  • a national paid maternity leave scheme, and
  • initiatives for clean energy and energy efficiency along with the establishment of Renewables Australia. 

From a macroeconomic perspective, media commentary since the Budget was handed down has focussed on the forecasts and projections produced by Treasury. A number of commentators have questioned whether the projected growth path of the Australian economy is too optimistic.  Prior to the Budget there had also been much debate about the effectiveness of the Government’s fiscal stimulus measures.

This brief contains a summary of key economic and budget aggregates, a comparison with other economic forecasts from a range of sources, as well as a critical appraisal of the new methodology applied by the Government to produce budget forecasts and projections in light of the global recession. A few comments on the economic modelling used by Treasury to produce the Budget forecasts are also presented. Finally, the brief considers major revenue and spending aspects of the Budget.

The economic outlook

‘Statement 2: Economic Outlook’ in Budget Paper No.1 2009–10 details the economic outlook that underpins the budget aggregates presented in: ‘Statement 3: Fiscal Strategy and Outlook’; ‘Statement 5: Revenues’ and ‘Statement 6: Expenses and Net Capital Investment’.  The Australian Government has decided to implement a new methodology for producing their forecasts and projections over the forward estimates period. Traditionally, the Government has issued forecasts for the current financial year (in this case, 2008–09), and the Budget year (2009–10) and projections for a further three years. In the 2009–10 Budget, forecasts are presented for an additional year (2010–11) and projections are presented for two years beyond the forecast period (2011–12 and 2012–13), with different assumptions used for those projections than those used in the past.  In essence, projections have previously been predicated on the assumption that the economy will return to its long-run average growth rate. The traditional approach is likely to give a misleading picture of the true budget position, hence the new methodology. 

‘Statement 4: Assessing the Sustainability of the Budget’ is a detailed feature article containing analysis and longer term projections about the future path of the Budget given the deterioration in revenues and discretionary fiscal response to the downturn in real GDP growth. Statement 4 also covers the effects of discretionary fiscal policy on the economy and discusses evidence from the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD). 

The international outlook

The current recession has been caused entirely by factors outside of Australia. The financial crisis in the United States that started in 2007 has spread around the globe, seizing up credit markets, which in turn has curtailed global economic activity. Most countries have experienced significant asset price declines. The global nature of this recession means the Government’s view of the global economy is crucial to the domestic economic outlook. The Australian Treasury’s international economic outlook is summarised and compared to IMF forecasts in Table 1.  As can be seen from the table IMF and Treasury forecasts are reasonably close for most countries and regions with the exception of the Newly Industrialised Asian economies and the Association of South East Asian Nations group of five, given that Treasury rounds their forecasts to the nearest quarter of a percentage point.

Table 1: International real GDP growth rates – IMF and Australian Treasury forecasts

 

Actual

Forecasts

 

2008

2009

2010

2011

 

IMF

Treasury

IMF

Treasury

IMF

Treasury

IMF

Treasury

United States

1.1

1.1

-2.8

-3

0.0

1/4

N/A

1 3/4

Euro area (a)

0.9

0.7

-4.2

-4

-0.4

0

N/A

1 1/4

Japan

-0.6

-0.7

-6.2

-6

0.5

1/2

N/A

3/4

China (b)

9.0

9.0

6.5

6 1/4

7.5

8

N/A

8 1/2

NIEs (a)(c)

1.5

1.6

-5.6

-4 3/4

0.8

2 3/4

N/A

3 1/4

ASEAN-5 (a)(d)

4.9

4.6

0.0

-1 1/4

2.3

2 1/2

N/A

3 3/4

India (b)

7.3

7.4

4.5

4

5.6

4 3/4

N/A

5 3/4

Major trading partners (a)

N/A

2.7

N/A

-2

N/A

2 1/2

N/A

3 1/4

Advanced economies (a)(e)

0.9

0.9

-3.8

-3 3/4

0.0

1/2

N/A

1 3/4

World (a)

3.2

3.2

-1.3

-1 1/2

1.9

2 1/4

N/A

3 1/2

(a)  World, euro area and advanced economies growth rates are calculated using GDP weights based on purchasing power parity  (PPP), while growth rates for major trading partners, NIEs and ASEAN-5 are calculated using export trade weights.
(b)  Production-based measures of GDP.
(c)  The Newly Industrialised Economies (NIEs) are Hong Kong, South Korea, Singapore and Taiwan.
(d)  The Association of Southeast Asian Nations group of five (ASEAN-5) comprises Indonesia, Malaysia, the Philippines, Thailand and Vietnam.
(e)  Composed of the 33 industrialised economies classified as advanced by the IMF.

