Treasurer Joe Hockey and Finance Minister Mathias Cormann explain money matters during the week. Photo: Alex Ellinghausen
ON THE surface the elections costing figures released by the Parliamentary Budget Office this month were good news for the government, appearing to confirm that the Coalition will generate healthy surpluses in years to come.
But a closer look at the statements raises serious questions about the bottom-line estimate that the Coalition's commitments will increase the underlying cash balance by $7.1 billion over the forward estimates period.
Figures that are in doubt include those for the paid parental leave scheme; about $4 billion worth of the savings measures proposed to offset the non-collection of the carbon tax; estimates for the cost of combating people smuggling and border security measures; and the estimated $5.2 billion saved from cutting the public service by 12,000.
In addition, the PBO points out that other policies will have significant long-term adverse budget implications, increasing costs and reducing revenue.
Before the election Prime Minister Tony Abbott and Treasurer Joe Hockey repeatedly defended their claim that their policies would improve the budget bottom line, saying their policies had been costed by the PBO. They also criticised the reliability of Treasury budget figures.
Central to the Coalition's election campaign were the promises to abolish the carbon tax and the Minerals Resources Rent Tax. It is now clear that the Coalition intends to collect these taxes for the present financial year with the MRRT expected to generate $700 million this financial year and the carbon tax $6.47 billion.
Abolition of these taxes will cut revenue over the following three years of the forward estimates by $3.5 billion for the MRRT and $9 billion for the carbon tax.
To offset this significant drop in revenue, the Coalition proposes several savings measures.
But the PBO report reveals that the estimated savings from many of these measures are of low reliability. These include the $1 billion saving for discontinuing business compensation measures in the clean energy future fund; $775 million for abolishing carbon tax measures no longer needed; $2.9 billion for discontinuing instant asset write-offs; and $405 million for discontinuing the phase-down of interest withholding tax.
When the PBO released its report on a Friday afternoon (October 18) the media paid it little attention. Mr Hockey and Finance Minister Mathias Cormann claimed their costings had been vindicated, saying the report showed their policies would lead to a substantial improvement of the budget bottom line.
They claimed the PBO's finding that the Coalition's combined election commitments would increase the underlying cash balance by $7.1 billion was $1 billion better than the Coalition had estimated at the time of the election.
But they never mentioned the low reliability of many of the estimates.
In addition there are other reasons why the Hockey-Cormann claim is potentially misleading.
A major contributor to the cash-balance bottom line figure is a $5.6 billion cut in loans and equity investments resulting from the abolition of the Clean Energy Finance Corporation.
Now the first thing to be noted about these loans, or investments, is that while continuing with them would have reduced the government's cash balance, they would also have been assets in the Corporation's books.
Loans get paid back. When a bank lends you $350,000 for a house, its cash balance falls by that amount but it also has a $350,000-plus asset on its books - the debt you owe. That is how banks make money, as we all know.
The budget cash balance drop resulting from the Clean Energy Finance Corporation's investments would be exactly matched by the value of these investments in the corporation's books.
Stopping the investments makes no difference to our net asset position.
Similarly, the touted sale of Medibank Private would do nothing to improve the nation's net position. It simply changes the form of our assets, selling off a profitable business built up by past generations, to reduce existing debt.
As Australia does not have a debt problem, there is no real need for this.
The other big Coalition reduction in expenditure that the PBO notes is the $4.2 billion cut in the investment in NBN Co.
Whether this saving is achieved remains to be seen.
But there is also the question of how you view this expenditure and how much you regard fibre to the home as productive infrastructure.
If you see this additional expenditure as excessive and principally enabling additional consumer spending on entertainment, then it is a negative in the budget bottom line; but if you see it as providing the community with $4.2 billion worth of productive infrastructure from which business opportunities will emerge, then it is a worthwhile asset.
The PBO points out the abolition of the MRRT and carbon tax will result in reduced revenue beyond the forward estimates period.
Were they to continue, these taxes would fund government services into the future, thus making a positive contribution to the structural balance of the budget.
The PBO points out that the amount of this revenue forgone is very difficult to estimate.
Treasury agrees, saying before the election that the carbon price path to 2020 was subject to considerable uncertainty and the MRRT estimates were highly sensitive to assumptions of production volumes, capital deductions, commodity prices and the exchange rate.
But uncertainty does not mean zero revenue.
By some accounts the good days from the MRRT were yet to come. In the initial years the miners were allowed considerable deductions but as the mines move solidly into the production phase, the deductions decline and government coffers get boosted.
Another big ticket item that is not accounted for in the total underlying cash balance picture the government applauds is the significant negative impact on the government's long-term financial position caused by the decision to increase the indexation of military superannuation.
This has a cash cost of $58.1 million over the next four years but massively boosts the overall superannuation obligation, decreasing net worth by about $4.4 billion by 2016-17.