The federal budget: Coalition versus Labor

In justifying the leadership challenge, Malcolm Turnbull pointed to Tony Abbott’s failings on “economic leadership”. The Coalition made very strong claims about being superior economic managers in the lead up to the 2013 election, so it’s important to investigate how they’ve actually performed.

This post will investigate the Abbott-Hockey Government’s performance on the budget, and compare it with other recent Australian government. Budget management is only one part of economic management, but it is the part that Abbott and Hockey presented as their central economic mission, along with axing the carbon tax.

In opposition, Abbott and Hockey claimed that the nation was in the grips of a “budget emergency”. They argued that Rudd and Gillard profligacy had trashed a record of prudence under Howard and Costello. Many people do believe that, for all Abbott’s faults, he helped fix a budget mess that Labor created.

But how does the story square with the facts?

Undeniably, the period of the former Labor Government coincided with a shift into budget deficit. But under the Coalition, the deficit has grown. Whereas Treasury had Labor forecast to return to surplus in 2016-17, under Abbott this blew out to a $25.8 billion deficit. The surplus has been pushed back to 2019-20.

Clearly, the budget is affected by a lot of factors outside the government’s control. Joe Hockey, for example, said his budgets were affected by the “headwinds” of lower than expected commodity prices. You can’t blame him for a decline in the terms of trade. Labor said the same thing when they were in government. Labor had some miscellaneous other issues in addition to this, such as the largest global financial meltdown since the Great Depression.

What we need is to isolate how much of the change in the budget is due to the policies of the respective government, rather than, say, commodity prices or an ageing population. We’re in luck, because the Commonwealth Budget papers do, in fact, split out budget estimate changes into “policy decisions” – what we’re looking for – and “parameter variations”. (Parameter variations is the technical term for “other stuff”.) The budget “estimates” refers to the government’s expectations about its expenditure and revenue, and hence its expected surpluses and deficits. They are provided over four to five years.

Each budget update includes a reconciliation table outlining how the estimates have improved or deteriorated since the previous update, broken down into policy decision and parameter variation components. In the 2015-16 Budget published in May, the main budget reconciliation is in Table 7 of Budget Paper 1, p 3-17. This table shows that in the 2015-16 Budget the total estimated deficits over four years worsened from $103.9 billion to $116.5 billion. Of this, only around $3.2 billion was due to parameter variations, $9.3 billion was due directly to the Coalition’s policies.

To get a sense of the Coalition’s budget management over its period in office, we can sum the impact of policy decisions published in the reconciliation table of each of its budget update. The resulting aggregate is the estimated net budget impact of the government’s spending and savings decisions in the first four financial years of each decision’s announcement in the budget papers. For comparison, we will do the same for other governments over the past decade. Adding different years together is a bit crude, but it gives a reasonable indication of the extent to which governments were spenders or savers relative to each other.

The result, as a clickbait title would have it, will shock you:

Budget comparison

The data file is here. What first stands out is the fiscal prolificacy of the final term of the Howard government, whose decisions smashed the bottom line by an estimated $202.2 billion in four-year impact terms. This was largely but not entirely due to his repeated income tax cuts (he increased expenditure too). Howard’s fourth-term budget hit is almost 88 per cent larger than the $106.7 billion budget impact recorded by the 2007 Labor Government.

While this comparison between John Howard and Labor is counter-intuitive to conventional wisdom in press gallery-land, it is consistent with research by the IMF.

It should be noted that most of the 2007 Labor Government’s spending was announced in stimulus packages aimed at protecting jobs during the global financial crisis. Unlike Howard’s tax cuts, this spending was mostly temporary. (For simplicity, the chart counts the full impact of all budget updates from October 2008 to May 2009 as stimulus package spending. Other definitions of the stimulus packages exist, such as Treasury’s, but this doesn’t meaningfully alter the story.)

The second striking aspect of the chart is the frugality of Labor’s second term, which is lone among the four governments in publishing a net saving to the budget estimates.

The 2013 Coalition Government has subsequently weakened fiscal discipline, publishing a four-year net spend totalling $9.5 billion. But didn’t Abbott make big cuts to health, education and social security for vulnerable Australians? Yes. However, these were counteracted by big spending elsewhere. The main game of the 2014-15 Budget wasn’t improving the bottom line but rather, as NATSEM pointed out, regressive redistribution. It took from the poor and gave to the rich.

Now some caveats should be mentioned. Firstly, the numbers we are looking at are estimates. This might be a worry if the estimated costs of new policies were systemically under- or over-stated. However, these numbers are based on professional costings by Treasury and Finance departments. To the extent there are systemic errors, it is reasonable to expect them to be broadly similar across governments. Such errors are not going to be enough to fundamentally change the drastic story of the chart above.

The strength of our analysis is that it involves no modelling assumptions of its own: it simply takes each government’s budget impact from what’s published in Commonwealth budget papers, which are based on policy-by-policy costings prepared in Treasury and Finance. Amidst an unrelenting shitstream of baseless econ-punditry, this is a rare piece of solid ground. It should be the starting point of public discussion, and those who wish to argue for a fundamentally different story should have to mount a compelling case why they should be taken seriously.

The second caveat to make is that we are looking at short-term budget discipline. This is because the budget papers only publish new policy costs over four to five years. Attempts to go beyond this head deep into make-believe-numbers land. We can move on to dabbling in such black arts as 40 year projections, but let’s start with what we have reasonable estimates for.

The economic leadership of Abbott is especially suited to a short-term analysis. His most prominent claims about the budget were in the here and now – for example, he claimed that Rudd and Gillard were responsible for current levels of debt and deficit. A budget emergency is, by definition, an immediate crisis. Abbott and Hockey eventually tried to pivot to the long-term, but this is very different to their presentation before the election:

Based on the published figures we believe we can deliver surpluses in each year of the first term of a Coalition government (Tony Abbott, January 2013).

Bah-bow.

The analysis presented here suggests that the Coalition Government, under Abbott and Hockey, was nothing special in terms of budget management. The Abbott Government in fact weakened fiscal discipline, despite substantial cuts to the social safety net. In addition, Abbott’s overarching budget narrative does not stack up: it was not Rudd and Gillard profligacy that drove the budget into deficit. If we’re looking for a budget vandal, we should look no further than John Howard.

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