That disappearing "surplus"

Events have shown how much the Treasurer, Mr Willis, gilded the lily in his Budget speech, writes RICHARD WOOD.

LATE on the afternoon of Thursday, October 26, the Secretary to the Commonwealth Minister for Transport, Mr O'Keefe, introduced legislation to obtain Parliament's approval to appropriate additional money to meet "essential and unavoidable" expenditures additional to those already appropriated in the 1995-96 Commonwealth Budget brought down in May.  Puzzled as to why the Minister for Finance had not introduced this legislation, I have been able to establish no more than that "he disappeared at the last minute".

Little wonder that Mr Beazley did not face the music given that the legislation seeks to spend an additional $1,416 million in 1995-96 within just five months of the Budget.

True, this additional spending is partly offset by savings of $499 million, but the net addition of $917 million is still large.  What is more, the new spending decisions appear to virtually wipe out the net reductions in outlays of $750 million provided for in the 1995-96 Budget, so that the Government's decisions may now actually add to spending in 1995-96.

Moreover, no explanation was given in Mr O'Keefe's speech as to why the additional spending could not be entirely offset by savings elsewhere, which is the standard requirement of the Finance Department.  Given that the Commonwealth now spends over $130,000 million a year, such savings could surely have been found.

The Government's decision to indulge in additional net spending of $917 million is all the more remarkable when it is recalled that the Treasurer, Mr Willis, went to great trouble to ensure that he could present estimates in May that showed an overall Budget surplus of $718 million.  He went to so much trouble, indeed, that he cut the normal reserve for contingencies from $350 million in 1994-95 to a mere $85 million in the current year.  Now, with the blow-out in spending, Mr Willis has grossly inadequate reserves to meet the additional spending.

As a result the Budget surplus has well and truly disappeared, although Mr O'Keefe's speech did not acknowledge that.  In fact, on top of the net additional spending of $917 million, the Government has lost $215 million as a result of agreeing not to proceed with the wholesale sales tax on building materials.  Indeed, not all of the tax measures announced in the Budget have passed the Senate and other revenue "losses" cannot be ruled out.

Also, the decision to increase AIDC's capital rather than privatise it, will cost the Government over a net $200 million compared with estimates.  Total receipts from asset sales could be significantly lower than the estimate of $5,350 million.  In addition, with the economy now almost certain to grow by less than the 3.75 per cent forecast, revenue will likely be lower and other expenditure, such as unemployment benefits, higher.

All up, it would not be surprising to find that latest estimates revealed that the Budget is now headed for a $1,000 million deficit instead of a $718 million surplus.  Unfortunately, no official estimates are available and it will be particularly interesting to see whether the Government dodges the publication of mid-year revisions to estimates, as it did last year.  Moreover, the election campaign proper has not yet started.  One recent report suggested that Mr Keating is working on a proposal to promise an extension of existing family benefits to those in middle income groups who presently miss out.  Such proposals could easily add another $1,000 million or so to Commonwealth spending in a complete year.  How significant is this "blow-out" in the Commonwealth Budget?  In his Budget speech Mr Willis said that the Budget's "one principal objective" was to "provide for the continued expansion of the Australian economy ... by tackling the major constraint on growth:  the long-term decline of our savings".  Mr Willis identified a two-part plan to improve savings, the first part of which was to increase public savings through bringing the Budget into surplus three years earlier than previously forecast.

The trouble is that Mr Willis gilded the lily right from the start.  The Budget's contribution to saving depends not on the overall surplus but on its deficit or surplus on current transactions.  The original 1995-96 estimates in fact provided for a general government deficit on current account of $3,807 million (0.8 per cent of GDP), that is, a draw on saving not a contribution to it.  This draw onsaving may now be around $5,500 million (about 1.2 per cent of GDP) even before the election campaign starts.

Thus, while the Commonwealth's draw on savings in 1995-96 will still be less than last year's, with the additional spending and possible revenue shortfall the difference is now likely to be quite small.  (Last year the Commonwealth general government current account deficit was about 2.3 per cent of GDP).  This underlines the point I have made at Budget time that the change in budgetary policy is considerably less than the impression being given by the published Budget figures, which implied a reduction in the overall deficit equal to 2.8 per cent of GDP.

More generally, this "blow-out" significantly detracts from the credibility of the Government's forward estimates beyond 1995-96.  Those estimates provided for an annual current account curplus of around 0.5 per cent of GDP.  That was always too small a contribution to saving by the Commonwealth.  But what price now on there being any contribution at all?

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