Tax losses mean Swan will have to cut deeper for surplus

FAR from delivering the promised budget surplus of $1.5 billion, the 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 the 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 in the budget 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."

Mr Anthony 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 to $7 billion by 2019-20."

A list of suggested budget cuts included 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.

"The idea is not to abolish programs but to target them to individuals on the basis of hardship rather than electoral success.

"Large savings can also be achieved through the widespread adoption of competitive tendering processes, and incorporating economic efficiency principles into contract design especially for the purchase of large capital items, public works and defence weapons platforms," the report says.

Macroeconomics predicts a boost in economic growth to a "respectable" 3.1 per cent in 2012-13.

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Frequently Asked Questions about this Article…

What is the current Australian budget outlook and could Treasurer Wayne Swan miss the surplus?

According to a private-sector analysis by Macroeconomics, Treasurer Wayne Swan is on track to deliver a deficit rather than the promised $1.5 billion surplus. The report says the budget position for 2012-13 is about $10 billion worse than the government's midyear update and forecasts a potential $8 billion deficit unless much deeper cuts are made.

Why are tax losses hurting government revenue and company tax receipts?

Macroeconomics points to widespread tax losses across the tax base — including individuals, super funds, trusts and companies — as a key reason for weaker receipts. The report highlights a roughly $6 billion shortfall in company tax revenue and says capital losses, a weaker economy, declining terms of trade and mining depreciation replacing taxable profits have all reduced revenue.

How big would spending cuts need to be to return to surplus or achieve a structural surplus?

The report estimates the Treasurer would need about $10 billion in cuts to deliver a one-off surplus and roughly $15 billion in cuts to deliver a structural surplus that is sustainable over time. Without those large adjustments, Macroeconomics forecasts ongoing structural deficits.

How might changes to the superannuation guarantee affect the budget and investors?

Raising the superannuation guarantee to 12% will increase the value of superannuation assets and the cost of the associated concession. The report warns that the proposed funding source — the mining tax — is likely to diminish as the boom ends, creating a potential funding gap estimated at $5–7 billion by 2019-20.

What types of budget savings does the Macroeconomics report recommend?

The report suggests targeting middle- and upper-class welfare rather than abolishing programs, spreading adjustment pain thinly but imposing larger burdens on those likely to benefit from an economic upswing. It also recommends widespread adoption of competitive tendering and applying economic-efficiency principles to the purchase of large capital items, public works and defence platforms to achieve savings.

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

Macroeconomics warns that without very large cuts and tightly controlled spending growth, the budget will face structural deficits for the next decade and government debt is likely to continue rising. That means the government may struggle to deliver sustainable surpluses over the medium term.

What should everyday investors watch for in response to this budget pressure?

Investors should watch government decisions on spending cuts, changes to superannuation policy and how concessions are funded, since these can affect retirement balances and sectoral government spending. The report also signals possible shifts in procurement and public-works contracting that could influence companies that rely on government contracts.

What economic growth does Macroeconomics expect despite the budget pressures?

Despite the fiscal strains, the report predicts a boost in economic growth to a 'respectable' 3.1% in 2012-13, suggesting some improvement in activity even as budgetary challenges remain.