Sources: ‘Statement 2: Economic outlook’, Budget strategy and outlook: Budget paper no. 1: 2009-10, p. 2-10; IMF, World Economic Outlook, April 2009, pp. 12, 65 and 73.

The domestic outlook

This section looks at Treasury’s forecasts for major economic aggregates for the domestic economy that have generated much media and political debate and summarises some of the research underlying this debate. It also outlines some of the key underlying assumptions and compares the Treasury forecasts with those from other sources. Table 2 below summarises Treasury’s forecasts for major economic aggregates and a more detailed summary of forecasts is presented in Appendix A.

Table 2: Major economic aggregates – forecasts and projections[2]

 

Forecasts

Projections

 

2008-09

2009-10

2010-11

2011-12

2012-13

Real GDP

0

-1/2

2 1/4

4 1/2

4 1/2

Employment

-1/4

-1 1/2

1/2

2 1/2

2 1/2

Unemployment rate

6

8 1/4

8 1/2

7 1/2

6 1/2

CPI

1 3/4

1 3/4

1 1/2

2

2 1/2

Nominal GDP

5 3/4

-1 1/2

3 3/4

6 1/4

6 3/4

Source: ‘Statement 1: Budget overview’, Budget strategy and outlook: Budget paper No. 1: 2009-10, p. 1-7.

Key assumptions underlying the domestic outlook

Treasury outlines the technical assumptions used to produce the domestic economy forecasts:

The exchange rate is assumed to remain around its recent average level — a trade‑weighted index of around 59 and a United States dollar exchange rate of around 72 US cents. Interest rates are assumed to move broadly in line with market expectations. World oil prices (Malaysian Tapis) are assumed to remain around US$56 per barrel. The farm sector forecasts are based on an assumption of average seasonal conditions in the future, but account for current low water storage levels.[3] 

In previous years, budget forecasts have been based on unchanged interest rates whereas in this Budget, it is assumed that interest rates ‘move broadly in line with market expectations’. 

The debate on the Budget projections

In particular, the projections in the years 2011–12 and 2012–13 that show real GDP growing at 4½ per cent per year have been questioned as to their realism. Treasury have exercised their judgement, based on the historical experience of the last two Australian recessions as to the path out of the current recession.

However there is the argument that these recessions may not be an accurate guide to the future, as the circumstances surrounding those recessions were different from that of today. In particular, this recession has been preceded by a massive financial crisis that emanated from the centre of the world financial system, the United States, and very quickly spread to other economies in the ‘centre’, particularly the UK and European economies. This financial crisis has then spread to peripheral countries as well, including Australia. The main channels for contagion to Australia have been equities markets and the costs of credit intermediation. In addition, the downturn in economic activity has been highly synchronised across the globe. These two factors lead some economists to the conclusion that this global recession is likely to be drawn out and recovery slower than ‘normal’. Carmen M. Reinhart and Kenneth S. Rogoff (in three separate papers), examine episodes of past financial crises in detail and compare the current crisis to those precedents.[4] 

In their latest paper, they conclude:

An examination of the aftermath of severe financial crises shows deep and lasting effects on asset prices, output and employment. Unemployment rises and housing price declines extend out for five and six years respectively. On the encouraging side, output declines last only two years on average. Even recessions sparked by financial crises do eventually end, albeit almost invariably accompanied by massive increases in government debt …

Since the onset of the current crisis, asset prices have tumbled in the United States and elsewhere along the tracks lain down by historical precedent. The analysis of the post-crisis outcomes … for unemployment, output and government debt provide sobering benchmark numbers for how the crisis will continue to unfold. Indeed, these historical comparisons were based on episodes that, with the notable exception of the Great Depression in the United States, were individual or regional in nature. The global nature of this crisis will make it far more difficult for many countries to grow their way out through higher exports, or to smooth the consumption effects through foreign borrowing. In such circumstances, the recent lull in sovereign defaults is likely to come to an end … [D]efaults in emerging market economies tend to rise sharply when many countries are simultaneously experiencing domestic banking crises.[5] 

The IMF refers to its own research in its most recent World Economic Outlook and concludes:

