Fiscal stimulus in an age of debt: how much stimulus are we - - PowerPoint PPT Presentation

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Fiscal stimulus in an age of debt: how much stimulus are we - - PowerPoint PPT Presentation

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Fiscal stimulus in an age of debt: how much stimulus are we planning? Economic and social outlook conference John Daley, CEO, Grattan Institute 20 July 2017 How much stimulus are we planning? Projected fiscal tightening has not happened

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Fiscal stimulus in an age of debt: how much stimulus are we planning?

Economic and social outlook conference John Daley, CEO, Grattan Institute 20 July 2017

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How much stimulus are we planning?

Projected fiscal tightening has not happened

  • Reality has not matched repeated projections of return to budget balance
  • Projections for nominal GDP, wages, and revenues were too high

Budget projection methodology makes fiscal plans unreliable

  • Asymmetrical projections – risks not evenly balanced
  • Assume short economic cycle, and amplify optimism by assuming output gap closed
  • Assume the world hasn’t changed

So we are stimulating more (and repairing the budget less) than planned

  • Budget repair relies on bracket creep rather than measures
  • Transport spending remains relatively high
  • Governments have forecast-led denial about need for budget repair
  • Realpolitic suggests we need a pessimism-generator

Correctives

  • More judgement and common sense
  • What is trend (over what period)? How long the cycle? Is spare capacity absorbed?
  • What are the institutional barriers to change?
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Financial year ending

Source: Grattan analysis of Commonwealth Budget Papers 2010-11 to 2017-18

We have been planning (and failing) to tighten for 8 years

Actual and projected Commonwealth underlying cash balance, % of GDP

  • 5
  • 4
  • 3
  • 2
  • 1

1 2009 2011 2013 2015 2017 2019 2021 2014 2015 Actual Projection made in 2017 2016 2010 2012 2013 2011

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4

  • 7
  • 5
  • 3
  • 1

1 3 2009 2011 2013 2015 2017 2019

Lack of fiscal tightening mostly due to revenue surprises, not policy choices

Cumulative change in budget outcome from initial projection to reality

  • r latest, % of GDP

Net change in budget position Spending parameter changes Spending policy changes Revenue policy changes Revenue parameter changes

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Source: Grattan analysis of Commonwealth Budget Papers 2010-11 to 2017-18

The gap is growing between projected and actual personal income tax

Actual and projected personal income tax receipts, $ billions Financial year ending 120 140 160 180 200 220 240 260 2010 2012 2014 2016 2018 2020 Actual 2016 2015 2014 2012 2013 2011 2017 ~$16b ~$26b

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Source: Grattan analysis of Commonwealth Budget Papers 2010-11 to 2017-18

Fiscal projections have also missed for company, super, and capital gains tax

Actual and projected tax receipts, $ billions

40 60 80 100 2010 2012 2014 2016 2018 2020 Company tax 5 10 15 20 25 2010 2012 2014 2016 2018 2020

2017

Capital gains tax Actual Financial year ending

Includes capital gains tax from individuals, companies & super funds

2013 2016 2015 2014 2012 2011 2017

Actual

2013 2016 2015 2014 2012 2011

5 10 15 2010 2012 2014 2016 2018 2020 Superannuation taxes

2017

Actual

2013 2016 2015 2014

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How much stimulus are we planning?

Projected fiscal tightening has not happened

  • Reality has not matched repeated projections of return to budget balance
  • Projections for nominal GDP, wages, and revenues were too high

Budget projection methodology makes fiscal plans unreliable

  • Asymmetrical projections – risks not evenly balanced
  • Assume short economic cycle, and amplify optimism by assuming output gap closed
  • Assume the world hasn’t changed

So we are stimulating more (and repairing the budget less) than planned

  • Budget repair relies on bracket creep rather than measures
  • Transport spending remains relatively high
  • Governments have forecast-led denial about need for budget repair
  • Realpolitic suggests we need a pessimism-generator

Correctives

  • More judgement and common sense
  • What is trend (over what period)? How long the cycle? Is spare capacity absorbed?
  • What are the institutional barriers to change?
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Actual and projected growth in nominal wages, per cent Financial year ending

2017 budget doubles down: increases forecast wage growth as reality goes lower

1.5 2.0 2.5 3.0 3.5 4.0 4.5 10 11 12 13 14 15 16 17 18 19 20 21

Notes: Total hourly rates of pay excluding bonuses, private and public wages Source: Grattan analysis of Commonwealth Budget Papers 2010-11 to 2017-18

2010 2012 2013 2014 2015 Actual 2016 Projection made in 2011 2017

If wages instead grow at 2%, tax collections will be $12.6 billion lower in 2021

Assumptions:

