Gillard’s speech a depressing demonstration of economic and budgetary incompetence

Is there a more depressing demonstration of economic and budgetary incompetence than Julia Gillard’s speech yesterday attempting to justify why her government is going to produce a bigger than expected deficit yet again.

The background to the story is all too familiar.

As the first chart below (showing outcomes for the years ending 30 June 1997 through to 2012) reminds us, the Howard Costello Government, between 1996 and 2007, produced eleven budgets of which only two were deficits. Since then the Rudd-Gillard Government has produced four huge deficits in a row.

 2012-13 was going to be the year it all turned around. Giving the budget speech in May 2012, Treasurer Wayne Swan had this to say:

This Budget delivers a surplus this coming year, on time, as promised, and surpluses each year after that, strengthening over time.

The surplus Swan promised for 2012-13, $1.5 billion, was extremely modest. But even a quick review of the numbers suggested that some skepticism was in order.

First, it assumed revenues of $369 billion. This compared to revenues the previous year of $330 billion – in other words, Swan was assuming revenue would jump by $39 billion in one year.

This revenue jump was always a wildly optimistic assumption. (In the previous three years, the revenue movements had been -$8 billion, $17 billion and $28 billion.)

Second, it assumed spending of $364 billion – which would have been a reduction of $7 billion on the previous year’s figure of $371 billion. But in the previous three years, spending had jumped each year, by $21 billion, $9 billion and $25 billion respectively.

Swan’s 2012-13 budget was based on thoroughly unrealistic assumptions. He planned to bring in a lot more money than in the previous year; spend less – and eke out a tiny surplus.

Prudent budgetary management involves a measure of caution. Things do not always go to plan. Sensible, experienced managers will take account of that reality – and build in some margin of comfort into their numbers. Swan and Gillard, by contrast, made the most optimistic possible assumptions – and then locked in spending to match those assumptions.

In his time as Treasurer Swan has shown a singular inability to achieve his forecasts. The  second chart below shows, across five budgets, what he originally predicted would be the result for the year – and what the actual result for the year turned out to be.  (For 2012-13, the chart uses Deutsche Bank’s latest estimate of what the actual result for 2012-13 will be.)

What we saw yesterday from Julia Gillard was an incoherent attempt to justify five years of budgetary indiscipline. First, she said revenue was going to be $12 billion lower than expected this year – and the excuse was that nominal GDP is growing more slowly than expected (and more slowly than real GDP) and hence tax revenues are lower than expected. Put another way, she is complaining that tax revenues grew too slowly because inflation is too low – a truly bizarre complaint for a Prime Minister to make.

Second, Ms Gillard said that despite the unexpected drop in revenue, the government still planned to increase spending.   To quote her: “We won’t, during this time of reduced revenue, fail the future by not making the wise investments that will make us a stronger and smarter nation.”

When revenue drops, rational managers reduce spending. Ms Gillard is explicitly rejecting that sensible management principle.

The Rudd-Gillard Government have been consistently hopeless budgetary and economic managers. Yesterday’s speech is depressing confirmation of that grim reality.