Recessions that are associated with both financial crises and global downturns have been unusually severe and long-lasting. Since 1960, there have been only 6 recessions out of the 122 in the sample [considered by the IMF researchers] that fit this description … On average, these recessions lasted almost two years … Moreover, during these recessions GDP fell by more than 4¾ per cent. Reflecting in part the severity of these recessions, recoveries from synchronised recessions are weak.[6]

Other forecasts

The Reserve Bank of Australia (RBA) has recently issued their own set of domestic forecasts in their latest Statement on Monetary Policy.[7] In addition, Access Economics, ANZ Bank, National Australia Bank (NAB) and Westpac Bank have all issued their own forecasts.  These are all summarised in tables 3a and 3b below. Unfortunately the two tables are not directly comparable as the RBA forecasts are expressed as percentage changes in the year to the quarter while the other forecasts are compiled on the same basis as those in the Budget (percentage change on previous year). 

However, the RBA has stated:

In year-average terms, GDP is forecast to decline by ½ per cent in 2009/10 before growing by 2 ¼ per cent in 2010/11.[8] 

Thus, when expressed in the same terms, the RBA forecasts are the same as the Treasury forecasts.  The private forecasts in Table 3b are also broadly in line with the Budget forecasts.

Table 3a:  RBA forecasts – Statement of Monetary Policy, May 2009

 

Dec

June

Dec 

June

Dec 

June

Dec

 

2008

2009

2009

2010

2010

2011

2011

Real GDP

0.3

-1¼

-1

½

2

CPI

3.7

2

Actual data to December 2008. For the forecast period, technical assumptions include A$ at US$0.75, TWI at 61, cash rate at 3.00 per cent, and WTI crude oil price at US$65 per barrel and Tapis crude oil price at US$67 per barrel.

Percentage change over year to quarter shown

Source: RBA, Statement of Monetary Policy, p. 69.

Table 3b: Other private forecasts

 

2008-09 Estimates

 

Access

ANZ

NAB

Westpac

Budget

Real GDP

0.1

 1/4

 ¼

0.2

0

Employment

1.4

1   

 ½

1.1

-1/4

Unemployment rate

4.9

5 3/4

5 ¾

5.8

6

CPI

3.6

3   

1 ¾

3.2

1 3/4

Nominal GDP

5.4

5 3/4

N/A

6

5 3/4

 

2009-10 – Forecasts

 

Access

ANZ

NAB

Westpac

Budget

Real GDP

-0.2

- 3/4

- ½

-0.2

-1/2

Employment

-1

-1 1/4

-2 ½

-1.7

-1 1/2

Unemployment rate

7.3

8   

7 ½

8.5

8 1/4

CPI

2.1

2   

2 ½

1.8

1 3/4

Nominal GDP

-1

-2   

N/A

-2.3

-1 1/2

 

2010-11 – Forecasts

 

Access

ANZ

NAB

Westpac

Budget

Real GDP

2.4

2 1/4

N/A

2.5

2 1/4

Employment

0.1

 1/4

N/A

-0.3

1/2

Unemployment rate

8.4

8 1/4

N/A

8.7

8 1/2

CPI

2.8

2 1/2

N/A

2.3

1 1/2

Nominal GDP

4.1

4 1/2

N/A

3

3 3/4

Sources: Access Economics, ANZ, NAB, Westpac, Treasury.[9]

Fiscal policy

Another issue that has been politically contested has been the effect of the Government’s stimulus measures. In the budget papers Treasury has presented a summary of the discretionary fiscal policy measures taken since the September quarter of 2008 and the so-called ‘multipliers’ they have applied when estimating the impact of those measures.  An interesting feature is that OECD multipliers for direct government consumption are slightly higher than those for transfers to liquidity constrained households, particularly for the first year. Estimates from the OECD and IMF were used as a guide to validate the decision of Treasury to apply multipliers of between 0.5 and 1. These are shown in Table 4 below. Note that these multiplier estimates were released after the initial October 2008 Economic Security Strategy, but the IMF estimates were available before the release of the Nation Building and Jobs Plan. The OECD estimates were only released after both of the abovementioned stimulus packages were announced. 

