Budget charts

Some quick charts from the 2013-14 Budget papers. First, the revenue forward estimates and projections look far more plausible than they have in a long time. The last time the Budget revenue estimates have looked this plausible was MYEFO in 2009.

While there has been quite a bit said about the size of revenue write-downs since the GFC, these observations should be contextualised with an assessment of the plausibility of past estimates and projections.

On the expenditure side, I am less convinced by the forward estimates and projections. Actual expenses in 2011-12 were $377.7b. The Budget last year projected $376.3b for 2012-13 (you may recall a whole heap of 2012-13 payments were prepaid from 2011-12 to achieve this "no growth" result). This week's Budget papers have the estimate for expenses at $381.4b for 2012-13, up $5.1b. Notwithstanding the $5.1b growth in expenses this year, the out-year estimates and projections in this year's Budget papers are the same or less than they were in last year's Budget papers.

So let's look at the balance statements.

Much is made of Treasury independence and expertise in framing Budget estimates and projections. Do not be fooled by these statements. Budget papers are profoundly political documents: they frame an important narrative for any government in respect of its economic competence. For this reason, they are not left to bureaucrats alone to write. The estimates and projections in the Budget papers are based on hundreds of parameters that are the subject of intense, iterative discussions between senior officials in the Treasury and the Department of Finance and the government of the day (regardless of its hue).

These negotiations are a fine balance. The government wants to maximise its narrative without over-reaching on its immediate and longer-term credibility. This process follows the rules of repeated games under game theory. The need for a government to retain the public's confidence from one year to the next means that Budget parameters and estimates typically lie within a reasonable (market expected) range, with an occasional upside or downside bias. Cumulatively these biases are designed to benefit the narrative of the government of the day.

Earlier in the week, we saw Peter Costello admit that when he was the Treasurer framing his Budget papers, he opted for the conservative estimates for revenue growth from a range presented to him by Treasury. I am unaware of any public statements on Wayne Swan's biases, but my guess is that up until now they have been on the upside for revenue growth.

It will be interesting to see how these estimates and projections are reported when the Pre-election Economic and Fiscal Outlook (PEFO) comes out on or before 23 August 2013. Unlike the Budget papers, the PEFO estimates and projections are not based on parameters negotiated between the Treasury and Finance officials and the government of the day. Indeed, it may have been the possibility of a significant PEFO contradiction that prompted the more conservative estimates of revenue growth over the out years in this year's Budget papers compared with previous years.

Having said that, I do not expect a significant contradiction between the Budget and PEFO. But I will be looking for the odd 25 basis point movement in parameters here and there that cumulatively contribute to a headline movement in the expenses and balance charts above.

Blog holiday

Dear reader, I am heading off for an extended blog holiday.

November 2012 Retail Sales

Over the last three to six months we are seeing shrinking sales across household goods, clothing/footwear, department stores, and cafes, restaurants and takeaways. In total, it looks like retail spending is flat-lining.

In respect of the States, Tasmania is in a contracting world of pain, growth in a number of states is slowing, and Western Australia continues to grow well ahead of the others.

Some things I have not looked at for a while

At 698, the Baltic Dry Index is bottom-feeding again (but still above its February 2012 minimum of 647).

The DEEWR leading indicator rose for the 5th consecutive month in December 2012. Cyclical employment is still heading south.

The growth in trend unemployment (drawing on the ABS and DEEWR payments data).

Commonwealth revenue and expenditure as a percent of GDP

The base chart:

Which some like to interpret in the context of the macroeconomic and/or political environment.

Explanatory notes: In the first of the back-plane coloured charts, the orange areas indicate two or more quarters of decline in real GDP growth (seasonally adjusted, includes zero growth quarters). The yellow areas indicate two or more quarters of decline in real GDP per capita (either seasonally adjusted or in trend terms, noting this selection is interpreted a little capriciously).

In the second chart, the red area indicate Federal Labor governments. The blue areas represent Coalition governments. The light/dark shading indicates parliamentary terms between Federal elections.

Monthly government financial statements

In the lead up to Christmas, the Government released its monthly financial statements for September and October. These statements also saw the government acknowledge that it is unlikely to achieve a surplus this financial year. A quick look at the data is in order. Growth in individual and company tax revenue appears to be slowing.

However, indirect tax is up sharply and growth in total revenue is tracking at a similar (but perhaps slower) rate to previous years.

Note: The source data on the Finance website includes this footnote to Note 2 on Indirect Tax (October 2012), which goes about half way to an explanation for the leap in indirect tax: “(a) As foreshadowed in the September monthly statements, the carbon price mechanism (accrual) revenue will be reported in the October and future monthly statements. The revenue is recorded through the year as emissions occur (no cash payments for the carbon price are due until June 2013). Each monthly outcome will be based on the expected annual results. The October amount includes the full year to date amount since no carbon price revenue was shown in the July, August or September accounts. The October outcome includes around $641 million of revenue related to emissions in October and around $1,922 million related to emissions in the July to September period.” 

The rate of total spending looks like it's ticking up.

The underlying cash balance has not changed much this financial year. However, with revenue growth flat (or declining slightly) and expenditure still growing, it looks like we are no longer closing the gap on the annual deficit.

November 2012 Credit Aggregates

Yesterday the RBA served up its credit aggregates for November 2012. From the first two charts we can see that lower interest rates are not translating into significant borrowing growth. The drop-off in the 6-month annualised line is particularly noticeable.

Let's look at that growth rate in its long-term context.

And a more detailed look at the components.