Greg Jericho 

Look over there, says Scott Morrison, at the net operating balance

Capital spending increases the budget deficit, so the treasurer wants us to focus on another (usually much smaller) measure
  
  

Scott Morrison
‘For a treasurer of a government that has long talked about the horrors of debt and deficit, it’s not surprising Morrison would have us focus on the smaller number.’ Photograph: Lukas Coch/AAP

Reading the budget papers always involves trying to focus on both the wood and the trees – seeing the big numbers and also the individual impacts. Next week’s budget looks to be one where more than ever the treasurer wants people to focus on the wood – and his new definition of what the wood is – which means more than ever we’ll need to pay attention to the trees.

Budgets involve an absolute mass and mess of numbers, and it’s easy to get lost.

I usually first read the economic tables to check the assumptions that drive the budget projections and then go from there to tables in the appendix. As a rule I treat the “budget overview” with scant regard, as it is often just a political sales pitch. But in Joe Hockey’s first budget, the overview (and nowhere else) contained the line that the government would cut spending to the states for education and health in order to “achieve cumulative savings of over $80 bn by 2024‑25.”

The overview is also where in past budgets the table outlining the impacts on various household types was listed – something that has been absent in the past three budgets.

So there is a lot to look for – not only what is included but also what is left out.

This year the new wrinkle will be to see how debt is treated – both in a government-wide sense and at a portfolio level. The treasurer, Scott Morrison, also appears to be placing a greater focus on a measure called the “net operating balance”.

Now treasurers often try to get the media and voters to focus on measures that tell the best story. Some treasurers even make up their own measure.

Joe Hockey hated that because revenue collapsed during the GFC, the Rudd-Gillard governments were lower taxers than the Howard government. He argued that those ALP governments were really big-taxing governments because you also had to include the budget deficit when considering the amount of money the government took out of the economy.

So he had the Treasury come up with a measure named the “call on resources”, which added revenue and the headline cash balance together.

It was, shall we say, stupid.

It’s the type of measure that only makes sense if you think governments should cut spending when revenue collapses (otherwise known as the “Yes I would like a deep recession” strategy).

No one gave it any heed, and it also failed to make his political argument, because the measure showed that the “call on resources” was actually bigger under the Abbott government than the Rudd-Gillard governments:

When Morrison took over as treasurer, he dumped it.

Morrison’s new favourite measure, the net operating balance, is at least not made up – it is a standard figure that is in all budget papers but it gets little attention.

In essence the net operating balance is the “fiscal balance” minus net capital investment. The fiscal balance is not the same as the “underlying cash balance” (which is the balance we talk about when we talk about a budget deficit or surplus), as it is an accrual measure while the cash balance is (oddly enough) a cash measure.

And that right there might be the most boring paragraph I’ve ever written. I hope you all stayed awake.

So what do we really need to know? Why is Morrison focussing on this measure?

Basically Morrison likes the net operating balance because it does not include capital spending outlays and thus focuses more on recurrent spending. As a result, the net operating deficit is usually smaller than the standard “budget deficit”.

The two, however, move largely in line with each other, but the gap has widened a bit recently. Last December’s mid-year economic and fiscal outlook projected the net operating deficit in 2019-20 to be just $1.3bn, compared with the budget deficit of $9.99bn:

The reason for the difference is the increase in projected capital spending – i.e., spending on infrastructure:

By 2019-20 capital investment is currently projected to reach around 0.3% of GDP – the highest since the tail-end of the GFC stimulus in 2011-12.

The suspicion is that next week’s budget will contain even more investment spending. Such spending would increase the budget deficit, but it would not affect the net operating balance.

So clearly, for a treasurer of a government that has long talked about the horrors of debt and deficit, it’s not surprising that Morrison would have us focus on the smaller number – especially as our debt levels are now well above where they were three years ago:

But to what end is this infrastructure spending?

The one budget figure that I like to focus on (journalists, like politicians, have their favourite measures) is the projected growth of demand:

Demand in the economy has been incredibly weak in the past few years, and government demand – especially in 2014-15 – has done little to help. It will be interesting to see if Morrison’s budget will take a very active approach towards firing up the economy, or if for all his talk about infrastructure, there appears little immediate impact on the economy.

But we need to always remember that a budget balance – whether underlying cash or net operating – is not an end in itself.

Do we wish for a net operating surplus if it comes via cuts to education or health spending, or because the indexation on pensions is reduced, or because students will have to pay more for their degrees?

Cutting taxes on those earning over $180,000 and cutting welfare spending affects the net operating balance as much as it does the standard budget balance.

Chasing a surplus of one measure is not inherently more sensible than the other – especially if the method used to achieve that surplus involves policy that would increase inequality.

It’s why focussing on the “wood” in a budget is all well and good, but the “trees” matter a great deal.

 

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