Sunshine of your love (for fiscal transparency)
Greater transparency strengthens Australia's public finances
My very first post noted budget forecasts are not very accurate. In his budget speech in May 2023, Treasurer Chalmers estimated a budget surplus (underlying cash surplus) of 0.2 percent of GDP in the fiscal year ending 30 June 2023. In the event, a surplus of 0.9 percent of GDP was recorded that year. Chalmers’ forecast for the 2023-24 was for a deficit of 0.5 percent of GDP. In his next budget speech in May 2024, the Treasurer estimated a surplus of 0.3 percent of GDP for 2023-24. In the event, the surplus for that year turned out to be 0.6 percent of GDP. That is, Chalmers’ first two budgets were pessimistic, the reality proving to be better for the public finances! The chart shows the evolution of UCB against the budget forecasts since the 1990-91 Budget (which forecasted a 2% of GDP surplus for the budget year just before the economy went into a recession). The budgets are colour-coded with blue for the Coalition and red for the ALP.
In the budget speech on 25 March 2025, Treasurer Chalmers estimates a deficit of 1 percent of GDP for the current fiscal year, and forecasts a deficit of 1.5 percent of GDP next year. Could we end up with yet another surprise surplus?
The table below that shows the statistical summary of forecast deviations for UCB over the business cycle spanning between the early 1990s recession and the pandemic (that is, the 1990-91 and 2018-19 Budgets).
Even if next year turns out to be like 1999-2000 or 2004‑05, when the budget bottom lines were 1.2% of GDP better than what was forecast, we will still have a deficit next year.
Of course, next year is probably going to be worse than what we thought at the time of the budget speech. Since 25 March, we have seen Donald Trump significantly escalated the so-called Trade Wars and violent reactions in global financial markets and commodity prices. These will undoubtedly have repercussions for the real economy, and therefore the budget bottom line. As the Pre-Election Economic and Fiscal Outlook (PEFO) states: This escalation in trade hostilities has created significant economic uncertainty and exacerbates the risks to the economic and fiscal outlook.
What is PEFO? Let me quote from the Preface of the document.
The Charter of Budget Honesty Act 1998 (the Charter) requires the Secretary to the Treasury and the Secretary of the Department of Finance (the Secretaries) to jointly publicly release a Pre-election Economic and Fiscal Outlook report (PEFO) within 10 days of the issue of the writs for a general election. These writs were issued on 31 March 2025.
The purpose of the PEFO is to provide updated information on the economic and fiscal outlook. The information in the report takes into account, to the fullest extent possible, all Government decisions and all other circumstances that may have a material effect on the economic and fiscal outlook that were in existence before the issue of the writs for the election. Where additional material information or risks have emerged since the issue of the writs, the PEFO may provide a qualitative assessment of that information or those risks.
The Charter provides that, where there is information unchanged from that set out in full in an earlier budget report, the PEFO may summarise and state this information is unchanged.
The backdrop to the Charter was the 1995-96 budget and the 1996 election. The last budget of Prime Minister Keating forecasted a budget surplus of 0.1 percent of GDP for 1995-96 fiscal year. In contrast, a deficit of 2.1 percent of GDP was recorded that year. That is, the 1995-96 budget was the most optimistic other than those affected by the Global Financial Crisis or the pandemic.
To prevent such ‘budget blackholes’ the Howard-Costello government legislated the Charter of Budget Honesty Act in 1998, which mandates the Departments of Treasury and Finance to release PEFO based on the latest available information at the time when election writs are issued.
Just as well that Trump trade war escalations occurred after the writs were issued on 29 March, otherwise we might have had different projections in PEFO compared with the Budget announced just days earlier!
The Charter of Budget Honesty has improved budget transparency in Australia. In addition to PEFO, the government is required to publish regular Mid-Year Economic and Fiscal Outlooks (MYEFOs). Over time, Budget Papers have included greater disclosures, including the Forecasting Performance and Sensitivity Analysis and the Statement of Risks. Policy costings have become a key feature of our election campaigns and general political discourse. The Parliamentary Budget Office has become a robust organisation over the past decade.
Greater transparency creates stronger incentives over time to ensure that all fiscal risks are identified, quantified, and carefully managed. Transparency can help promote earlier and smoother policy responses to changing circumstances and can also increase confidence in the financial market as well as generaly public in the quality of fiscal management. Transparency also reduces uncertainty for investors and taxpayers, lowering the cost of borrowing for the government, and ultimately for private households and firms.
Sunshine is said to be the best disinfectant, and the greater disclosure help strengthen Australia’s public finances by shining a light on potential fiscal risks, so that Budgets don’t become True Lies!
Further reading
An alternative take on Trump’s favourite word
Seen from a different angle, would the US president still choose tariffs?
Tim Harford, 21 Feb 2025
Trump’s Looming Deficit Disaster
Having seemingly learned nothing, he appears determined to double down on these destructive policies, risking a global downturn.
Desmond Lachman, 11 Feb 2025
Over the next 90 days, countries must work out what America’s president wants
The Economist, 8 April 2025
The trade deficits will remain roughly unchanged — the globe will just end up poorer
Martin Wolf, 9 April 2025
It’s not just bread and circuses any more
Gillian Tett, 11 April 2025
Trump Is Stupid, Erratic and Weak
The disaster of Trumponomics continues
Paul Krugman, 10 April 2025
Adam Tooze, 12 April 2025
This is called "capital flight"
It usually only happens to poor countries, and it never ends well.
Noah Smith, 12 April 2025
Heightened tensions can hurt stock markets, raise government borrowing costs, and pose risks to financial stability
Salih Fendoglu, Mahvash S. Qureshi, Felix Suntheim
April 14, 2025
And, on Fareed Zakaria's show "GPS" on 2024-04-13 Su, Larry Summers wipes the floor with him. Shame on Oren...
Brad DeLong, 14 April 2025
Who's up and who's down
Scott Sumner, 15 April 2025