Fiscal stimulus in an age of debt: how much stimulus are we planning? Economic and social outlook conference John Daley, CEO, Grattan Institute 20 July 2017
How much stimulus are we planning? Projected fiscal tightening has not happened • Reality has not matched repeated projections of return to budget balance • Projections for nominal GDP, wages, and revenues were too high Budget projection methodology makes fiscal plans unreliable • Asymmetrical projections – risks not evenly balanced • Assume short economic cycle, and amplify optimism by assuming output gap closed • Assume the world hasn’t changed So we are stimulating more (and repairing the budget less) than planned • Budget repair relies on bracket creep rather than measures • Transport spending remains relatively high • Governments have forecast-led denial about need for budget repair • Realpolitic suggests we need a pessimism-generator Correctives • More judgement and common sense • What is trend (over what period)? How long the cycle? Is spare capacity absorbed? • What are the institutional barriers to change? 2
We have been planning (and failing) to tighten for 8 years Actual and projected Commonwealth underlying cash balance , % of GDP 1 2012 2011 Projection made in 2010 2013 2017 2014 2015 2016 0 -1 -2 -3 Actual -4 -5 2009 2011 2013 2015 2017 2019 2021 Financial year ending Source: Grattan analysis of Commonwealth Budget Papers 2010-11 to 2017-18 3
Lack of fiscal tightening mostly due to revenue surprises, not policy choices Cumulative change in budget outcome from initial projection to reality or latest, % of GDP Spending parameter 3 changes Spending policy changes 1 Revenue policy changes -1 Revenue parameter changes -3 -5 Net change in budget position -7 2009 2011 2013 2015 2017 2019 4
The gap is growing between projected and actual personal income tax Actual and projected personal income tax receipts , $ billions 260 2017 2016 2015 240 2014 2013 220 2012 2011 200 ~$26b 180 ~$16b 160 Actual 140 120 2010 2012 2014 2016 2018 2020 Financial year ending Source: Grattan analysis of Commonwealth Budget Papers 2010-11 to 2017-18 5
Fiscal projections have also missed for company, super, and capital gains tax Actual and projected tax receipts , $ billions Company tax 100 2017 2015 2011 2012 2014 2013 2016 80 60 Actual 40 2010 2012 2014 2016 2018 2020 Superannuation taxes Capital gains tax 25 15 2013 2014 2015 2016 2017 2017 20 2011 2015 2014 2012 2013 2016 10 15 10 5 Includes capital gains tax Actual 5 Actual from individuals, companies & super funds 0 0 2010 2012 2014 2016 2018 2020 2010 2012 2014 2016 2018 2020 Financial year ending Source: Grattan analysis of Commonwealth Budget Papers 2010-11 to 2017-18 6
How much stimulus are we planning? Projected fiscal tightening has not happened • Reality has not matched repeated projections of return to budget balance • Projections for nominal GDP, wages, and revenues were too high Budget projection methodology makes fiscal plans unreliable • Asymmetrical projections – risks not evenly balanced • Assume short economic cycle, and amplify optimism by assuming output gap closed • Assume the world hasn’t changed So we are stimulating more (and repairing the budget less) than planned • Budget repair relies on bracket creep rather than measures • Transport spending remains relatively high • Governments have forecast-led denial about need for budget repair • Realpolitic suggests we need a pessimism-generator Correctives • More judgement and common sense • What is trend (over what period)? How long the cycle? Is spare capacity absorbed? • What are the institutional barriers to change? 7
2017 budget doubles down: increases forecast wage growth as reality goes lower Actual and projected growth in nominal wages, per cent Assumptions: 4.5 • Return to trend 2011 Projection made in • ‘Close output gap’ 4.0 2017 2010 = 2012 2016 If currently below 3.5 2015 2013 trend, then project 2014 above trend 3.0 If wages instead 2.5 grow at 2%, tax Actual collections will 2.0 be $12.6 billion lower in 2021 1.5 10 11 12 13 14 15 16 17 18 19 20 21 Financial year ending Notes: Total hourly rates of pay excluding bonuses, private and public wages 8 Source: Grattan analysis of Commonwealth Budget Papers 2010-11 to 2017-18
