FactCheck: is deficit, debt and the spending trajectory of the previous government on the wane?

The Final Budget Outcome for 2014-15 shows that the government is continuing to reduce the deficit and debt and is lowering the spending growth trajectory of the previous government. – Joint media release from Finance Minister Mathias Cormann and then-Treasurer Joe Hockey, September 21, 2015.

The government likes to say it’s driving down the deficit, debt and spending. But the ABC Fact Check Unit found last year that Shadow Treasurer Chris Bowen was right to say that the government has doubled the deficit.

Who is right?

Estimates versus outcomes

The statements in the media release are based on a comparison between the Final Budget Outcomes for the 2014-15 financial year and the estimates at the time of the 2015-16 Budget.

Based on this comparison, Cormann and Hockey’s statement checks out. In particular, cash deficit and net debt in 2014-15 turned out to be lower than estimated at the time of the 2015-16 Budget.

However, comparing final outcomes with estimates does not tell us much about how this government has fared at reducing the budget deficit and net debt since they took power. In this regard, a comparison between final outcomes across different financial years is more meaningful.

The historical data for this comparison are available from Appendix B of the Final Budget Outcome 2014-15 document. The three fiscal aggregates of interest are the underlying cash balance, the fiscal balance, and the net debt.

The underlying cash balance and fiscal balance are both measures that show whether the government has to borrow from financial markets to cover its spending.

The cash balance is a cash measure obtained as the difference between receipts (excluding Future Fund earnings) and payments. The fiscal balance, by contrast, is an accrual measure computed as revenues net of expenses from operations plus revaluation adjustments and capital adjustments.

The net debt is a common measure of the strength of the Government’s financial position and comprises selected financial assets and liabilities. It is the difference between the amount the government borrows and the amount it lends.

The chart below reports the three fiscal aggregates, expressed in millions of Australian dollars, for the last five years.

This same data is presented as percentages of Gross Domestic Product (the value of total production in Australia in a year) below.

Deficit and debt

In looking at the historical data, it is important to consider that the Labor government presented the 2013-14 budget in May 2013, but the Coalition government was in office for most of the 2013-14 financial year. This makes the Coalition government formally responsible for the 2013-14 Final Budget Outcomes.

The cash and fiscal balance present qualitatively the same picture. The budget deficit has been reduced since 2013-14. However, the deficit in 2014-15 is quite significantly above the deficit recorded in 2012-13, which was the last financial year completed by a Labor government.

Net debt instead has continued to rise since 2010-11. Table B5 of the Final Budget Outcome released in September shows that, in particular, net debt in 2014-15 is $A238.7 billion. While this is $11.5 billion lower than estimated at the time of the 2015-16 budget, it is still two full percentage points of GDP higher than in 2013-14 and 4.7 percentage points of GDP higher than in 2012-13.

Overall, the budget deficit in 2014-15 has decreased compared to the previous financial year, but is still higher than what was observed when the Labor government was last in office, while net debt continues to rise.

Spending growth trajectory

With respect to spending, The Conversation asked a spokesperson for Cormann to clarify the meaning of “lowering the spending growth trajectory of the previous government”. The spokesperson sent the following by email:

When we came into government we inherited spending growth of about 3.7% above inflation on average per annum, which we have brought down to about 1.5% on average per annum above inflation so far. The improvement in the budget bottom line for 2014/15 of more than A$3 billion was driven by government spending being $2.9 billion lower than expected. This is a 0.3% drop in spending from the previous year, in real terms.

You can read the full response here.

The 3.7% growth figure may have been taken from the National Commission of Audit, which reported that it:

expects real growth in payments to increase materially from 2016-17 to 2023-24 to an average rate of 3.7% per year.

Again, this is a projection, not a final observed outcome. For a comparison between actual historical spending data, we can use the information available from Table B1 of Appendix B of the Final Budget Outcome 2014-15. These data are reproduced in the chart below.

The chart reports general government payments (cash data) in millions of dollars and as a percentage of GDP. The chart also shows the real growth rate of payments. Real in this case means “at constant prices”; that is, excluding the increase due to inflation. This is achieved by using a deflator. Two deflators are used to construct the series in the table: one is the Consumer Price Index and the other is based on the non-farm GDP (that is, GDP excluding production in the agriculture sector).

The growth dynamics differ depending on which of the two series you are looking at. The series based on the CPI effectively shows a reduction in 2014-15 compared to 2013-14, which however saw a very large spending increase compared to 2012-13. The series computed from the non-farm GDP deflator indicates that spending increased 2014-15, even though at a slower rate than the year before.

The annual average growth rate of spending in the two years of the Coalition governments was 3.75% (based on CPI). The annual average over the period 2010-2013, which corresponds to the Gillard/Rudd government was 0.4%.

As a proportion of GDP, spending in 2014-15 remained significantly higher than under the previous Labor governments.

As noted in the joint media release, government spending is $2.9 billion lower than expected. But again, a comparison of historical data indicates that there is not much evidence of downward trajectory compared to the period of the Labor governments.

Verdict

The data from Appendix B of the Final Budget Outcome 2014-15 show that:

• The cash balance and fiscal balance in 2014-15 have been reduced compared to 2013-14, but they are still above their level in 2012-13, the last year the Labor government was in office
• Net debt has increased in 2014-15 compared to the previous year
• Spending decreased in 2014-15 compared to previous year
• However, spending was already decreasing in 2012-13 and in 2014-15 spending as a proportion of GDP is 1.5 percentage points higher than in 2012-13.

So it’s true the government is “continuing to reduce the deficit and debt” compared to the 2013-14 budget estimate of where we would otherwise have been now. However, debt and deficit are still in worse shape now than they were before the government took office.

And there is not much evidence of downward trajectory compared to the period of the Labor governments.

Review

Overall, this is a good and fair FactCheck. The use of the Final Budget Outcome figures is correct. As they are final figures, they supersede the estimates contained in the 2015-16 Budget. It can also be noted that, in part, the net debt levels are burdened by interest repayments on previous government borrowing, with annual interest repayments on federal government debt almost $A11 billion for 2014-15. – Phil Lewis and Anne Garnett

Fabrizio Carmignani receives funding from the Australian Research Council for a project on the estimation of the piecewise linear continuous model and its applications in macroeconomics.

Anne Garnett has received funding from the ARC and NCVER in the past.

Phil Lewis does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article. He also has no relevant affiliations. During his career he has received funding from many private and public sector organisations including most recently the ARC, NCVER, DEEWR, the AFPC, ABLA and CPA Australia. He recently contributed to a major CEDA report Australia’s Future Workforce.