Budget (or Star Trek) in The Age

In The Age today, I attempt to make the budget more interesting by using a trick from Star Trek.

[DDET Click here to read the article]

Going boldly backwards

Joshua Gans, The Age, 14th May, 2009

The Government, in the face of world economic turmoil, has stayed the course.

FINALLY, after a long wait, coupled with various leaks, it was released. The latest Star Trek movie came out just last week, and it didn’t disappoint. It was a modern update of old themes that pleased most and was satisfying, provided you didn’t think about the plot too much.

The same can be said of the federal budget. The themes are as old as macroeconomics — expect to lose tax revenue in a recession but don’t try to claw back expenditure because this will cost you prolonged woes. But there is a modern twist, ranging from new infrastructure projects to research spending tantalisingly titled “Super Science”. In the end, it is hard to know what to make of it all, and the last thing anyone wants to do is think too hard about it.

So how do we evaluate whether the Treasurer is doing the right thing or not? It turns out that an old trick from Star Trek works well: we can ask, what if things were different if we went back and changed something in the past? What would have changed?

Today’s media are full of a big “what if” counter-factual: What if the Opposition (both past and current) were in charge today? What would the budget have looked like?

This is hard to answer, and the Opposition does not yet have an answer for it. The only thing we have heard is that it would have brought forward tax cuts rather than given out stimulus cheques. But it is unclear whether that would have changed the deficit magnitude. The smart money is surely on the proposition that nothing would have changed.

Sadly, that helps us little in evaluating the budget’s appropriateness. So let me ask another “what if”: What if the financial crisis had not happened? Yes, I know it was inevitable, but exactly one year ago that inevitability was not in the budget papers. Let’s see where the speculation takes us.

We can assume that since the Government religiously kept its election promises now, it would have done the same without a $200 billion revenue shortfall.

That means tax cuts, pension increases, parental leave, education and research expenditure increases and also pretty much the same level of spending on infrastructure as was laid out last year. We just didn’t know which shovels would start breaking ground.

It is also likely that some schemes would have been more generous. Pension and social security increases may have been higher, while parental leave provisions would be occurring now rather than in 18 months. That adds to a higher expenditure level than we are going to have but, against that, it is also safe to say that the two rounds of stimulus cheques would not have been mailed. For most people, the crisis may have taken with one hand and given with the other. All that has changed is a substitution of short-term for long-term policy rationales.

Finally, there is the carbon pollution reduction scheme. Even though the legislation is yet to pass, this is the first budget where the projected revenues from the auction of permits have been recorded in the forward estimates. The Government expects to receive $4.47 billion in 2011-12 (when the scheme will bring in $10 per tonne of carbon) and $12.99 billion in 2012-13 (when the auction runs). These figures are presumably based on the unconditional emission targets rather than those that would come with a global agreement.

The financial crisis probably affected the scheme in two ways. First, it made the Government cautious in its unconditional target. We may have had 10 per cent rather than 5 per cent to win broader environmental support. Greater reduction would have increased revenue projections. But, second, the scheme was delayed — effectively for two years.

This was done because hitting businesses with such a big reform now would have harmed recovery from the recession. This delay poses little consequence for the environment. After all, a carbon price is designed to impact on investment choices and few of these involve assets with useful lives of less than two or three years.

But the delay had major fiscal consequences. Had the scheme begun in 2010-11, it could possibly have added $18 billion to $22 billion to the budget’s bottom line over the two years from 2010 to 2012. Indeed, next year’s deficit would be significantly lower than this year’s. In this light, the hard budgetary choice was taken a couple of weeks ago when the Government revised its climate change policy. And it will also drive the projected level of public debt even higher if the policy is delayed further by failing to pass into law before the next election.

The picture here is clear. In our Star Trek mirror universe without the global financial crisis, the Government’s decisions would probably have been remarkably similar to what we had as of Tuesday. For all the talk that the global financial crisis has changed everything, it has done little.

To be sure, we have moved into record deficits rather than kept the surplus. But that was the economy, not the result of reactive government action.

The only conclusion we can reach is that the Government, in the face of world economic turmoil, has stayed the course. We should consider ourselves fortunate that we had that luxury.

Joshua Gans is professor of economics at Melbourne Business School, University of Melbourne. He contributes to the economics.com.au blog.