Why future surplusses are going to be hard to achieve

Ross Gittins in Revenue fall to keep any surplus thin looks at the reduction in tax receipts due to the GFC, its aftermath as well as income tax cuts to explain why the Australian Government has been having such difficulty returning the budget to surplus.

Parkinson said that since the global financial crisis, federal tax revenue had fallen by the equivalent of 4 per cent of gross domestic product [about $60 billion a year] and was "not expected to recover to its pre-crisis level for many years"

Ross goes on to write:

The fascinating question is why this economy/tax revenue disconnect has occurred.

One part of the explanation is that the 2008-'09 recession — the one it suits both sides to claim we didn't have — knocked an enormous hole in tax collections. The cumulative write-down in revenue against the forward estimates between 2007-'08 and 2011-'12 has been about $130 billion.

The global financial crisis put an end to asset price booms in the housing and share markets — with implications for capital gains tax collections — and in the post-crisis world it's hard to see when those markets will boom again.

He also looks at the revenue problems the states are having:

The problem for state budgets is structural. Their chief revenue source is the goods and services tax. During the many decades in which households were reducing their rate of saving, their consumption spending (and hence, GST collections) grew faster than their incomes.

Now their rate of saving has stabilised, consumption and GST revenue will grow no faster than household income. And household income will be constrained by the stable-to-declining terms of trade and weak productivity improvement.

Federal tax receipts are also being reduced by the accelerated depreciation that mining companies are now claiming as they expand their operations:

The first phase of the resources boom was more lucrative for the taxman because the main thing that happened was hugely higher coal and iron ore prices going straight to the mining companies' (taxable) bottom line.

In the second phase, the now stable-to-falling prices are accompanied by much higher accelerated depreciation deductions arising from the construction of new mines and gas facilities.

However, the real problem is with the tax cuts that we've received:

But all these things are just elements of a more fundamental explanation for the budget's new growth/tax disconnect: the Howard government's decision to cut the rates of income tax for eight years in a row.

This has robbed the income-tax scale of its propensity to bracket creep. It also represented a significant shift in the federal tax mix, greatly reducing reliance on personal income tax and greatly increasing reliance on capital gains tax and, particularly, company tax.

Get the point? This switch was made at a time when, for all the reasons we've discussed, the level of non-income tax revenue was artificially high. Now those temporary factors have evaporated, leaving us with a badly wounded tax base.

Of course, Peter Costello shouldn't get all the blame for this monumental act of fiscal vandalism. When he sprang the last three of those eight annual tax cuts on Labor in the 2007 election campaign, it unhesitatingly matched him. And it insisted on delivering them, even after their structural folly must have become apparent.

This means neither side of politics wants to acknowledge the huge hole they've driven into the budget. When the pollies won't admit it, the econocrats can't either. And all the rest of us sheep take our lead from whatever nonsense the pollies do want to talk about.

Ross Gittins is a must read as far as I'm concerned.