Tuesday, December 01, 2015

No revenue problem, Treasurer? We're about to learn the truth

About that revenue problem ... the one we don't have.

Since the May budget, expected revenue has slipped by $4.6 billion for 2015-16, and $8 billion for 2016-17. Projected spending has hardly grown at all.

Deloitte Access, which has calculated the figures ahead of this month's mid-year budget update, reckons this year's deficit will be $5.2 billion worse than forecast ($40.3 billion rather than $35.1 billion), and next year's $8.3 billion worse than forecast ($34.1 billion rather than $25.8 billion). Subsequent years will be $11.4 billion and $12.7 billion bigger.

By any measure, the government has a revenue problem. Any measure but the treasurer's, that is.

Within days of taking the job three months ago Scott Morrison infamously declared that revenue wasn't a concern. The budget he was inheriting had "a spending problem, not a revenue problem".

It would be odd if it was true, given that the first Hockey budget took a stick to spending and more or less left revenue alone. Morrison has been softening the language since, most recently redefining the concept of a revenue problem. "A revenue problem I would define as not taxing people enough," he told Sky News last month. "I don't think that we have that problem."

"Our problem at the moment is that Australians aren't earning enough – not that they're not paying enough tax, but that we're not earning enough."

He is right about earnings. Since the Coalition took office private sector wage growth has slid from 2.7 per cent to 2.1 per cent – a record low.

Not only are Australians not earning as much as expected and not paying as much tax as expected, they are less likely to be pushed into higher tax brackets than was expected ...

Deloitte Access says pay-as-you-go tax collections will be $2 billion lower than expected this financial year and $2.6 billion the next.

Company tax collections will be $4.4 billion lower this year and $7 billion less the next. Lower than expected profits will mean lower than expected share prices and superannuation returns.

Superannuation taxes will raise just $7 billion next year – only slightly more than half the sum of $12 billion collected a few years back.

This week Morrison has been fine-tuning his language ahead of the December update. "What you will get from this government is a very honest and sober view about where we are heading," he said on Monday. "But an optimistic view which is based on realism."

When the bad news is presented in two weeks' time, it'll be delivered without a solution. The mid-year update isn't a budget, or even a minibudget. Aside from some measures to boost innovation, it'll let the problems sit.

One of the those problems may well be a set of projections that shows the budget never returning to surplus. The treasury has downgraded its long-term economic growth projections, making an automatic return to surplus harder. Without a return to surplus (or without a downturn in global interest rates) the government can't cut its steadily growing interest bill on borrowings.

Once close to zero, net interest on borrowings is now $11 billion per year, roughly half what the government spends on Medicare. As each new deficit requires more borrowing, it'll keep growing, hitting $13 billion in 2018-19. Unless something happens to drive it down, budgets will become increasingly constrained in what they can do.

By letting the state of Australia's finances sink in over the summer break and not proposing solutions until the release of the tax green paper early in the new year Morrison and Turnbull will focus our minds on the importance of getting tax right. What matters is not so much an immediate revenue fix (although that would be nice) but plugging the holes that are about to get bigger.

The tax concession on superannuation contributions will cost the government $17.35 billion this financial year. By 2018-19 it will cost $20 billion. The treasury believes it would grab most of it if it taxed contributions at marginal rates. Very little would leak elsewhere, in part because most super contributions are compulsory. The concession on the earnings of super funds costs $16 billion, but by 2018-19 it is set to almost double, costing $30 billion.

Left unchecked, these extraordinarily generous concessions will make our tax system increasingly leaky, especially as more and more high wealth Australians retire and move into the phase of life where they pay no tax whatsoever on their super fund earnings, no matter how big.

I am often asked why I am always on about super these days (something the government is also on about). Why not attack other tax concessions or lift tax rates on something else? It's because the concessions on super are huge; bigger than anything else apart from concessions on the family home, and growing far faster.

They can be wound back in a way that creates winners. Low-income Australians will be better off if super is taxed at marginal rates with a rebate, and they are the people compulsory super is meant to be for. Wise financial managers pay attention to revenue as well as spending. In a few days' time we'll discover how important that is.

In The Age and Sydney Morning Herald