A $19.4 billion business lesson: Don’t budget like Wayne Swan

On budget night, the pen dropped from Old Taskmaster’s hand when the federal deficit figure was announced.

$19.4 billion?!

Now say that figure slowly a few times until it really sinks in: A budget deficit of nineteen point four billion dollars.

“I am determined to produce a surplus in 2012-2013. We have got our colours nailed to the mast,” Wayne Swan once proclaimed.

“We see the surplus in 12-13 as being absolutely fundamental,” he said.

“The budget will be back in surplus in 2013 if I’m re-elected,” Julia Gillard promised, before the last election.

Then came the excuses. The revenues failed to grow by as much as first assumed! The watered down mining tax didn’t raise as much revenue as predicted! Golly gosh, who could have possibly predicted granting significant concessions to the mining industry would lead to the mining tax generating significantly less revenue than it would have in its original form?

And that’s without even mentioning the shortfall from Stephen Conroy’s recent “Digital Dividend” spectrum auction.

A $7 billion budget revenue shortfall quickly turned into $12 billion, then $17 billion. It’s Kevin Rudd’s fault, they protested! It’s Tony Abbott’s fault! It’s John Howard’s fault! It’s Peter Costello’s fault! It’s China’s fault! It’s America’s fault! It’s the economy’s fault! It’s everybody’s fault!

Sure, some economists have said the economy is too weak to try for massive budget cuts. But even if you agree with this argument, surely the government would have been in much better shape politically had they started to argue the case for prolonged deficits earlier, rather than promising a surplus?

Well, Old Taskmaster says this: None of us can see the future. As a result, all budgets, business plans and economic models are – by nature – based on assumptions. While these assumptions can be reasonably accurate, there is always a risk of unforeseen circumstances emerging or potential costs

This is why it is always better to err on the side of caution on your budget figures. Assume your sales will fall on the low side, costs will be higher than anticipated, revenues fall on the weak side and deadlines will be overrun.

If you’re cautious and wrong, you will find you end up with better than anticipated results for the quarter. On the other hand, if you opt for heroic assumptions, you could find you end the financial year in a world of bother.

Just like Wayne Swan.

Get it budgeted – cautiously!