10 MAY 2013
Sharing the Burden of a Tough Federal Budget
Ahead of next week’s Federal Budget, Australia’s $1.5 trillion superannuation savings pool could be back on the Federal Government’s chopping block again after Prime Minister Julia Gillard recently indicated that every option would be closely looked at.
In an address to the Per Capita Reform Agenda Series, the Prime Minister said the government faced a $12 billion fiscal gap and had “serious decisions” to make and announce ahead of the 2013/14 budget. As a result, she said the government needed to “have every reasonable option on the table to meet the needs of the times, even options previously taken off the table”.
Earlier this month, Federal Treasurer Wayne Swan and Financial Services and Superannuation Minister Bill Shorten released details of the ALP’s highly awaited planned changes to superannuation. In response, the opposition claimed the changes were not final, with further tax changes to superannuation expected to be found in the budget papers.
The amount of tax revenue the government had collected so far this financial year was already $7.5 billion less than what was forecast in October last year and is expected to increase to $12 billion by the end of June 2013.
Preliminary Deloitte Access Economics analysis found the budget shortfalls were in company tax, resource rent tax, and other individuals, which includes tax on unincorporated small businesses as well as tax on interest, dividends and rent. This can be seen from the chart below:
Given the expanding revenue shortfall, the main question for the federal government is how, and how quickly, could the significant fiscal gap be filled, especially as Australia is unlikely to go back to the “extraordinary revenue peaks” of the mining boom from 2002/03 to 2007/08.The huge profits of that time meant company tax revenue reached an astonishing 5.3% of GDP (gross domestic product) in 2006/07 compared to a share of 4.5% of GDP last financial year – a fall of around $10 billion in company tax a year.
The Deloitte Access Economics analysis said filling a $12 billion budget hole in a year would require “difficult national choices” with a number of potential avenues to consider. Among the suggestions were the abolition of all Family Tax Benefit Part A payments, which would save $14 billion, or stopping all healthcare funding to the states, which would save $13 billion.
If the shortfall was to be made up from tax expenditure, the government could extend capital gains tax to the family home, which would raise $15 billion a year - capital gains tax was 1.5% of GDP in 2006/07, last financial year it was 0.4%. This translates to a drop in tax collection of around $15 billion a year compared to seven years ago.
Alternatively, the government could tax all superannuation contributions at marginal tax rates, raising $14 billion.
The Prime Minister said that the ALP planned to make wise investments that would make Australia a “stronger and smarter nation”. In addition she said that the government was in the process of making decisions to “spend less in some areas than we had hoped, to raise more in revenue in some areas than we had planned”. She indicated that those within Australian businesses, families and institutions should carry a fair share of the burden of funding government.
Wayne Swan delivers the 2013/14 Federal Budget on May 14th and we will provide a full update shortly after the announcement.
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