Table 4: OECD and IMF estimates of fiscal multipliers

 

OECD - Australia

OECD - US

IMF - G-20

 

Year 1

Year 2

Year 1

Year 2

 

Spending measures

Infrastructure

0.9

1.1-1.3

0.9

1.1-1.3

0.5-1.8

Government consumption

0.6

0.7-1.0

0.7

0.8-1.1

 

Transfers to households

0.4

0.7-0.8

0.5

0.8-0.9

 

Revenue measures

Personal income tax cuts

0.3-0.4

0.4-0.8

0.3-0.5

0.5-0.9

0.3-0.6

Indirect tax cuts and other

0.2-0.3

0.3-0.5

0.2-0.3

0.3-0.5

 

Sources: ‘Statement 4: Assessing the Sustainability of the Budget’, Budget strategy and outlook: Budget paper no. 1: 2009–10, p. 4-6; IMF; OECD.[10]

Treasury has also presented some medium-term projections regarding the sustainability in government finances in the medium-term. The ability for government finances to return to a sustainable footing is critically dependent upon two factors, the extent to which medium-term projections of Australian economic growth eventuate and policy choices that are made over the same timeframe. One critical assumption is that real growth in spending will be held to 2 per cent per annum, once the economic growth is above-trend, until the Budget returns to surplus.[11]

Economic modelling and its limitations

Treasury uses the TRYM macro-econometric model, in conjunction with sectoral and other economic models to inform the Government about the likely path of the economy over the budget forecast period. There are good reasons to view the budget results cautiously to the extent they are derived from the TRYM model. 

First, these are not ‘normal’ economic times and thus, given the econometrically estimated nature of the TRYM model, it would be imprudent to uncritically rely on forecasts that are based on data that are at the extremes or outside of the ranges of the sample used to estimate equations contained in the model.  This is because the estimated behavioural relationships are likely to have changed in such circumstances. 

Second, in terms of the results presented in Statement 4 of Budget Paper No. 1 on fiscal policy and the effect on real GDP (and therefore on employment growth and the unemployment rate), it should be noted that the TRYM model is structured in such a way that fiscal policy is assumed to have a short-run impact on the economy. [12] The economy is then usually assumed to return to a long-run trend growth path. In the case of this year’s Budget, the above-trend trajectory of recovery is also assumed. Treasury states, in terms of macroeconomic theory:

Overall, the TRYM model can be characterised as being broadly Keynesian (demand driven) in the short run, but having a neo-classical (supply driven) long run.[13] 

Another reason for caution is that Treasury have not provided any indication of forecast errors of major economic parameters that underlie the Budget. Presentation of forecast error bands would at least reinforce the notion that these forecasts are not iron-clad statements of fact when it comes to the future evolution of the Australian economy, but that they are subject to various (known and unknown) sources of error that arise for a variety of reasons (such as sampling and measurement errors), and that forecast errors increase the further that forecasts are extended into the future.

A rather simple and effective way of presenting forecast error bands is through the use of fan charts. These charts show historical data and also forecasts, however, the forecasts are presented as probability distributions, rather than point estimates. This would enable readers of the budget papers to perform some objective ex post assessment of the forecasts. Fan charts also allow the incorporation of subjective judgements about the future risks to those forecasts through the use of asymmetric probability distributions. The Bank of England uses fan charts for their forecasts of inflation and other economic variables and they provide a good discussion of how fan charts are derived and interpreted.[14]

Clearly if actual outcomes were consistently above or consistently below the central forecast or were continually on the outer extremes of previous forecasts, then one could conclude that there are problems with the model(s) used to derive them.  They would also serve to illuminate researchers as to the nature of potential problems they should focus on when trying to improve their modelling.

Treasury notes the limitations of the TRYM model:

… to be useful control ultimately has to be applied to a forecasting baseline.[15] The accuracy of the forecast baseline not only depends on knowledge of the true parameters of the economy (such as the [Non-Accelerating Inflation Rate of Unemployment] … ) but also requires projections for exogenous variables which are difficult to forecast, such as commodity prices and rainfall, and must be based on survey data which is incomplete, contains substantial survey errors and is subject to revision. As a result the accuracy of forecasts for most target variables even for the first year out is relatively low.[16]

In the case of this Budget the ‘pre-stimulus’ baseline scenario is that no stimulus had been applied, compared with a ‘post-stimulus’ scenario which includes all of the Government’s discretionary fiscal stimulus actions taken since the September quarter of 2008. In short this does not constitute empirical ‘evidence’ of the effectiveness (or the degree of effectiveness, let alone desirability) of discretionary fiscal stimulus in ameliorating the effects of recession. It reflects more the judgement exercised by the Treasury which is informed by macroeconomic theory and based on considerable experience and research.[17]. One could also mount an argument as to whether the ‘no stimulus’ baseline is the appropriate basis for comparison.

