The Budget: getting the big calls right?

Why is an official 'structural'/cyclical split excluded? The Budget Papers argument that 'it's too hard to measure' is a cop-out answer, really. Besides, an IMF structural Budget estimate is used for international comparison purposes (Budget Paper No. 1, pages 4.29-4.31, and Chart 11).

Cynics will conclude its exclusion suits governments. Boom-time Budget surpluses can be claimed as 'proof' of good Budget management, or used for tax cuts and increasing other entitlements even though these might be unsustainable over the full economic cycle.

The current Government's label for such profligacy is 'sharing the benefits of the mining boom'. Nonsense. Booms are temporary. Their Budget benefits should be used for temporary purposes, especially delivering surpluses to offset Budget deficits when the bust follows. Creating expectations of permanent increases in entitlements financed by forecast revenue increases is even more irresponsible.

Without estimates of the cyclical/'structural' split, governments can have it both ways on the downside too.

The current Government says slowing growth in revenue is structural when much of it is cyclical. To add to the confusion, some Ministers call this a revenue 'contraction'. Then it's argued taxes need to increase. Some Ministers call these increases 'structural saves'. Claiming the tax/GDP ratio is lower than the boom-inflated ratio under the Howard Government is also used to 'justify' tax increases.

By also saying revenues will recover, the Government implies (i) the revenue slump is cyclical, and (ii) boom-time revenues are cyclically average! The structural credibility deficit rises.

The current Government also claims revenue shortfalls were unexpected. Really? Australia's terms of trade have been falling for nearly two years now. This is likely to continue, and more than the Budget forecasts. Globally, the mining industry shows the classic demand-price-supply responses of the 'hog cycle' studied by economics 101 students for well over half a century. As a commodity exporter, Australia has weathered commodity price cycles for centuries.

Besides, basic risk management dictates preserving boom time surpluses to cover busts, even if the timing of the latter cannot precisely be foreseen. Spending the boom's present and expected proceeds – and more – on supposedly permanent entitlement increases is the antithesis of responsible fiscal housekeeping.

The Budget papers should give priority and prominence to the structural Budget balance. That way, we get a fix on the cyclical Budget position over time as well.

The Treasurer says his job is 'to get the big policy calls' right. Quite so. For this, having the right navigation tools is essential.

The 'structural' Budget balance is both policy guide and public justification for fiscal discipline. It's the Budget's GPS.

Without it, the big policy calls can be wrong, and governments can go off course, in one year – or ten.

The 'pathway to surplus' can become a 'runway to ruin'.