Wednesday, November 02, 2011

Long ago and oh so far away... the budget looked good

Wednesday column

It’s just as well the banks are cutting rates. The budget is getting hammered. In May the budget forecast an 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 the forecast acceleration by saying very low company tax instalment payments in 2010-11 meant that more than usual of any boost to tax would turn up in 2011-12 rather than 2010-11.

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 share market 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 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 in to 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 boost company takings 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 boost takings 29.3 per cent.

Since the budget the Australian share market has collapsed a further 12 per cent. The forecast upturn may be underway. 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 will bring in 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 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 per year when 12 per cent super is fully operational in 2019-20.

The cost will have to be worn by the budget forever, whether or not mining has a good year.

It’s the same with the one per cent cut in company tax rate due to apply to all companies from 2013-14 and to small companies from 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 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.

Published in today's Age

Thanks Karen

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