Opinion & Commentary
The politics of the big number
True or false? The Commonwealth budget surplus is $62 billion. The Prime Minister’s salary is $1,321,000.
Both statements are patently false, but no more so than the claim that personal income tax is being cut by $31 billion.
Each of these figures is in fact a sum over four years.
It might make you feel better to think of your income as a sum over four years, but you wouldn’t want to rely on it as a measure of your financial well-being.
If you, like me, cannot make much sense of budget flows summed over years, why are so many people parroting “$31 billion in income tax cuts”, including some who should know better?
More generally, why are the budgetary effects of tax and expenditure policy changes now routinely presented in this meaningless and misleading way?
Four-year forward estimates, introduced in the 1980s, serve their purpose as a technique for improving medium-term fiscal management. But they were never intended to be summed over four years to produce a “big number” effect. It was government spin doctors that discovered such a use for them and have popularized it under all governments.
Why stop at four years? Most expenditure and tax policies are not subject to sunset clauses and the world does not come to an end after four years. The tax cuts will cost $75 billion over six years and more than $130 billion over ten years. If you want a really big number, why not count the cost in perpetuity, without even bothering to discount for the time value of money?
Before the age of the spin doctor, the usual practice was to quantify budget measures as the cost in the first year of the measure and (if different) the cost in a full financial year. This approach made very good sense. We are conditioned to think of budgets in annual bites, not quadrennial chunks.
In the case of the “$31 billion” election tax cuts, spin is being turned back on the government in the campaign by a section of the commentariat to keep taxes higher than they need to be in the name of fighting inflation. The true cost is not $31 billion, but $7 billion in the first year and $14 billion when fully implemented in 2010-11.
Over three years the cuts are giving back a bit more than a year’s worth of the revenue gain that would normally come from economic growth and bracket creep. After those three years revenue will still be 12 per cent higher.
The election offering is not a huge tax policy change. It can be absorbed by the $300 billion Commonwealth budget without being inflationary. If it forces a bit more discipline on the spending side of the budget to achieve the government’s target surplus, so much the better.
The Rudd government, having had the politics of the big number turned against it, should amend the Charter of Budget Honesty to ban multi-year sums from Commonwealth usage.
Robert Carling is a Senior Fellow at the Centre for Independent Studies.
