European cash crisis slices $7 billion from tax revenue

This week's budget update will show the government still on track for a 2012-13 surplus.

By InvestSMART · 28 Nov 2011

By InvestSMART ·
28 Nov 2011

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This week's budget update will show the government still on track for a 2012-13 surplus.

THIS week's budget update will show the government still on track for a 2012-13 surplus, despite the euro crisis wiping a whopping $7billion over four years off expected capital gain tax revenue since May.

The crisis has driven down the value of shares and other assets.

Treasurer Wayne Swan will unveil spending cuts to help reach the surplus target but said yesterday it would be wrong to "take an axe" to the economy when the overseas situation was so uncertain.

With the European crisis hitting revenue hard, Mr Swan said the government would strike a balance between strong fiscal discipline and supporting job creation and growth.

The financial crisis has consistently knocked revenue - there has already been a $130billion write-down over five years to 2012-13, compared with the forecast.

The $7billion reduction in the capital gains estimate follows a 15per cent fall in the Australian share market since the May budget, which Mr Swan said would result in lower-than-expected capital gains tax from companies, superannuation funds and individuals.

Despite saying the government would not hit the economy too hard with cuts, Mr Swan warned the statement would involve some "difficult decisions" on savings.

"Maintaining our fiscal rigour is absolutely critical at a time when international financial markets are punishing those countries that lack discipline," he said.

Finance Minister Penny Wong said the government had made about $100billion in savings in its last four budgets "and there are no easy saves left".

The government in recent months has appeared to waver on whether a 2012-13 surplus would be attainable but has now toughened its language.

The budget's bottom line in 2012-13 and later years will be helped by speeding up more than $1billion of Queensland flood relief into this financial year.

Savings were announced last week in programs for teachers performance pay and immunisation. The measures each saved about $200million over four years.

The budget update will include a crackdown on tax breaks for foreign workers and executives who get living-away-from-home allowances that are tax dodges, yielding hundreds of millions in savings. Senator Wong said these were raised in the recent tax forum as being "problematic".

Such claims have jumped from $162million to $740million in five years. The changes will not hit Australians getting legitimate allowances.

Last Friday, the government moved to remove a huge tax deduction that could be claimed in corporate mergers - a loophole that could have threatened the revenue by $10 billion.

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Frequently Asked Questions about this Article…

What did the budget update say about Australia’s 2012–13 surplus target?

The budget update says the government is still on track for a 2012–13 surplus despite weaker revenue. Treasurer Wayne Swan flagged spending cuts and tougher language on savings, but stressed the government won’t “take an axe” to the economy and will try to balance fiscal discipline with support for jobs and growth.

How has the euro crisis affected Australia’s capital gains tax (CGT) revenue?

The euro crisis pushed down the value of shares and other assets, contributing to a 15% fall in the Australian share market since the May budget. That decline has wiped about $7 billion off expected capital gains tax revenue over four years, reducing CGT receipts from companies, superannuation funds and individuals.

How big is the overall revenue hit from the financial crisis in the budget forecasts?

According to the update, the financial crisis has driven a roughly $130 billion write-down in revenue over five years to 2012–13 compared with earlier forecasts, with the $7 billion cut specifically affecting the capital gains estimate.

What measures is the government using to protect the budget without harming economic growth?

The government plans a mix of targeted spending cuts and savings rather than broad, deep cuts. Measures include speeding up more than $1 billion of Queensland flood relief into the current year, previously announced program savings (for example, teacher performance pay and immunisation measures that each save about $200 million over four years), and efforts to strike a balance between fiscal discipline and supporting job creation and growth.

Is the government targeting tax loopholes to raise revenue?

Yes. The budget update includes a crackdown on problematic tax breaks, such as living-away-from-home allowances claimed by some foreign workers and executives, which have risen from $162 million to $740 million in five years. It also moved to remove a large tax deduction available in some corporate mergers that could have threatened up to $10 billion in revenue.

Will changes to living-away-from-home allowances hurt ordinary Australians?

Finance Minister Penny Wong said the crackdown will target dodgy claims and is not intended to hit Australians legitimately receiving living-away-from-home allowances. The measures are expected to yield hundreds of millions in savings by closing inappropriate claims.

What does the fall in the Australian share market mean for everyday investors?

A 15% market fall since the May budget has reduced asset values, which can mean smaller capital gains (or larger paper losses) for investors. The government notes this market weakness is also the reason expected CGT revenue has declined. Investors may see impacts on portfolio values and potential tax outcomes as a result.

How much savings has the government already achieved and are there many options left?

The government says it has made about $100 billion in savings across its last four budgets and that “there are no easy saves left.” That is why this budget update focuses on targeted measures, tightening of certain tax breaks, and some difficult savings decisions to help meet the surplus goal.