Monday, 28 January 2013

How to mislead

There is a piece over at Catallaxy by Henry Ergas with supporting points by Sinclair Davidson which purports to show the main reason for the Government being unable to attain getting the budget into the black is Government spending.

Let us unpack the reasoning and see if it stacks up.

Firstly we read
'In 2008-09 and 2009-10, Labor massively increased government spending, taking it to a higher share of GDP than at any time since 1993-94. That surge was meant to be wound back once the economy recovered; but though growth was well above trend by 2011-12, the increase was never reversed, with new spending programs being ramped up as stimulus measures were phased out.'

No mention of the reason for the increase in spending ( where did that GFC go?) No mention that a ratio rises because of two reasons. No mention of how he determines trend.
Also note he implies the growth to combat the GFC continued..

Next we get this.
'As a result, since Labor was elected, per capita government expenditure has increased by 3 per cent a year in real terms, more than double the rate at which it grew under John Howard.'

In this he is being very sneaky and tricky. He keeps the large increase in the first year of the stimulus in the figures to imply the overall increase is still quite large. A look at MYEFO shows that over the years since the stimulus including the latest budget the real increase in spending is 3.9% over 5 years but falls to 1.1% over 4 years and is in fact nil over the last three years.

Given that tax revenues as a % of GDP are the lowest we have seen since Keating was PM then it follows the improvement in the budget position must be in expenditure.
Look at it another way if the government was spending as Ergas is alluding then it would have been adding to GDP but it has in fact been detracting from GDP!

We then get this after a very short paragraph.
'That forecast surge was never plausible: it involved tax collections increasing more rapidly than at any time since 1986-87, when an overheating economy and raging inflation produced a 13 per cent increase in revenues.'

Why would Treasury look at a period of strong economic growth ( so strong inflation rose to quite high levels) to forecast revenues? When one looks at periods when the economy was recovering after tax revenues had taken a strong hit we see rises of 12 and 18%. Wow that changes the story doesn't it.

Just another couple of things to consider.
 Spending  in this current budget will be 23.8% ( down from the peak of 26%). This is below the average of the last Government!
The difference in tax revenues as a % of GDP between this government and the last government is 2.3% of GDP. That's around  a cool $35b!

Wow it is amazing how a story changes when one introduces pertinent facts!

I should add Jonathon Portes has a great take down of those who advocate austerity all the time like Ergas and Davidson do.  It is about the UK but it is easy to see how it would translate to Australia