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The letter (below) published in today’s AFR repeats some points already made in the letter published in The Australian and circulated on Monday. Some recipients of that letter responded by expressing surprise at the implications of Parkinson’s statement and one even suggested that Treasurer Swan may have “arranged” for Parkinson to “pull a con” by saying publicly that a budget surplus is almost impossible to achieve only then to announce on budget night that it has been (or will be!). The apparent lack of concern by ministers would also seem to suggest that a 2012-13 budget surplus is “on track”. Indeed much of the current talk by ministers is about passing the proposed mining tax and using the proceeds to finance various hand-outs, not to reduce the deficit (this partly reflects the obviously incorrect argument that the hand-outs cannot be made without the mining tax).

But, while nothing is impossible in Canberra at the present time, Parkinson’s statement is such a definitive one that it is difficult to see how the government can avoid experiencing a major “shortage” of revenue in framing the 2012-13 budget – and the estimates for future years. Perhaps we will see some totally unexpected savings decisions in the form of large tax increases (eg on upper incomes) and/or large expenditure cuts (eg on defence equipment).

Des Moore

Parkinson foreshadows horror budget
letter published in The Australian Financial Review, 14 March 2012

As former head of budgetary policy at the Commonwealth Treasury, I find it very surprising that the major budgetary problem revealed by Treasury Secretary Martin Parkinson on 8 March has so far received little attention from commentators.

Parkinson’s statement that tax revenues are now running 4 percentage points of GDP below pre global crisis levels, and are “not expected to recover to its pre-crisis level for many years to come”, has major implications for budgetary policy for both sides of politics.

Take for a start the promise by the Gillard government to achieve a budget surplus in 2012-13.

Parkinson’s statement indicates that tax revenue in 2012-13 is now estimated at about $45 billion less than in the November Mid-Year Economic and Fiscal Outlook and that the small estimated surplus has now become an estimated deficit of around $40 billion.

This means that if the government is to achieve its much promised (small) budget surplus in 2012-13, savings of at least $40 billion will now need to be obtained in the May 2012-13 budget from either expenditure reductions or tax increases.

These days $40 billion may not sound much. But estimated expenditures of $370 billion for 2012-13 already provide for a 3 per cent reduction in real terms and another $40 billion cut would mean a real reduction of around 14 per cent.

Under a minority government this looks unachievable, with the previous largest real reduction being 4 per cent under the Hawke-Keating government in the 1988-89 budget.

This suggests that a large part of the savings will have to be found from increases in revenue – and from measures that are not one-offs but will last “for many years to come”. Australians have previously experienced horror budgets but, on the basis of Parkinson’s revelation, the forthcoming one looks like being more horrific than any before.

This also has implications for Opposition budgetary policy. In an address on 7 March Shadow Treasurer Hockey indicated that “based on current data we will achieve a surplus in our first year in office ...and a cash surplus in every year in our first term”. Assuming the Opposition is in office for most of 2013-14, this policy will need all the help it can get from the Audit Commission announced by Opposition leader Abbott.

Des Moore
Institute for Private Enterprise,
South Yarra Vic

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