Weak tax take threatens services: Treasury head
Martin Parkinson told a post-budget function in Sydney the share of the economy devoted to tax had suffered its most dramatic slide since the 1950s.
"From its pre-crisis level of 23.7 per cent the tax-to-GDP ratio fell to 20.1 per cent in 2010-11," he said. "This reflects both successive large cuts to personal income tax rates and a fundamental change in the relationship between the nominal economy and tax receipts."
Weak tax collections were set to continue. Mining companies had become more economically important and paid a low proportion of their profits in tax, around 5 to 10 percentage points less than for the corporate sector as a whole.
"Just to be clear, this is not a judgment about what the effective tax rate paid by mining companies should be," Dr Parkinson told the business economists. "It is simply a statement of fact."
Non-mining companies would soon need to take the place of miners in driving economic growth, but there was a risk the transition would "not be seamless". Right now their growth was "not much bigger than the recession of the early 1990s".
Dr Parkinson's assessment came as the Fitch ratings agency endorsed Australia's AAA credit rating, describing the nation's public finances as "very strong". "We view Australia's public financial position as a source of strength," the firm's global director of sovereign ratings, Art Woo, said.
Its propriety measure of "general government debt" representing the amount owed by all levels of government came in at 26 per cent of gross domestic product. This was below Norway's and way below that of nations such as the United States which had general government debt of 100 per cent of GDP.
Dr Parkinson said Australia's weak tax take was colliding with growing expectations of government, the rapidly rising costs of healthcare and the ageing population. "We have a big gap between what the community demands of government and what it is prepared to pay," he said.
"We have to think about savings or new sources of revenue."
Frequently Asked Questions about this Article…
Treasury head Martin Parkinson warned that Australians will either have to pay more tax or accept poorer government services. He highlighted a sharp fall in the tax-to-GDP ratio, saying the share of the economy devoted to tax fell from a pre-crisis 23.7% to 20.1% in 2010–11.
The tax-to-GDP ratio measures tax revenue as a share of the economy. According to the article, Australia's ratio fell from 23.7% before the crisis to 20.1% in 2010–11. Martin Parkinson attributed the decline to large cuts to personal income tax rates and a change in how the nominal economy translates into tax receipts.
The article notes mining companies have become more economically important but pay a lower proportion of their profits in tax—about 5 to 10 percentage points less than the corporate sector overall. Parkinson stressed this as a statement of fact rather than a judgment about what their effective tax rate should be.
Parkinson said non-mining companies will need to take the place of miners in driving growth, but warned the transition may "not be seamless." At the time of the article, non-mining growth was only slightly stronger than during the early 1990s recession, suggesting potential risks for the broader economy.
Fitch endorsed Australia's AAA credit rating and described the nation's public finances as "very strong." Fitch's proprietary measure of general government debt was reported at 26% of GDP—lower than Norway's and far below countries such as the United States, where general government debt can be around 100% of GDP.
The article says Australia's weak tax take is colliding with rising expectations of government, rapidly rising healthcare costs and an ageing population. Martin Parkinson warned there is a big gap between what the community demands of government and what it is prepared to pay, putting pressure on future public finances.
Parkinson indicated that policymakers will have to consider savings or new sources of revenue to close the gap between public demands and available funds. The article presents this as the immediate policy challenge, without specifying particular tax changes.
Everyday investors should monitor developments in tax and fiscal policy, government spending priorities (especially health and aged-care costs), and how non-mining sectors perform as drivers of growth. The article suggests these areas are central to how the government may respond to weaker tax receipts and rising budgetary pressures.
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