Welcome to Budget 2019-20, where the future is bright and the horizon is clear of danger – apart from the dangers which the budget papers themselves warn about but bizarrely ignore.

This year’s budget is an odd mix of tax cuts and spending measures targeted to win an election, but with assumptions so joyous and optimistic that you could be forgiven for thinking the Liberal party wants to lose just so it can blame the ALP for not living up to their predictions.

Treasurer Josh Frydenberg’s 2019 budget speech – in full Read more

Before we get to the fanciful economics outlook, first the numbers:

Once again we find it’s always easier to deliver a surplus with lots of revenue.

The budget forecasts total revenue to rise to 25.4% of GDP in 2021-22 – the highest level since 2005-06:

And while they expect revenue the likes of which has not been experienced since the GFC, spending remains well above pre-GFC levels.

The government is not forecasting a big surge in spending but neither is it heading down the austerity path.

Indeed the big jump in the budget balance happens next year, when the budget is projected to go from a $4.1bn deficit to a $7bn surplus.

You might think that switch from a deficit of 0.2% of GDP to a surplus of 0.4% of GDP would be the start of ever growing surpluses. But no, the projected surpluses are now actually smaller in 2020-21 and 2021-22 than was predicted in the December midyear economic and fiscal outlook.

Whereas in December the treasurer was predicting surpluses of 0.6% of GDP and 0.9% of GDP in those two years, now a surplus of 0.5% and 0.8% is anticipated before dropping to 0.4% of GDP in 2022-23.

The rosy forecasts in Frydenberg's budget – and the big assumptions behind them Read more

One reason for that is the growth of tax revenue.

In this current year the government is forecasting a nice 7.7% jump in individual income tax, with another boost of 7.5% in 2021-22. But then it falls to just 1.5% in the following year.

Company tax meanwhile gets its big boost this year – up 10.8% off the back of an astounding 23.7% increase last year. That is a two-year run up there with anything that occurred during the mining boom years. So yes, as Paul Keating would say, the government has been hit in the arse with a rainbow. Alas the rainbow is expected to fade – company tax is expected to rise by just 0.6% in 2020-21:

So where does the boost in personal income tax come from? From assumptions.

Finally wages are going to return to pre-GFC levels. Yes you heard it here first: by June 2022 wages growth will be back at 3.5% annual growth.

Let’s just say however that Treasury hasn’t had too much luck with wages growth forecasts. In effect they have taken place of the old forecasts of budget surpluses that failed to arrive.

In the 2017-18 budget, Scott Morrison predicted 3.5% wages growth by June 2020. The following year it was pushed out to June 2021, and now the new treasurer sees the same hope of 3.5% growth pushed out another year:

The jump in wages growth from 2.75% in 2019-20 to 3.25% in the following year would also be the biggest one-year jump in wages growth since 2010-11, and yet it is expected to happen with employment growth forecast to slow from the current level of 2.7% to 1.75% by 2020-21 and then to 1.5% from 2021-22 onwards:

And all of this glorious wage rise is happening despite unemployment being forecast to stay at 5%.

In effect the government would have us believe that the labour market will stay as it is now, but our employers will all want to pay us more:

Given the government knows the wages growth is not really coming, and it will definitely not be here in time for the election, it has decided the best way to talk about living standards is to deliver tax cuts.

The problem with the tax cuts in last year’s budget was they were mostly targeted towards the wealthy – who were bizarrely pitched as being “average Australians” despite earning more than around 90% of all workers.

So this year the government has decided to increase the “low and middle income tax offset”. Last year this peaked at $530 for someone on $50,000 to $90,000; now it tops out at $1,080.

But never fear, this government has not changed its spots – it still loves rich people, and thus its second and third round of tax cuts to come in 2022-23 and then in 2024-25 (conveniently beyond the budget years) are all very much weighted towards those earning over $100,000.

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The first round of tax cuts sees someone on the current median income of all workers of just below $60,000 get a tax cut of 1.8% while someone on $100,000 gets just a 0.9% cut and a person earning $200,000 will barely notice their 0.07% cut.

But in 2022-23 things are different. The policy to lift the 32.7% tax bracket from $37,001-$90,000 to $45,001-$120,000 greatly benefits higher income earners.

A person on $60,000 will see no tax cut at all because while they get the benefit of the changes tax thresholds the “low and middle income tax offset” comes to an end. But at least someone on $100,000 does OK – they get a cut of 0.75%, and the battler on $200,000 gets a 1.2% cut.

And then in 2024-25 the big cuts kick in.

This is the flat-tax heaven the Liberal party dreams of where the 37% tax bracket is abolished and the 32.5% rate is reduced to 30% and the 45% rate threshold is lifted to $200,000.

In this round the person on $60,000 gets a 0.6% tax cut – $375 a year. Someone on $100,000 sees a tax cut of 1.4% and our poor soul on $200,000 gets a 4.54% cut – an extra $9,075.

That last round of tax cuts will be mightily expensive, but luckily for the government it does not affect any surplus estimates because it is beyond the four years of the budget. But it is within the 12-year projection the government has for paying off net debt.

The budget assumes by 2029-30 net debt will be down to zero, despite them forecasting an increase in net debt in this year from the 18.2% of GDP that was predicted in the December Myefo to now 19.2%.

But never fear, in 11 years that will be all gone, because apparently we are also going to continue to have an extraordinary run of economic joy. This is despite the budget papers also predicting China’s GDP growth will slow from 6.6% this year to 5.75% in 2021 and the USA’s economy will slow from 3% to 1.75% in the same period.

Australia, however, will carry on growing between 2.75% and 3% until the end of the next decade:

At no stage during that time will a government need to spend money to stimulate growth to ward off a global slowdown.

It is economics as make-believe. Designed purely to allow the Liberal party to say, should they lose government, that they left the economy on a path to debt free.

These growth figures and the projected paying of net debt is a fairy story – about as real as our wages growing at 3.5% any time soon, and also about as real as this budget changing the government’s political fortunes.