The future of Mr. Peter Costello.(budget and economic policy)

Publication: National Observer - Australia and World Affairs

Publication Date: 22-DEC-05

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COPYRIGHT 2005 Council for the National Interest

The past three months have seen two major political developments--the Prime Minister's so-called "Athens declaration" and associated political brouhaha, and the federal Budget for 2005-06. Common to both are the personality and performance of the Treasurer, Peter Costello.

In what follows I propose first to assess the quality of Mr. Costello's tenth Budget and comment upon his performance more generally in the Treasury portfolio. I shall then note some lessons from the "Athens declaration" incident regarding the behaviour of the Treasurer. Finally, I shall pose some suggestions for appropriately disposing of the now too-longrunning "Costello for P.M." saga.

THE 2005-06 BUDGET OPPORTUNITY

The Budget for 2005-06 is an extraordinary document. To see just how extraordinary it is, we need to look back to its predecessor. The 2004-05 Budget, after providing for spending increases totaling $37.8 billion over the four-year forward estimates period (2004-05 to 2007-08), and personal income tax cuts totaling $14.7 billion over the same period, nevertheless projected underlying cash surpluses totaling $11.9 billion.

With the ink hardly dry on that Budget, the Government embarked on a spending spree leading up to October's federal election. The Pre-Election Economic and Fiscal Outlook (P.E.F.O.) document, a report by the Secretary to the Treasury and the Secretary to the Department of Finance issued on 8 September 2004 under the Charter of Budget Honesty Act 1998, costed these spending policy decisions at $4.2 billion over the forward estimates period. As against that, upward revisions to the estimates (so-called "parameter and other variations") amounted to a massive $19.6 billion, more than wholly because of upward revenue estimates revisions of $21.5 billion. Projected underlying cash surpluses over the forward estimates period now totaled $25.2 billion--more than double the Budget figure.

The government was quick to take advantage of this revenue cornucopia in its election campaign promises. The Mid-Year Economic and Fiscal Outlook 2004-05 (M.Y.E.F.O.) document, published in December, 2004 in accordance with the Charter of Budget Honesty Act, provides the figures. In the three months between the P.E.F.O. and the M.Y.E.F.O., new spending policy decisions--almost all of them election campaign promises--were estimated to cost $7.0 billion over the forward estimates period. Again, however, upward "parameter and other variations" to the revenue estimates saw the underlying cash surpluses of $24.0 billion for the forward estimates period, in aggregate, barely dented.

In the months thereafter leading up to the Budget on 10 May 2005 there were persistent suggestions from independent sources that, so far from peaking in the M.Y.E.F.O. figures, the revenue estimates (and associated underlying cash surpluses) were being revised even further upwards. Probably the most respected of these independent sources is the Canberra consultancy Access Economics. (1) Its Budget Monitor document, finalised on 20 April, 2005, predicted a huge further jump in revenue growth, with the underlying cash surpluses over the forward estimates period forecast to soar by no less than $21.6 billion over and above the M.Y.E.F.O. figures, to an aggregate $45.5 billion.

Astonishing though the prospective Budget outlook painted by Access Economics was, in the event it proves to have understated, not overstated, the prospective surplus situation. The Budget papers indicate that, when Ministers sat down to finalise the Budget, Treasury figuring would have been providing for underlying cash surpluses, over the four years to 2007-08, (2) totaling more than $60 billion! Again, as in September and December last, and as Access Economics had suggested, the huge upward revisions derived principally from some $37.5 billion of "parameter and other variations" between the M.Y.E.F.O. and the Budget.

To those who have borne with me thus far in this heavily figure-laden recitation, I should now proffer some explanation for having inflicted it upon them. I have done so to underline the sheer magnitude of the taxation reform opportunity the Government had available to it in the lead up to the Budget....

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