Labor: Hide The Increase

Australia’s much-heralded “low” debt-to-GDP ratio statistic appears to be a fraud. Deliberately “adjusted” by the Rudd Government, in order to make their massive debt-funded spending binge appear less than it is.

In the 2009-10 Mid-Year Economic and Fiscal Outlook (MYEFO), the government refers to a change in the methodology used to calculate GDP  for the previous 2008-09 year, and for the historical data series.  This change results in a “substantial increase” in the published level of GDP.

The flow-on result from this change is obvious. The government’s spending, as a percentage of that artificially increased GDP figure, will appear lower than if the change had not been made.

And because all of its spending is being done using borrowed money, the debt-to-GDP figure will also appear lower too. Perfect cover for a government that needs to defend itself from Opposition attacks, and smooth over public fears, about rising government debt.

But there’s more.

In the 2009-10 MYEFO, the Rudd Government changed the methodology used to “adjust” government spending for inflation. The result is that the government’s “real” spending growth % figure is artificially reduced… by a whopping 30.1% for 2009-10.

How can we know this?

In the fine print – isn’t it always? – on the Rudd Government’s Budget 2009-10 MYEFO website, we read:

* The 2008-09 Annual National Accounts show a substantial increase in the level of GDP over history due to the ABS adopting the new System of National Accounts 2008. Given the degree of increase in the level of nominal GDP, the Government has released updated tables of fiscal aggregates contained within Appendix D of the 2009-10 MYEFO.

Let’s take a look at Appendix D. There we read the following:

DEFLATING REAL SPENDING GROWTH BY THE CONSUMER PRICE INDEX

The 2009-10 MYEFO, including the historic series, calculates real spending growth using the consumer price index (CPI) as the deflator. Prior to the 2008-09 Budget the non-farm GDP deflator (NFGDP) was used and has therefore been shown in this statement for comparative purposes. The change from using non-farm GDP deflator to the CPI provides a more accurate depiction of government spending growth.

So, the change “provides a more accurate depiction” of Rudd Labor’s spending growth, does it? How very convenient, for a government that is borrowing more than a billion dollars a week, that has been under pressure from the Opposition since late 2008 over its massively wasteful “stimulus” spending.

There are no prizes for guessing that this “more accurate depiction” effectively reduces the figure for spending growth as a percentage of GDP.

Let’s take a closer look.

From those “updated tables of fiscal aggregates contained within Appendix D of the 2009-10 MYEFO” we see the following:

Now recall the statement above:

The 2009-10 MYEFO, including the historic series, calculates real spending growth using the consumer price index (CPI) as the deflator. Prior to the 2008-09 Budget the non-farm GDP deflator (NFGDP) was used..

Ok. So up to the year 2008-09, the standard methodology was to deflate (ie, reduce) the government spending figure (“Payments”), by a measure called the ‘non-farm GDP deflator’.

But in the 2009-10 MYEFO, the government suddenly decided to change this, and start using the consumer price index (CPI) as a deflator instead. Now, I wonder why they’d want to do that?

If we look at the spreadsheet, we see that the percentage growth in spending for this year 2009-10, is a lower figure by using the CPI deflator. How much lower?

30.1 per cent lower.

By making this retrospective change in the methodology – in the Mid-Year budget report update, you’ll notice – the government’s spending as a % of GDP can be shown as 26.7 per cent. Only a modest increase on the previous year 2008-09.

(When you pause to think about this, it is quite implausible that the government could borrow and spend tens of billions in 2009-10 – on foil insulation, pink batts, Julia Gillard-memorial school halls, First Home Owners Boost, etc –  but still somehow manage to show in the official budget figures just a small year-on-year %-of-GDP increase in government spending).

And in the projections for the next three years, using the new method allows Rudd Labor to show projected growth in government spending that is 8-10% per annum lower than by using the previously standard method.

How convenient. That certainly makes Finance Minister Lindsay Tanner’s much-trumpeted promise to keep real spending growth restricted to 2% per annum so much more achievable, doesn’t it? Simply bodgy up the numbers, and hope noone will dig through the maze to find it. Who would ever suspect such behaviour, from a low-rent solicitor and ex-union hack with zero economic qualifications.

(Note too, that under the previous NFGDP deflator method, the government’s projections show that it would fail to meet its own spending growth promise, in budget year 2012-13)

Rudd Labor have persistently defended their massive spending binge by claiming that our net debt-to-GDP ratio is one of the lowest in the developed world.

Of course it is… when you “adjust” the numbers to make a “substantial increase” in nominal GDP, and artificially reduce your spending growth %-of-GDP figure by 30.1%.

One is again reminded of this great episode of ‘Yes Prime Minister’ – “They’re government statis…. they’re facts” (2.27min)

UPDATE: And this even more relevant episode.