Indeed the empirical literature on the effectiveness of discretionary fiscal policy is quite ambiguous as to the effects of various types of stimulus measures.[18] Part of this stems from econometric problems associated with identifying ‘discretionary’ changes in fiscal policy, but it is also partially due to assumptions about the behaviour of agents in the economy. The use of different data-sets, definitions of discretionary measures, time periods and econometric methods can produce starkly different results. Economists also struggle with the difficulty of not being able to conduct controlled experiments, therefore eliminating the ability to precisely replicate previous research.

Econometric modelling, particularly at a high level of aggregation, is more art than science, with a considerable amount of subjective judgement being applied. It should be seen as indicative in nature only, and results should not be interpreted as precise statements of fact. The intention of these comments is not to cast doubt on the accuracy of Treasury’s forecasts or their assertions that discretionary fiscal stimulus will have an impact on the economy (as can be seen above, forecasts presented in the Budget match forecasts from other sources quite well). Rather, they are merely to provide some background as to how these forecasts/judgements are formed, their limitations; and also to reinforce the point that the economics profession as a whole does not have a conclusive answer to the question of the effectiveness of discretionary fiscal stimulus.

The Minister for Finance, the Hon. Lindsay Tanner MP acknowledges the imprecise nature of forecasting in a recent interview on the 7.30 report.  In response to a question from the host, Mr Kerry O’Brien, he replied:

Well, Kerry, given that we're talking about the years ahead, we can't really base it on much other than forecasts and promises. The forecasts tell us where Treasury believes the economy is heading and the promises indicate the disciplines we are imposing upon ourselves and how we are gonna deal with the challenges that we confront. And people will then have to judge the outcomes. Keep in mind that these will change as time unfolds. So, inevitably, what happens every year and indeed every six months is that Treasury updates the forecasts and they will change to a degree over time as a result of those processes. But we have to make forecasts and we have to indicate a strategy as to how we are going to build the nation for the future, get through the current recession and get into recovery and return the budget to surplus.[19]

Revenues and expenses

As will be seen below, the budget position has deteriorated significantly since May 2008. The Budget has deteriorated so dramatically that the Government even took the unusual step of issuing an Updated Economic and Fiscal Outlook in February 2009 after the release of the Mid-Year Economic and Fiscal Outlook in December 2008. The Budget has deteriorated even further since February 2009. This underscores the fragile nature of macroeconomic forecasts, even over the course of a single year as outlined in the previous section, especially around turning points in the economy. Treasury have presented an appraisal of their forecasting accuracy for revenues, although a similar analysis has not been performed for expenses. 

Most of the deterioration in the fiscal balance is due to a dramatic fall in taxation revenues, but also a rise in expenses arising from the government policy response to the downturn in economic activity as a result of the global financial crisis. 

Revenue

Table 5 below shows the variations to revenues since the 2008–09 Budget. It is clear that most of the turnaround in revenues has been driven by parameter variations, which are essentially unexpected gains or losses due to incorrect forecasts of revenue. Between the 2008–09 and 2009–10 budgets, $23.5 billion worth of revenue expected in 2008–09 never materialised. Nearly 98 per cent of the difference is accounted for by parameter variations. From 2008–09 to 2011–12, parameter variations equate to a total loss of $175.4 billion worth of estimated revenue. 

Table 5: Revenue – Policy decisions and parameter variations

 

Estimates

Projections
 

2008-09

2009-10

2010-11

2011-12

 
$m
$m
$m
$m

Revenue at 2008-09 Budget

319,464

336,920

350,862

366,922

Changes between 2008-09 Budget and MYEFO

       

Effect of policy decisions

-100

-87

-23

0

Effect of parameter and other variations

-6,114

-12,488

-14,286

-11,382

Total variations

-6,214

-12,575

-14,309

-11,382

Revenue at 2008-09 MYEFO

313,250

324,345

336,552

355,540

Changes between MYEFO and UEFO

 

Effect of policy decisions

-449

-1,102

5,611

5,437

Effect of parameter and other variations

-8,840

-19,241

-23,172

-24,354

Total variations

-9,289

-20,343

-17,561

-18,918

Revenue at 2009 UEFO

303,960

304,001

318,991

336,621

Changes between UEFO and 2009-10 Budget

       

Effect of policy decisions

-2

-256

-4,990

-631

Effect of parameter and other variations

-8,019

-13,133

-19,159

-15,214

Total variations

-8,021

-13,389

-24,149

-15,845

Revenue at 2009-10 Budget

295,939

290,612

294,841

320,776

Source: ‘Statement 5: Revenue’, Budget strategy and outlook: Budget paper no. 1: 2009–10, p. 5-14.

