A huge shortfall in corporate tax collections has put a dent in optimistic budget projections.
IT'S just as well the banks are cutting rates. The budget was getting hammered. In May the budget forecast a massive jump in company tax revenue of 28.9 per cent. That's right, around 30 per cent. The company tax take was to jump from $57.9 billion to $74.6 billion in the space of a financial year, an increase of $16.7 billion.
The reasonable-sounding argument was that profits had been bludgeoned by the global financial crisis, the high dollar and the January natural disasters and that these effects would "unwind gradually" during 2011-12. But 28.9 per cent was more than an unwinding it would have driven company tax to a new record high, even after adjustment for inflation.
And it wasn't gradual. The budget papers partly explain that the provisional tax instalments in 2010-11 were very low. This means that any extra tax is likely to boost this year's rather than last year's bottom line.
Also, several tax breaks would end in 2011-12 and the budget would book "gains associated with increased Australian Tax Office compliance activities", which would be helpful if it happened.
Superannuation tax revenue would jump as well, roaring back 29.3 per cent or $2.1 billion as the sharemarket recovered.
Combined, these two revenue forecasts each largely dependent on an improved economy promised $18.8 billion in extra revenue, enough to pave the way for the paper-thin $3.5 billion surplus forecast for 2012-13.
In addition, income tax revenue was expected to climb 10 per cent, reflecting "anticipated growth in employment and wages", contributing another $14.6 billion.
Only a brave or foolish person would call the Treasury over-optimistic. Its tax analysis division has 50 staff. The Finance Department's budget group has 250 staff. They know far more about the budget position than any of their critics.
But on this occasion the economy was crumbling underneath them as the budget was published. Released in May at a time when all but three of the employment outcomes for 2010-11 were already known, the budget went for jobs growth that year of 2.75 per cent. It got 2.2 per cent. For 2011-12 it went for jobs growth of 1.75 per cent. Three months into that year jobs growth is running at an annualised 0.2 per cent.
Without an economic boost we will have 177,000 fewer Australians working and paying tax by mid next year than the budget was counting on. Company tax has been going the same way. At budget time the government expected to collect $57.1 billion in 2010-11. It collected $56.3 billion, almost a billion less hardly an encouraging beginning to an upward trend that was going to boost company takings by 28.9 per cent.
Superannuation tax earnings missed the mark by 8 per cent, also an unimpressive start to an upward trend that was going to boost takings by 29.3 per cent.
Since the budget the Australian share market has collapsed a further 12 per cent. The forecast upturn may be under way. The market has been improving since the start of October, but it's too early to have much confidence.
We urgently need a financial update. The May budget was out of date within days of its release. We'll get that update with the release of the Mid-Year Economic and Fiscal Outlook (MYEFO), an event often scheduled for Melbourne Cup day. This year it will be later. Treasury and Finance need more time to put the forecasts together.
The mining tax should help, bringing in an officially forecast $6.5 billion by 2013-14, its second year. But iron ore prices have been heading south in recent months. The Reserve Bank's overall commodity price graph released late yesterday was heading down for the first time in months, and it was heading down for two months in a row. The previous increase in September was revised to a fall of 1.4 per cent, followed by a fall of 3.9 per cent in October.
The bank said in the statement released with yesterday's rate decision that Australia's terms of trade had "peaked and will decline somewhat in the near term".
The spending to be financed by the mining tax will continue to grow. The tax concessions associated with the lift in compulsory superannuation start out costing $240 million over the next four years and balloon to $3.6 billion a year when 12 per cent super is fully operational in 2019-20.
The cost will have to be worn by the budget for ever, whether or not mining has a good year.
It's the same with the 1 per cent cut in the company tax rate due to apply to all companies from 2013-14 and to small companies from 2012-13.
The much-heralded 2012-13 return to budget surplus (confirmed again by the Prime Minister in question time yesterday) looks shaky unless the interest rate or cuts persuade us to spend.
There are all sorts of ways the budget could be massaged into an apparent surplus in 2012-13. Selling radio frequency spectrum and selling mortgage-backed securities are two, but unless things pick up the task might become too big.
It's no one's fault, but things aren't turning out the way they were meant to.
peter.martin@fairfaxmedia.com.au
Frequently Asked Questions about this Article…
Why were the government's budget revenue forecasts described as over-optimistic?
The May budget assumed a strong rebound in company tax (a 28.9% jump) and superannuation tax (a 29.3% rise), partly relying on an improving sharemarket and jobs growth. But provisional tax instalments were unusually low, employment and wages growth fell short of expectations, the sharemarket dropped further after the budget, and actual collections (for example, company tax receipts were lower than forecast) missed the targets — all of which made the original forecasts look overly optimistic.
How do missed employment and company tax forecasts affect everyday investors and the economy?
Lower-than-expected jobs growth means fewer people paying income and company taxes, reducing government revenue. That can make a planned budget surplus harder to achieve, potentially limiting government spending or forcing spending cuts or asset sales. For investors, weaker tax receipts and slower economic growth can weigh on markets and influence interest rate and policy decisions that affect investment returns.
What is the Mid-Year Economic and Fiscal Outlook (MYEFO) and why should investors care?
MYEFO is the government’s mid-year financial update that revises budget forecasts. The article notes the May budget was quickly out of date, so MYEFO will provide updated revenue and spending numbers. Everyday investors should watch MYEFO because it clarifies the fiscal outlook, which can influence market sentiment, policy moves and expectations for taxes, spending and interest rates.
Will the mining tax solve the budget shortfall and what does falling commodity prices mean for investors?
The mining tax was forecast to bring in about $6.5 billion by 2013–14, which helps the budget on paper. However, iron ore and other commodity prices have been trending down recently, and the Reserve Bank warned terms of trade had likely peaked and may decline. That means mining tax revenue could be lower than hoped if commodity prices fall, which is important for investors with exposure to resources or reliant on resource-driven fiscal revenue.
How could the government still show a surplus in 2012–13 even if the economy remains weak?
The article points out a few ways the budget might be 'massaged' into a surplus: selling assets such as radio frequency spectrum or mortgage-backed securities, or relying on one-off measures. But these are stop-gap fixes; without genuine economic improvement or stronger revenue, achieving a sustainable surplus could be difficult.
What impact do changes to compulsory superannuation and related tax concessions have on the budget?
Raising compulsory superannuation increases future government costs via tax concessions. The article says those concessions start at roughly $240 million over the next four years and could grow to about $3.6 billion a year once 12% super is fully operational (by 2019–20). These ongoing costs must be financed by the budget regardless of mining performance or other revenue swings.
Should individual investors be alarmed by the sharemarket drop mentioned in the article?
The article notes the Australian sharemarket had fallen about a further 12% since the budget but had started improving since early October — though it was too early to be confident. For everyday investors, the sensible response is to avoid panic, review portfolios in the context of long-term goals, and consider diversification rather than making hasty decisions based solely on short-term market moves.
How do interest rate cuts and Reserve Bank commentary factor into the budget outlook and investor decisions?
The piece observes that rate cuts (and banks cutting rates) could be needed to stimulate spending and help the budget return to surplus. At the same time, the Reserve Bank signalled that terms of trade may have peaked and commodity prices were falling. For investors, this means watching central bank moves and economic data closely — rate cuts can support markets and borrowing costs, but weaker commodity trends and fiscal pressure can offset those benefits.
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