Like a circus sideshow, the May budget has found its way back into our backyards. Yes folks, it’s time for more Federal Budget Shenanigans in Australia! As a financial planner, i find the announcements and discussion surrounding Federal Budgets highly amusing, as nearly every possible form of financial fudging is on display.

Rather than discuss what will or will not be in the budget, i thought we’d focus on the manipulation of figures instead – so here’s a Michael’s Musings look at the Federal Budget.

Federal Budget Shenanigans

Smoke and mirrors is possibly the best way to describe the methodology underpinning the preparation and presentation of Federal budgets in Australia. Perhaps the 2014 budget will be different but who knows? The “pre-budget” public discussion has hardly created an environment of understanding…

The actual budget announcements are usually pre-empted by the pumped-up claims of a need for change, followed by “leaked” possible policy changes which inevitably lead to divisive community discussion and argument. As important as all this budget palava is to the national accounts, the fact is that Australia’s federal finances are on a very solid footing on a global relativity scale.

This year, we’ve been directed to be worried about Australia’s ongoing sustainability, as if we are on the verge of a national accounts disaster. While it is important to “balance the books” and ensure prudent management of taxation finances, there is no requirement that the budget be “in surplus” by any particular timeframe. Australia holds an envied position in global financial circles but you’d never guess that from the dire proclamations of recent months. A look at the incredibly high increases in government expenditure since the world’s finances fell apart in 2008/9 makes it clear that something has to be done but we are far from a disaster at this point in time.

So here’s the list of things to watch out for…

• We’ll spend $X billion on roads/ports/rail/_insert latest fad…
  • What amount was already set down to be spent anyway?
  • When will the expenditure start, and how likely is it that it will actually start?
  • What timeframe is the expenditure slated for? $5bn this financial year has a lot more impact than $5bn spread over the next 8 years.
• This will result in savings of $X billion…
  • Are these merely incremental increases to savings already forecast/implemented/legislated?
  • How long has this level of savings been calculated over?
  • Are they really savings in costs or are they savings in possible increases in costs?
  • What are the assumptions underlying the savings estimates?
• This will result in additional government income of $X billion…
  • Will it really…? Remember the Mining Tax…?
  • What are the assumptions underlying the income projections?
  • Are we dealing with “straight-line projections” of the kind that assumed Australia’s commodity fuelled terms-of-trade boom would last forever?
  • Has work been done on the likely change in behaviour of the people that are supposed to pay these extra taxes? Are those folk going to just pull out the cheque book and willingly send another bucket load of taxes to the ATO?
• The budget deficit will move to a surplus by the year 201X…
  • What are the range of possible outcomes?
  • What are the key assumptions that are liable to impact on this particular date?
  • What would be the likely worst outcome if the budget assumptions were incorrect?
  • What would be a very good outcome if the economic conditions were extremely positive? In other words, how do we know when things are working?
• This is a tough budget…
  • Ummm… Will total government expenditure be lower than it was last year?
  • Are we again riding on the “inflation assumption”? That is, costs can increase in line with inflation with no need to justify that level of increase?
  • If it IS a tough budget, explain again why this needs to be so right now, in a world that is still recovering from a massive banking crisis?

My cynicism may seem overly strong and perhaps it is. However, political agitating usually grips the reins of mainstream discussion, and i would like to inject a little healthy cynicism into the overall debate. The last few budgets have been ridiculous in their flouting of logic and prudent future estimations. Let’s hope this latest attempt at running the country’s $300 billion+ of taxes and Government income holds to a more transparent presentation – but i for one, am not holding my breath…

Federal Budget Links…

Federal revenue receipts can be found here… The Federal income excluding GST has increased from $235 billion in 2011 to $354.9 billion in 2014. That’s an extra $119.9 billion of revenue in just three years. If your income grew by 50% in three years, do you think you would be able to keep your extra expenditure in line with that extra income? If you look at the Australian Government Budget Aggregates, you will notice that the government’s “take” of tax from the economy is lifting from 22.4% in 2012 to 24.4% in 2017. Just out of interest sake, if the economy fails to grow as projected then the government take will be quite a bit higher…

Yet the discussion on past budgets and future expenditure centres on the variation from “estimates”. Estimates are only ever estimates. Projected expenditure is more than likely going to form a definite cost, so why don’t budget figures include tables of various outcomes for different underlying assumptions?

Historical federal receipts and expenditure can be found here, and it really is worth a look. Since 1978 the expenditure has increased in big strides. Try to find a period where total dollars spent actually goes backwards… The closest i could find was 1997-98, which was only $898 million more than the year before. That’s almost a rounding error when talking about total expenditure of $140.587 billion (it’s actually fractions of a percent, so not too bad really and probably counts as a “negative increase” as it would be less than inflation for the year according to the RBA figures). Interestingly, actual expenditure fell for the first time in 2013 – bet you didn’t read that anywhere else…! If you do look at the figures, remember that they include GST and other receipts. Given that GST doesn’t all belong to the Federal Government, it makes sense to keep to the non-GST figures when considering underlying relativities.

The overall budget headlines can be found here. i will leave it to you to judge their economic merit or plausibility. My personal point of view is that the entire budget is made more plausible by the allocation of funds for a test pilot to help people manage the downsizing of their homes under Australia’s pension system. This style of reform has the potential to dramatically change the country’s finances and focus, and on the face of it makes up for quite a bit of budget shenanigans!

Feel free to cheer or jeer my budget discussion but i would be very interested in any investigations you may undertake based on my budget questions.