Revenue Forecasting Performance

Treasury discusses the three main sources of error in forecasting revenue in Appendix D of ‘Statement 5: Revenue’, Budget paper no. 1:[20]

  • errors in forecasts of the economy underpinning the forecasts the revenue forecasts
  • errors in translating the economy to revenue forecasts and
  • miscellaneous factors including (but not limited to) post-budget policy decisions, court decisions regarding tax law interpretation and revisions to historical economic data. 

Treasury describes revenue estimates as being produced using a ‘base plus growth’ methodology. In highly simplified terms, the ‘growth’ part of the methodology is derived from the economic growth forecasts. Thus, economic growth forecasts are crucial to the outlook for revenues (see discussion of economic modelling above). Treasury shows a chart (chart D2) which examines taxation revenue forecast errors versus nominal non‑farm GDP growth forecasting errors. The chart contains a range that implies that if revenue forecasts are within it, then the forecast is acceptable in terms of accuracy. The range essentially implies a 0.5 per cent margin for error if economic forecast errors were zero. In other words, this chart abstracts from errors in economic forecasts as a source of error. In the eight year period considered, there are four years within the range (2001–02, 2003–04, 2005–06 and 2006–07) and four above the range (2000–01, 2002–03, 2004–05 and 2007–08), implying that revenue had been underestimated in those years, relative to economic forecast errors. There is a general tendency for revenues to be underestimated in times of economic expansion and overestimated in times of contraction. 

As noted in last year’s Budget Review in the ‘Key Features’ brief, the budget papers have not forecast any of the recessions Australia has experienced since the early 1950s.[21] This both highlights the difficulties of forecasting and suggests that any improvements that Treasury could make in forecasting the economy could yield significant gains in terms of budget predictability.

Expenses

In contrast to revenues, changes in expenses have been overwhelmingly dominated by policy changes since the last budget. In 2008–09, policy changes worth $33.8 billion have been offset by a fall in expenses due to parameter variations of $1.9 billion. From 2008–09 to 2011–12, policy changes have resulted in $98.2 billion worth of extra expenses. 

Table 6a: Expenses – Policy decisions and parameter variations

 

Estimates

Projections
 

2008-09

2009-10

2010-11

2011-12

 
$m
$m
$m
$m

2008-09 Budget expenses

292,470

310,513

323,083

339,241

Changes between 2008-09 Budget and MYEFO

       

Effect of policy decisions(a)

11,413

1,172

743

842

Effect of parameter and other variations

-258

58

456

-297

Total variations

11,154

1,230

1,200

544

2008-09 MYEFO expenses

303,624

311,742

324,283

339,785

Changes between MYEFO and UEFO

       

Effect of policy decisions(a)

19,158

18,618

17,071

10,775

Effect of parameter and other variations

-464

1,688

3,288

4,303

Total variations

18,694

20,306

20,360

15,078

2009 UEFO expenses

322,317

332,047

344,641

354,862

Changes between UEFO and 2009-10 Budget

       

Effect of policy decisions(a)

3,294

8,123

2,054

4,941

Effect of economic parameter variations

       

Total economic parameter variations

-39

1,495

2,214

-40

Unemployment benefits

-285

1,067

2,551

1,494

Prices and wages

141

313

-460

-1,663

Interest and exchange rates

104

114

122

129

Public debt interest

177

1,038

1,907

3,205

Program specific parameter variations

3,546

5,708

3,438

2,333

Slippage in 2008-09 Budget decisions

0

1

1

1

Other variations

-4,852

-10,199

-9,727

-8,914

Total variations

2,126

6,165

-113

1,525

2009-10 Budget expenses

324,443

338,213

344,528

356,388

(a)  Excludes the public debt net interest effect of policy measures.

Source: ‘Statement 6: Expenses and Net Capital Investment’, Budget strategy and outlook: Budget paper no. 1: 2009–10, p. 6-4.

