That's not how you budget in the private sector, Wayne

One thing is clear from the budget that Federal Treasurer Wayne Swan presented this week: Mr Swan takes a very different approach to budgeting than is the norm in the private sector.

In the private sector a budget is a planning document.  You prepare it in advance of the financial year, and then you report against it each month as the year progresses.

What is in the budget is one thing: how you perform against the budget as the year progresses is just as important.

Under Wayne Swan, it seems things are very different.

When Swan released his budget for 2011-12 on Tuesday evening of this week, almost as an afterthought we were also provided with the numbers for how 2010-11 was tracking.

A year ago, Wayne Swan brought down a budget which said that the  Commonwealth Government would earn revenues (mainly from tax collections) of $322 billion, expenditure would be $355 billion and the deficit would be $41 billion.

(The deficit, strictly called the ‘underlying cash balance’, also includes capital spending, and strips out the Future Fund earnings from the revenue figure.)

But on Tuesday night, we learned that the deficit for 2010-11 now looks likely to come in at $49 billion.

Why did this happen?  Because as the year went on, revenue fell sharply – almost $20 billion worse than was projected – but spending was only slightly down.

By private sector standards, this is very poor management.  If your revenue is coming in at below expectations, you find ways to cut your spending.   v

But in the public sector – as run by Julia Gillard and Wayne Swan – if your revenue is collapsing it seems you don’t really worry.  You just keep spending merrily away.

Another big difference: when a private sector organisation prepares a budget, it expends a lot of effort to make it realistic and achievable. 

A chief executive, reviewing draft budgets from his company’s different business units, will likely reject a budget which is too optimistic. For example, if a business unit budgets for sales of ninety million dollars this year, when its sales last year were fifty million dollars, it will face a very sceptical response.

By contrast, Wayne Swan tells us that although he will produce a deficit of $49 billion in 2010-11, within two years he will achieve a dramatic turnaround and there will be a surplus of $3.5 billion.

He wants us to believe this even though his final result in 2010-11 is now expected to be $8 billion worse than he told us at the start of the year.

And he wants us to believe that this turnaround will come entirely through a huge jump in government revenue – from $304 billion this year to $379 billion in two years’ time.

In the private sector, an executive who put forward such a budget would face quite a grilling.

The grilling would be all the more intense if that executive – like Wayne Swan – had a consistent track record of producing ‘actual’ numbers which were much worse than his budget numbers.

A critical question the executive would face from his boss: what will happen if the hoped for boom in revenues does not materialise?

After all, a budget which relies completely on revenue increases is essentially relying on factors outside of the control of the executive putting forward that budget. 

By contrast, if an executive proposes to reduce costs in the business unit for which he has responsibility, that is a matter over which he has rather more direct control.

Nobody with significant commercial or business experience would produce, or approve, a budget like the one Wayne Swan has put forward.

Maybe it’s about time we had a government with some senior figures who did have some business experience.