  • Return to trend
  • ‘Close output gap’

= If currently below trend, then project above trend

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Unemployment rate (%)

The disappearing and supposedly reappearing Phillips curve

  • 5

5 10 15 3 4 5 6 7 8 9 10 11 12 Growth in employee compensation (%)

Notes: Employee compensation is total remuneration of employees including wages, ad hoc bonuses, termination payments and in-kind benefits Source: Based on NAB analysis of ABS Labour Force data

Pre-1990s

1990 1985 1980

Post-boom

2015 1995

1991-1997

1991

1998-2013

2000 2005 2010 2008 1998 2009

Budget projection

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How much stimulus are we planning?

Projected fiscal tightening has not happened

  • Reality has not matched repeated projections of return to budget balance
  • Projections for nominal GDP, wages, and revenues were too high

Budget projection methodology makes fiscal plans unreliable

  • Asymmetrical projections – risks not evenly balanced
  • Assume short economic cycle, and amplify optimism by assuming output gap closed
  • Assume the world hasn’t changed

So we are stimulating more (and repairing the budget less) than planned

  • Budget repair relies on bracket creep rather than measures
  • Transport spending remains relatively high
  • Governments have forecast-led denial about need for budget repair
  • Realpolitic suggests we need a pessimism-generator

Correctives

  • More judgement and common sense
  • What is trend (over what period)? How long the cycle? Is spare capacity absorbed?
  • What are the institutional barriers to change?
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0.0% 0.1% 0.2% 0.3% 0.4% 0.5% 0.6% 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Commonwealth is planning to increase transport infrastructure spending

Actual and projected C’wth spending on transport projects, per cent of GDP 2013 Projection made in 2015 2016 2017 2011 2012

E-W payment

2014 Financial year ending Note: Inland Rail and Western Sydney Airport

  • ff budget
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Budget balance 2020-21 budget outcome compared to 2016-17 outcome, $2017 billions

Budget deficit 2016- 17 2016-17 Budget measures Fiscal drag Other revenue Spending restraint Initial deficit growth at nominal GDP Other (Future fund, non-fin asset impacts) Budget surplus 2020- 21

Most of the planned structural repair depends on fiscal drag

Denotes improvement in budget balance 38 7 37 3 5 7

7

  • 50
  • 40
  • 30
  • 20
  • 10

10 20

Variance from GDP growth

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  • 25
  • 20
  • 15
  • 10
  • 5

5 10 15 20 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Budgets have included some structural repair measures, but not many

Contribution of budget measures to fiscal balance at end of four years $bn budget measures

Source: Grattan analysis of historical Budget Papers, MYEFO and PEFOs

Spending measures Revenue measures Year of budget announcement Net impact

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Forecast-led denial is a bipartisan affliction

Sources: Treasurer's budget speech 2011-12; 2015-16; 2016-17

We are on track for surplus in 2012-13, on time, as promised — and this provides the solid foundations for the targeted investments we announce tonight. This budget keeps us on a sustainable path to bring the budget back to balance. I can report tonight that despite the headwinds, our timetable back to a Budget surplus is unchanged from last year.

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How much stimulus are we planning?

Projected fiscal tightening has not happened

  • Reality has not matched repeated projections of return to budget balance
  • Projections for nominal GDP, wages, and revenues were too high

Budget projection methodology makes fiscal plans unreliable

  • Asymmetrical projections – risks not evenly balanced
  • Assume short economic cycle, and amplify optimism by assuming output gap closed
  • Assume the world hasn’t changed

So we are stimulating more (and repairing the budget less) than planned

  • Governments have forecast-led denial about need for budget repair
  • Transport spending remains relatively high
  • Budget repair relies on bracket creep rather than measures
  • Realpolitic suggests we need a pessimism-generator

Correctives

  • More judgement and common sense
  • What is trend (over what period)? How long the cycle? Is spare capacity absorbed?
  • What are the institutional barriers to change?
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Reviews have not led to agile reform

Errors Forecast model Review of Treasury macroeconomic and revenue forecasting (2012)

  • Nominal GDP and tax revenue projections:

little evidence of bias over two decades

  • BUT forecast errors correlated with

economic cycle

  • Recommended

new economy-wide model to be embedded into forecasting Review of Treasury macroeconomic forecasting capabilities (2015)

  • Too rigorous adherence to models – not

enough judgement

  • Risk that short-term forecasts are anchored

by long run projections

  • Endorsed

recommendation for economy-wide forecasting model Review of economic modelling at Treasury (2017)

