Analyst tips $10bn budget shortfall as tax take falls

Far from delivering surplus of $1.5 billion, Swan is on track to deliver a deficit of $8 billion.

By InvestSMART · 27 Apr 2012

By InvestSMART ·
27 Apr 2012

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Far from delivering surplus of $1.5 billion, Swan is on track to deliver a deficit of $8 billion.

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.

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…

What budget result is Australia likely to face instead of the promised $1.5 billion surplus?

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

How big is the company tax shortfall and what does it mean for the budget?

The analysis finds about a $6 billion shortfall in company tax revenue compared with expectations at the time of the midyear update. That fall in company tax receipts is a major reason the budget position has deteriorated and contributes directly to the larger projected deficit.

What are the main causes of the collapse in tax revenue described in the report?

The report points to 'losses throughout the tax base' — fewer taxable profits and more capital losses across individuals, superannuation funds, trusts and companies. It also cites a weaker-than-expected economy, declining terms of trade and mining-sector depreciation expenses replacing taxable mining profits.

How much does the Treasurer need to cut to return to surplus, according to the report?

Macroeconomics says the Treasurer would need to cut about $10 billion to deliver a budget surplus and about $15 billion to achieve a structural surplus. The model also stresses that very large cuts on May 8 and tight spending growth across the forward estimates would be required.

What are the long-term risks if big budget cuts aren't made?

The Macroeconomics model projects structural budget deficits for the next decade and continued growth in government debt unless sizeable cuts are made and spending growth is kept tight. In short, the report suggests there may be no sustainable return to surplus this decade without major adjustment.

How would lifting the superannuation guarantee to 12% affect government finances?

Raising the superannuation guarantee to 12% would increase the cost of the concessional tax treatment as super assets grow. The report warns the policy is supposed to be funded by the mining tax, but mining tax revenues will shrink as the boom ends, creating a potential funding gap of about $5 billion to $7 billion by 2019–20.

Which types of budget cuts does the report recommend, and who would be affected?

The report's suggested cuts are headed by reductions in what it calls 'middle and upper-class welfare.' It recommends spreading adjustment widely while imposing the largest burden on those most likely to benefit from an upswing in the business cycle — rather than concentrating pain on lower-income groups.

What practical measures does the report suggest to achieve large savings without deepening cuts to essential services?

Beyond program cuts, the report recommends widespread adoption of competitive tendering processes and embedding economic-efficiency principles into contract design to secure large savings from how government services are procured and delivered.