Please note that the table above incorporates changes made via the corrigendum issued to Budget paper no. 1

Table 6b: Expenses – Share of total expenses by function

 

Estimates

Projections

 

2008-09

2009-10

2010-11

2011-12

2012-13

 
% of total
% of total
% of total
% of total
% of total

General public services

5.52

5.25

5.44

5.50

5.41

Defence

5.78

6.19

5.81

5.64

5.30

Public order and safety

1.14

1.15

1.10

1.05

1.03

Education

6.63

10.41

9.31

8.03

7.97

Health

15.22

15.15

15.44

15.61

15.37

Social security and welfare

38.50

32.82

33.82

33.83

33.06

Housing and community amenities

1.36

2.69

1.62

1.20

1.07

Recreation and culture

0.92

0.92

0.87

0.82

0.79

Fuel and energy

1.94

2.48

2.29

1.98

1.72

Agriculture, forestry and fishing

1.01

1.01

0.81

0.80

0.78

Mining, manufacturing and construction

0.59

0.50

0.57

0.55

0.51

Transport and communication

2.15

1.62

1.64

1.88

1.82

Other economic affairs

2.17

2.42

2.32

2.20

1.99

Other purposes

17.08

17.39

18.97

20.91

23.20

Total expenses

100

100

100

100

100

Sources: ‘Statement 6: Expenses and Net Capital Investment’, Budget strategy and outlook: Budget paper no. 1: 2009–10, p. 6-7; Parliamentary Library calculations.

This table shows the shares of total expenses for each portfolio area. The largest movers, in terms of shares of expenses, are: education, which increases its share from 6.63 per cent to 10.41 per cent in the year to (end) 2009–10; and social security and welfare from 38.50 per cent to 32.82 per cent. Focussing on 2009–10, increased shares of expenses also occur for defence, public order and safety, housing and community amenities, fuel and energy, other economic affairs and other purposes. 

A more expansive coverage of individual revenue and expense measures are contained in the Parliamentary Library’s other Budget Review 2009–10 briefs. 

Appendix A: Detailed Treasury estimates and forecasts: Economic Aggregates

Table A1: Detailed Treasury estimates and forecasts (a)

 

Estimates

Forecasts

 

2008-09

2009-10

2010-11

Panel A - Demand and output(b)

Household consumption

1

-1/4

1 3/4

Private investment

     

Dwellings

-2 1/2

0

11 1/2

Total business investment(c)

2 1/2

-18 1/2

3 1/2

Non-dwelling construction(c)

1/2

-26

3

Machinery and equipment(c)

3

-16 1/2

4

Private final demand(c)

1/2

-4

2 3/4

Public final demand(c)

5

7 3/4

-1/2

Total final demand

1 1/2

-1 1/4

2

Change in inventories(d)

-1 1/2

1/4

3/4

Gross national expenditure

1/4

-1 1/4

2 1/2

Exports of goods and services

-1/2

-4

4 1/2

Imports of goods and services

-1 1/2

-6 1/2

6 1/2

Net exports(d)

1/4

3/4

-1/2

Gross domestic product

0

-1/2

2 1/4

Non-farm product

-1/4

-1/2

2 1/4

Farm product

13

1

0

Nominal gross domestic product

5 3/4

-1 1/2

3 3/4

Panel B - Other selected economic measures

External accounts

     

Terms of trade

8 3/4

-13 1/4

0

Current account balance (per cent of GDP)

-3

-5 1/4

-5 3/4

Labour market

     

Employment (labour force survey basis)(e)

-1/4

-1 1/2

1/2

Unemployment rate (per cent)(f)

6

8 1/4

8 1/2

Participation rate (per cent)(f)

65 1/4

64 3/4

64 1/4

Prices and wages

     

Consumer Price Index(e)

1 3/4

1 3/4

1 1/2

Gross non-farm product deflator

5 3/4

-1

1 1/2

Wage Price Index(e)

4 1/4

3 1/4

3 1/4

(a) Percentage change on previous year unless otherwise indicated.
(b) Chain volume measures except for nominal gross domestic product which is in current prices.
(c) Excluding second-hand asset sales from the public sector to the private sector.
(d) Percentage point contribution to growth in GDP.
(e) Through the year growth rate to the June quarter.
(f) Estimate for the June quarter.

Source: ‘Statement 2: Economic outlook’, Budget strategy and outlook: Budget paper no. 1 2009–10, p. 2-6.



[1].    Australian Government, ‘Statement 3: Fiscal Strategy and Outlook’, Budget strategy and outlook: Budget paper No. 1: 2009–10, Commonwealth of Australia, Canberra, 2009, p. 3-11.

[2].    Real and nominal GDP parameters are year average. CPI and employment are through the year growth to the June quarter. The unemployment rate is the rate in the June quarter.

[3].    Australian Government, ‘Statement 2: economic outlook’, Budget strategy and outlook: Budget paper no. 1: 2009-10, Commonwealth of Australia, Canberra, 2009, p. 2-6.