The disappearing and supposedly reappearing Phillips curve Growth in employee compensation (%) 1980 15 Pre-1990s 1998-2013 1990 10 1985 2008 2010 2000 2005 5 1995 Budget 1998 1991-1997 2015 projection Post-boom 0 2009 1991 -5 3 4 5 6 7 8 9 10 11 12 Unemployment rate (%) Notes: Employee compensation is total remuneration of employees including wages, ad hoc bonuses, termination payments and in-kind benefits 9 Source: Based on NAB analysis of ABS Labour Force data
How much stimulus are we planning? Projected fiscal tightening has not happened • Reality has not matched repeated projections of return to budget balance • Projections for nominal GDP, wages, and revenues were too high Budget projection methodology makes fiscal plans unreliable • Asymmetrical projections – risks not evenly balanced • Assume short economic cycle, and amplify optimism by assuming output gap closed • Assume the world hasn’t changed So we are stimulating more (and repairing the budget less) than planned • Budget repair relies on bracket creep rather than measures • Transport spending remains relatively high • Governments have forecast-led denial about need for budget repair • Realpolitic suggests we need a pessimism-generator Correctives • More judgement and common sense • What is trend (over what period)? How long the cycle? Is spare capacity absorbed? • What are the institutional barriers to change? 10
Commonwealth is planning to increase transport infrastructure spending Actual and projected C’wth spending on transport projects , per cent of GDP 0.6% 2016 Projection made in Note: Inland Rail and Western 0.5% 2015 Sydney Airport 2017 2011 E-W 2014 off budget payment 0.4% 0.3% 2013 2012 0.2% 0.1% 0.0% 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Financial year ending 11
Most of the planned structural repair depends on fiscal drag Budget balance 2020-21 budget outcome compared to 2016-17 outcome, $2017 billions 20 Denotes improvement 10 in budget balance 7 7 0 5 3 -10 38 -20 37 -30 -40 7 -50 Budget Initial deficit Fiscal Other Spending Other 2016-17 Budget deficit 2016- growth at drag revenue restraint (Future fund, Budget surplus 2020- 17 nominal GDP non-fin asset measures 21 Variance from GDP growth impacts) 12
Budgets have included some structural repair measures, but not many Contribution of budget measures to fiscal balance at end of four years $bn budget measures 20 15 10 5 0 -5 Net impact -10 Spending measures -15 Revenue measures -20 -25 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Year of budget announcement Source: Grattan analysis of historical Budget Papers, MYEFO and PEFOs 13
Forecast-led denial is a bipartisan affliction This budget We are on track for surplus in keeps us on a 2012-13, on time, as sustainable promised — and this provides path to bring the solid foundations for the the budget targeted investments we back to announce tonight. balance. I can report tonight that despite the headwinds, our timetable back to a Budget surplus is unchanged from last year. Sources: Treasurer's budget speech 2011-12; 2015-16; 2016-17 14
How much stimulus are we planning? Projected fiscal tightening has not happened • Reality has not matched repeated projections of return to budget balance • Projections for nominal GDP, wages, and revenues were too high Budget projection methodology makes fiscal plans unreliable • Asymmetrical projections – risks not evenly balanced • Assume short economic cycle, and amplify optimism by assuming output gap closed • Assume the world hasn’t changed So we are stimulating more (and repairing the budget less) than planned • Governments have forecast-led denial about need for budget repair • Transport spending remains relatively high • Budget repair relies on bracket creep rather than measures • Realpolitic suggests we need a pessimism-generator Correctives • More judgement and common sense • What is trend (over what period)? How long the cycle? Is spare capacity absorbed? • What are the institutional barriers to change? 15
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