Analyst tips $10bn budget shortfall as tax take falls

FAR from delivering the promised budget surplus of $1.5 billion, Treasurer Wayne Swan is on track to deliver a deficit of $8 billion unless he cuts far harder than he had been planning, according to a private sector analysis traditionally delivered a week before the budget.

By InvestSMART · 27 Apr 2012

By InvestSMART ·
27 Apr 2012

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Macroeconomics, a consultancy run by former Treasury modeller Stephen Anthony, finds the 2012-13 budget position $10 billion worse than forecast in the government's November midyear update. Most of the collapse is due to a $6 billion shortfall in company tax revenue compared with what was expected at the time of the update.

"It's losses throughout the tax base," Mr Anthony told BusinessDay. "The Tax Office reckon they've reached 24 per cent of GDP. Usually they are 6 to 8 per cent of GDP. These are losses spread among individuals, super funds, trusts and companies, and they include capital losses in place of capital gains. Along with declining terms of trade, a weaker than expected economy and mining industry depreciation expenses in place of taxable profits, it has put a spanner in the works."

The Macroeconomics model projects structural budget deficits for the next decade and continued growth in government debt unless very big cuts are made on May 8 and spending growth is kept tight for the rest of the forward estimates.

"The Treasurer needs to cut $10 billion to deliver a surplus and $15 billion to deliver a structural surplus," Mr Anthony said. "Otherwise there will be no sustainable return to surplus this decade."

He said many of the government's commitments were making Mr Swan's job harder.

"Lifting the superannuation guarantee to 12 per cent will see the cost of the concession rise as the value of superannuation assets climbs. Yet the supposed funding comes from the mining tax, which will diminish in GDP terms when the boom ends. The gap between the two could reach $5 billion to $7 billion by 2019-20."

A list of suggested budget cuts in the report is headed by "middle and upper-class welfare". "We suggest spreading the pain of adjustment as thinly as possible and imposing the largest burden on those likely to benefit from an upswing in the business cycle," the report says.

"Large savings can also be achieved through the widespread adoption of competitive tendering processes, and incorporating economic efficiency principles into contract design."

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Frequently Asked Questions about this Article…

How big is the budget shortfall and how does it compare to the promised surplus?

According to a private-sector analysis by Macroeconomics, Treasurer Wayne Swan is on track to deliver a deficit of about $8 billion instead of the promised $1.5 billion surplus. The report says the 2012–13 budget position is roughly $10 billion worse than the government's November midyear update.

What caused most of the 2012–13 budget collapse?

The report attributes most of the collapse to a roughly $6 billion shortfall in company tax revenue compared with expectations at the time of the midyear update.

Are there other tax-base losses affecting the budget outlook?

Yes — Macroeconomics says losses are spread across the tax base (individuals, super funds, trusts and companies), including capital losses replacing capital gains, declining terms of trade, a weaker-than-expected economy, and mining industry depreciation expenses replacing taxable profits.

What does the analysis say about future budget deficits and government debt?

The Macroeconomics model projects structural budget deficits for the next decade and continued growth in government debt unless very large spending cuts are made on May 8 and spending growth is kept tight through the forward estimates.

How much would need to be cut to return the budget to surplus?

The report says the Treasurer needs to cut about $10 billion to deliver a surplus and about $15 billion to deliver a structural surplus that would support a sustainable return to surplus this decade.

What kinds of budget savings does the report recommend?

The report recommends targeting 'middle and upper‑class welfare' and spreading adjustment pain thinly, placing the largest burden on those likely to benefit from a business upswing. It also highlights savings from wider use of competitive tendering and applying economic efficiency principles to contract design.

How would lifting the superannuation guarantee to 12% affect the budget and where is the funding expected to come from?

Raising the super guarantee to 12% will increase the cost of the concession as superannuation assets grow. The report notes the proposed funding comes from the mining tax, which will shrink in GDP terms when the boom ends, potentially creating a funding gap of about $5–7 billion by 2019–20.

Who produced this analysis and why should everyday investors pay attention?

The analysis was produced by Macroeconomics, a consultancy run by former Treasury modeller Stephen Anthony, and is the private‑sector report traditionally released a week before the budget. Everyday investors should note it flags fiscal risks — larger deficits, rising government debt and possible significant budget cuts — factors that can influence markets and investment sentiment.