[4].    The three papers are: CM Reinhart and KS Rogoff, ‘Is the 2007 financial crisis so different? An international historical comparison’, Working paper 13761, National Bureau of Economic Research, Cambridge, Massachusetts, January 2008; CM Reinhart and KS Rogoff, ‘Banking crises: An equal opportunity menace’, Working paper 14587, National Bureau of Economic Research, Cambridge, Massachusetts, December 2008; and, CM Reinhart and KS Rogoff, ‘The aftermath of financial crises’, Working paper 14656, National Bureau of Economic Research, Cambridge, Massachusetts, January 2009.

[5].    Reinhart and Rogoff, ‘The aftermath of financial crises’, pp. 11–12.

[6].    International Monetary Fund, World economic outlook, April 2009, p. 119.

[7].    Reserve Bank of Australia, Statement on monetary policy, 8 May 2009, p. 69, viewed 13 May 2009, http://www.rba.gov.au/PublicationsAndResearch/
StatementsOnMonetaryPolicy/Statements/statement_on_monetary_0509.pdf

[8].    Reserve Bank of Australia, p. 68. 

[9].    Access Economics, Commonwealth Budget monitor, Issue 75, Canberra, Australia, 11 May 2009; ANZ Bank, ANZ Federal Budget report, Melbourne, Australia, 13 May 2009; National Australia Bank, 2009-10 Federal Budget report, Sydney, Australia, 12 May 2009; Westpac Banking Corporation, Australian Federal Budget 2009/10, Sydney, Australia, 12 May 2009.

[10]. OECD, ‘Chapter 3: The effectiveness and scope of fiscal stimulus’, Interim economic outlook,  Paris, March 2009; and, IMF, ‘Group of Twenty’, paper prepared by the staff of the IMF for the G20 meeting of deputies, London, 31 January–1 February 2009.

[11]. Australian Government, ‘Statement 4: Assessing the sustainability of the Budget’, Budget strategy and outlook: Budget paper no. 1: 2009-10, Commonwealth of Australia, Canberra, 2009, pp. 4-10.

[12]. Australian Government, ‘Statement 4: Assessing the sustainability of the Budget’, Budget strategy and outlook: Budget paper no. 1: 2009-10, Commonwealth of Australia, Canberra, 2009, pp. 4-4 to 4-8.

[13]. P Downes, ‘An introduction to the TRYM model: applications and limitations’, Paper presented to the International Federation of Automatic Control (IFAC) Symposium: Modelling and Control of National and Regional Economies, Gold Coast, 2–5 July 1995, p. 8.

[14]. http://www.bankofengland.co.uk/publications/quarterlybulletin/qb980101.pdf viewed 22 May 2009.

[15]. Control in this context refers to optimal control. In essence, it refers to the method used to obtain a solution for the model.

[16]. Downes, p. 11. 

[17]. Some economists such as Associate Professor Steve Keen (University of Western Sydney) are sharply critical of the macroeconomic theory and methodology used by Treasury to produce forecasts of the economy. An example of this criticism that specifically relates to this year’s Budget can be found at: Steve Keen’s Debtwatch, ‘Budget 2009: let’s assume we can have an opener’ viewed 18 May 2005, http://www.debtdeflation.com/blogs/2009/05/13/budget-2009-lets-assume-we-have-a-can-opener/

[18]. i.e., various types of tax cuts, direct government consumption, government spending on infrastructure or cash transfers to liquidity constrained households.

[19]. http://www.abc.net.au/7.30/content/2009/s2576476.htm viewed on 22 May 2009.

[20]. Australian Government, ‘Statement 5: Revenue’, Budget strategy and outlook: Budget paper no. 1: 2009-10, Commonwealth of Australia, Canberra, 2009, pp .5-50 to 5-52.

[21]. S Kompo-Harms and D Richardson, ‘Budget 2008-09: Key Features’, Budget review 2008–09, Parliamentary Library, Canberra, 26 May 2008, viewed 20 May 2009, http://www.aph.gov.au/library/pubs/rp/2007-08/08rp31.pdf; See also: D Richardson, Official economic forecasts: how good are they?, Current issues brief, no. 17 2000-01, Parliamentary Library, Canberra, 26 June 2001, viewed 20 May 2009, http://www.aph.gov.au/library/pubs/CIB/2000-01/01cib17.htm

Back to top


Facebook LinkedIn Twitter Add | Email Print