The Midyear Economic and Fiscal Outlook (MYEFO) is released each December as an update on the state of the government’s finances. New measures taken since the May budget are costed and factored in, and figures and forecasts are adjusted in light of newly-available data.
In theory, of course, revised budget forecasts could go either way. With six months’ worth of new data at its disposal, the government might discover that its finances are in better or worse shape than it announced in May.
It might seem peculiar, then, that, year after year, MYEFO forecasts are worse than budget forecasts. Peculiar, that is, if you ignore the politics. Year on year, governments employ wishful thinking in May budgets, keen to make things look as positive as possible when the eyes of the nation are upon them. Rosy assumptions are deployed to obscure a soberer reality, a practice I’ve now written about for two years, but which is as old as time immemorial. Then, six months later, they downgrade their overzealous predictions when they hope no-one is looking.
It should come as no surprise, then, that MYEFO, which could really be handed down at any point in December, is buried in the week before Christmas. Nothing says Merry Christmas quite like a blowout in the national deficit.
And, whether or not it’s what we asked Santa for, a blowout is what we’ve got. In the May budget, the government predicted we’d return to surplus by 2020-21. That was summarily dismissed as unlikely, given that neither major party has a credible plan to actually reach surplus. But, on the end date at least, the government appears to be sticking to its guns. Surplus is still predicted in 2020-21, but the path appears rockier. Despite a slightly smaller underlying cash deficit for this year (2016-17), the deficit is worse than predicted for every one of the four forward years, a total blowout of $10bn.
According to the government, this just means a steeper return to surplus in the same timeframe. But, since the May forecasts were considered unlikely to begin with, it’s reasonable to take this as the first step to an admission that the fiscal repair job is, once again, taking longer than we’ve been told.
None of this is new. This blowout is the latest in a fine bipartisan tradition of MYEFO mea culpas. The figure below shows the surplus predictions made by the Coalition government in successive Budgets and MYEFOs, showing that its promised arrival has been blown out with every update. A similar story, though not depicted, can be seen in the Labor government’s updates beyond 2009-10.
Source: MYEFO 2016-17; Budget 2016-17; MYEFO 2015-16; Budget 2015-16; MYEFO 2014-15; Budget 2014;15.
So, the Government still doesn’t appear to have a plan for surplus, and neither does the Opposition. Nothing new, right? So is there any cause for fresh concern?
Well, perhaps. This latest update comes fresh on the heels of an unexpectedly severe negative quarter of growth; economists predicted a -0.1% contraction for the September quarter, but the reality was a -0.5% contraction. Most economists seem confident that the economy will rebound in the December quarter, avoiding for now the technical (though somewhat arbitrary) definition of a recession. But there’s plenty of cause for concern.
Firstly, the contraction was in large part fuelled by a decline in housing and construction investment, a sign that the housing boom might have run its race. Other figures do not portend well. Private investment is contracting, consumer confidence is down, commodity prices are volatile and mining investment continues to fall. Couple all this with a continuously-prolonged deficit and the result is a less-than-stellar outlook heading into the new year.
The credit ratings agencies are starting to take notice. There is widespread speculation that both Moody’s and Standard & Poor’s will downgrade Australia’s AAA rating for the first time in nearly 14 years. Some have even suggested they might move to do so as early as today, but even if they don’t it is likely that they will early next year. This might further erode consumer confidence and increase the chance of a downturn.
The short of it? The Government might have coal in its stocking this Christmas. Though not actual coal, of course, given the mining investment figures.
You’d better not shout, you’d better not cry, you’d better not pout I’m telling you why: Standard & Poor’s is grading you down!
(But also not that sorry.)