TOMORROW NEVER KNOWS
Surpluses and surprises notwithstanding, a worsening fiscal outlook in the medium term
We started this blog about a year ago. Our idea was to publish one post a week on average on a policy relevant issue that we cared about. We started reasonably well, but failed to live upto our own expectation.
What happened?
To quote former British Prime Minister Harold Macmillan, ‘Events, dear boy, events’.
Events, the stuff of life, had consumed our time, and the blog has suffered. Our apologies to the reader. We want to be more regular in the coming months.
We want to post regularly, but I hesitate to say that we will, because tomorrow never knows!
Of course, governments cannot hide behind the ‘who knows about the future’ line — they have to publish budgets laying out future trajectories of revenue, plans for expenditure, and a strategy to ensure that public finances are on a sound footing after the taxes are collected and the sums are spent.
Last May, Jim Chalmers was expected to be the first Labor Treasurer since Paul Keating to deliver a surplus. In the event, budget surplus in 2022-23 fiscal year was 0.9 percent of GDP, instead of the 0.2 percent expected on Budget night. Chalmers budgeted for a deficit of 0.5 percent of GDP in 2023-24 fiscal year. This is now expected to be a surplus of 0.3 percent of GDP.
Of course, Treasurer Chalmers is forecasting a deficit of 1 percent of GDP for the budget year (2024-25). If history is any guide, chances of him achieving three straight surpluses is pretty low.
During the business cycle between the early 1990s recession and the COVID-19 pandemic, the underlying cash balance improved by at least one percentage point between budget forecast and the final budget outcome on only three occasions: 1.2 percentage points in 1999-2000, when Peter Costello achieved a 2 percent of GDP surplus; another 1.2 percentage points in 2004-05, when Costello achieved a surplus of 1.5 percent of GDP; and 1 percentage point in 2017-18, with Scott Morrison achieving a deficit of 0.6 of a percentage point.
Chart 1 shows the evolution of the underlying cash balance against budget forecasts and projections since 1990-91. It is clear that the medium term fiscal outlook is one of deficits to 2027-28.
Chart 2 shows that the 1.1 percentage points deterioration in the underlying cash balance over the medium-term (that is, from the current year to the end of the projection horizon) is the second largest since medium-term projections begun in 1997-98 — the largest being the 1.2 percentage points deterioration projected in last year’s budget.
This prompts me to ask the same questions as last year: Do we have a looming fiscal problem? Are we reaping economic and fiscal benefits that cannot endure? Salvaging the flotsam and jetsam of a tempest that will ultimately wreck the whole ship?
After all, tomorrow never knows!
Further reading (about stuff that we found interesting, without necessarily agreeing with, and may or may not write about in future)
The Best Books on Taxes and Taxation
recommended by Joel Slemrod & Michael Keen
26 May 2021
The effects of fiscal measures during COVID-19
The authors find that fiscal policy announcements have been effective in stimulating economic activity, boosting confidence, and reducing unemployment, but their effect varies by the type of measure and the stage of the pandemic.
Naihan Yang, Nour Tawk, Davide Furceri,
Jonathan D. Ostry, Pragyan Deb,
2 Feb 2022
In praise of the Internal Revenue Service
The much-maligned tax agency, battered by the pandemic, has kept the economy going
The Economist, 16 April 2022
The case for a land value tax is overwhelming
Natural resources are quite different from the capital stock created out of human effort
Martin Wolf, 5 February 2023
How to improve economic forecasting
Myopia and groupthink mean this science is not as evolved as it could be
Nicholas Gruen, 29 August 2023
An Age of Austerity is probably on the way
It's not the 2010s anymore.
Noah Smith, 18 Sep 2023
Housing Affordability Remains Stretched Amid Higher Interest Rate Environment
Prospective home buyers face high prices and elevated borrowing costs, while homeowners refrain from listing their properties
Nassira Abbas, Corrado Macchiarelli
January 11, 2024
What we really know about the global economy
From demography to technology, we must pay attention to the forces that will certainly shape our future
Martin Wolf, 17 Jan 2024
Will politics or economics win out in 2024?
The belief that demand cycles trump supply-side issues needs updating
Gillian Tett, 26 Jan 2024
Budgetary policy is so difficult that most countries in the west are unlikely to live happily ever after
Chris Giles, 14 Feb 2024
World Must Prioritize Productivity Reforms to Revive Medium-Term Growth
Without ambitious steps to enhance productivity, global growth is set to fall far below its historical average
Nan Li, Diaa Noureldin, April 10, 2024
Britain’s second-most-important tax is riddled with holes
The Economist, 22 April 2024