Ad Hockery exposed again

By ROSS GITTINS

As an accountant turned journo, I try to ensure the creative accounting used to make the budget figures look better than they really are doesn't go unexposed. But I've never seen a con as audacious as the proposed medical research future fund.

I wrote at length about all the accounting tricks perpetrated by the Gillard government, but now it's the Abbott government's turn.

In their budget update during last year's election campaign, the heads of Treasury and Finance signed off on a deficit estimate for 2013-14 of $30 billion. But four months later Joe Hockey and Mathias Cormann popped up with their own mid-year review claiming the deficit they'd inherited would be closer to $47 billion.

Today you'll hear Hockey repeat that claim. But that higher number was largely the result of our heroes indulging in a little creative accounting of their own.

About $7 billion of the $17 billion increase since the election was explained by Treasury revising down its forecasts for employment and wage growth and, hence, tax collections. Fair enough. But most of the remaining $10 billion involved dubious transactions our heroes claimed to have been forced to make because Labor had left them hanging.

The biggest was a transfer of $8.8 billion to the Reserve Bank – an amount the Reserve hadn't asked for and Treasury had recommended against. Its effect was to make Labor's last deficit look bigger and to make it easier for the Reserve to pay higher dividends into Hockey's subsequent budgets.

When in this year's budget Hockey announced the GP co-payment and various other cuts in health spending, he explained that these savings would be put in a new medical research future fund.

Once the money in the fund had built up $20 billion, the annual interest on the money in the fund would be used to pay for medical research. But under the changes announced last week, these payments from the net interest earnt would instead begin in 2015-16.

This is an accounting trick, but it seems only students of government accounting rules can see it. People think that since the savings are being spent building up the fund, there won't be any net saving to the budget until after the $20 billion target has been reached.

Not so. The saving to the budget bottom line is immediate, though the change means this saving will be reduced a fraction by the increased spending on research. Like many budget fiddles, this one relies on exploiting loopholes in the definition of the bottom line, the "underlying cash deficit".

The best way of thinking of it is that transactions recorded "above the line" affect the size of the deficit, whereas those recorded "below the line" don't. Below-the-line transactions are regarded as affecting only the way the deficit is financed.

The Medicare spending cuts are recorded above the line, but the decision to put an amount of money equivalent to those savings into a special fund goes below the line. It is, after all, only a decision to move money around the government's balance sheet. It doesn't involve the government spending a cent, just moving money between its accounts.

Of course, since the government is in deficit, it doesn't actually have any money to put into its medical research future fund account. So to its normal borrowing to cover the deficit it will have to add borrowing to finance the money it puts into the research fund.

This extra will add to the size of its gross public debt, but not to its netdebt, since the latter is the gross debt (everything the government owes other people) minus all the money in the various parts of the future fund, which has been used to buy shares and bonds, and so represents all the money other people owe the government.

However, when the government spends the interest on the medical fund on medical research, this spending will be recorded above the line and so will add to the deficit.

Once the dust has settled, however, I expect to see a second leg of the trick brought to fruition. In a subsequent budget the government may decide that, now it's spending more on medical research via the future fund, it's able to spend less on medical research via the National Health and Medical Research Council. This brilliant con job will be complete.

What's the point of it all? Partly it's an attempt to bamboozle doctors, but mainly it's designed to allow the government to break its election promise not to cut health spending while claiming it hasn't broken it, just "reprioritised" health spending.