  • Forecasts should be adjusted based on

judgement – views of sectoral experts, surveys, business liaison, views of senior staff

  • Models should use historical evidence of

adjustment process rather than mechanical assumption

  • Endorsed

recommendation for economy-wide forecasting model

  • Macro-econometric

model should span forecast and projection period

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Treasury projections have been optimistic

1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 2009 2011 2013 2015 2017 2019 2021

Note: Consensus forecasts as at May each year Source: Tim Robinson, presentation to Melbourne Economic Forum, Asia Pacific Consensus Forecasts, ABS, Budget Papers, Grattan

Nominal wages growth Actual Treasury projections

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… and professional forecasters even more

1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 2009 2011 2013 2015 2017 2019 2021

Note: Consensus forecasts as at May each year Source: Tim Robinson, presentation to Melbourne Economic Forum, Asia Pacific Consensus Forecasts, ABS, Budget Papers, Grattan

Consensus of professional forecasters Nominal wages growth Actual Treasury projections

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How much stimulus are we planning?

Projected fiscal tightening has not happened

  • Reality has not matched repeated projections of return to budget balance
  • Projections for nominal GDP, wages, and revenues were too high

Budget projection methodology makes fiscal plans unreliable

  • Asymmetrical projections – risks not evenly balanced
  • Assume short economic cycle, and amplify optimism by assuming output gap closed
  • Assume the world hasn’t changed

So we are stimulating more (and repairing the budget less) than planned

  • Budget repair relies on bracket creep rather than measures
  • Transport spending remains relatively high
  • Governments have forecast-led denial about need for budget repair
  • Realpolitic suggests we need a pessimism-generator

Correctives

  • More judgement and common sense
  • What is trend (over what period)? How long the cycle? Is spare capacity absorbed?
  • What are the institutional barriers to change?
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Old slides

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Financial year ending

Source: Grattan analysis of Commonwealth Budget Papers 2007-08 to 2017-18; Chart 3 Statement 7, Budget Paper No.1, 2016-17 Budget

Forecasts consistently over-pessimistic before GFC; over-optimistic after

Actual and forecast nominal GDP growth

  • 4
  • 2

2 4 6 8 10 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Forecast (1 year ahead) Actual GFC

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0% 1% 2% 3% 4%

Other nations use more judgement and are less optimistic

Real GDP growth 2021 (projection) 2017 actual 0% 1% 2% 3% 4% Wages growth UK (OBR) US (CBO) Aust Canada NZ UK (OBR) US (CBO) Aust NZ

Source: Grattan analysis of latest economic projections by CBO (US), OBR (UK), NZ Treasury and Canadian Department of Finance

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Government spending on transport infrastructure remains at historic highs

0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2%

Railways Roads, subdivisions, bridges

Notes: By financial year. Includes work done by the private sector for the public sector. Does not include ports. Source: ABS Engineering Construction Activity, Australia, Table 11.

Engineering work done for the public sector as a proportion of GDP Per cent 90 95 00 05 10 15

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0% 10% 20% Sydney Melbourne Brisbane Adelaide Perth 0% 10% 20% 30% Rest of NSW Rest of VIC Rest of QLD Rest of SA Rest of WA % of national economy (2014-15) % of population growth (2004-14) % of road & rail investment (2006-15) State Commonwealth Size Size and transport infrastructure spending % of Australian total

Government transport spending has not targeted growth in economy or population

Source: Grattan Institute, Roads to Riches

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0.0 0.5 1.0 1.5 2.0 2005 2007 2009 2011 2013 0.0 0.5 1.0 1.5 2.0 2005 2007 2009 2011 2013 Sweden Australia Canada Investment Sweden NZ Maintenance Australia

Australia focused on building new infrastructure, rather than maintenance

Japan UK Japan UK Canada Transport infrastructure spending as proportion of GDP NZ

Source: Grattan Institute, Roads to Riches

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Unemployment rate (%)

The disappearing and supposedly reappearing Phillips curve

5 10 15 20 3 4 5 6 7 8 9 10 11 12 Growth in employee compensation (%)

Notes: Employee compensation is total remuneration of employees including wages, ad hoc bonuses, termination payments and in-kind benefits Source: Based on NAB analysis of ABS Labour Force data

Pre-1990s 1990-2009 Post-GFC Budget forecasts

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Other economic forecasters have also been

  • ver-optimistic …

1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 2009 2011 2013 2015 2017 2019 2021

Note: Consensus forecasts as at May each year Source: Tim Robinson, presentation to Melbourne Economic Forum, Asia Pacific Consensus Forecasts, ABS

Nominal wages growth Actual Consensus of professional forecasters