Thursday, March 01, 2018

Money down the drain: how wine empties the budget

The hardest thing about putting together a budget is finding the money. Scott Morrison’s task gets harder each year.

Back in 2000, the first year of the GST, tax takings amounted to 25 per cent of gross domestic product. Put another way, one quarter of everything we earned went to Peter Costello to hand back to us via the budget.

By the end of the latest financial year, Morrison's first as Treasurer, the proportion had slid to 22.1 per cent. Morrison collected a total of $388.6 billion in tax. If the tax system had performed as it did for Costello back in 2000 he would have collected $439.7 billion.

This isn’t a story about the end of the mining boom. There was no mining boom in 2000. And nor is it a story about income tax collections being chipped away by tax cuts. They haven’t been chipped away. They are as high as they ever were, at 11.3 per cent of GDP, up from 11.1 per cent in 2000-01.

It is partly a story about vanishing company tax collections. But only partly. Costello collected company tax worth 5 per cent of GDP in 2000-01 while Morrison collected only 3.9 per cent in 2016-17, but company tax collections bounce around. In 2001-02, the year after Costello collected 5 per cent, he got just 3.6 per cent in the wake of the downturn that became a recession in the United States. Collections climbed back to a peak of 5.5 per cent in 2007-08 before collapsing, recovering, and then collapsing again. The Treasury is forecasting a recovery to 4.7 per cent in 2019-20, before a slide as a result of the cuts in the rate.

What’s happened is mostly a story about a different type of taxes, called ''indirect'' taxes. Direct taxes are those that tax income directly, such as income tax, fringe benefits tax, capital gains tax, company tax, and the tax on super fund earnings. Indirect taxes are those that get at income indirectly, such as the goods and services tax and the taxes on imports and luxury cars and wine and beer and cigarettes. It sounds like small beer, but it’s not, or at least it didn’t used to be. Indirect tax amounted 7.3 per cent of GDP in 2000-01. It has slid ever since, amounting to just 6 per cent in 2016-17.

Dollar for dollar, the slide in indirect tax collections has cost the budget more than the slide in company tax.

And it’s not because the GST is wasting away. That’s to come, as we spend more in ways the GST can’t catch, although government decisions to extend GST to online purchases will help. My rough calculations suggest the GST collected 3.5 per cent of gross domestic product in its first financial year and slightly more, 3.53 per cent, in the financial year just ended.

Nor is it because tobacco tax isn’t pulling its weight. It’s been pushed up repeatedly. Morrison collected 24 per cent more from it in 2016-17 than Joe Hockey did three years earlier, despite lower smoking rates.

The culprits are wine and beer, and the complicated relationship between them, set out in a pre-budget submission by former finance department budget official, Glenys Byrne.

In 2016-17 alcohol tax collections actually fell, by 0.7 per cent, at a time when total tax collections grew 5.2 per cent, the economy grew 2.7 per cent, and consumption of alcohol grew 2.4 per cent.

So much have alcohol taxes shrunk as a share of GDP that if they earned now what they did relative to the size of the economy in 2006-07, they would rake in $1.4 billion a year more. And things are worsening quickly. The budget update released in December had Morrison collecting $844 million less from alcohol in the four years to 2019-20 than the estimates he presented in his first budget in May 2016.

Beer is pretty well taxed. What’s charged depends on alcohol content and the consumer price index, which is why from time to time the manufacturers cut their alcohol content, to control costs. But the rules for wine are “incoherent”, to use the term applied by the Henry Tax Review. Cheap wine is barely taxed at all, and (astonishingly) its alcohol content doesn’t matter. This means the cheapest, strongest, most-destructive wine is likely to be taxed the least. Which isn’t new. John Howard introduced the so-called Wine Equalisation Tax in 2000. Byrne says it’s likely to be remembered as one of Australia’s worst ever taxes.

What is new is that people are switching from fully-taxed beer to barely-taxed wine, partly for that reason. Beer accounted for just under 40 per cent of alcohol consumed in 2015-16, down from 75 per cent in the 1960s.

The 2010 Henry Tax Review wanted to phase in a proper system of alcohol taxation, by unit of alcohol. Labor’s Wayne Swan ruled it out saying he wouldn’t do it in the middle of a wine glut. Five years later Malcolm Turnbull’s tax taskforce looked set to recommend the same thing before it was disbanded.

Doing nothing probably hurts the states more than the Commonwealth. The NSW Audit Office puts the cost to government services of alcohol abuse at $1 billion a year, or $416 a household. But it’s become material for Morrison. If he wants to plug revenue gaps, if he cares about his ability to deliver tax cuts, he’ll find a way to fix it.

In The Age and Sydney Morning Herald