Ideas@TheCentre
The taxman cometh
The Gillard government insists it will put the federal budget back in the black in 2012–13.
So it should, subject to one major qualification: If Australia goes into recession for whatever reason, the hit to federal revenue would keep the budget in deficit in 2012–13. That’s how the budget’s automatic stabilisers work, and few economists would argue against a deficit in those circumstances. It would make no economic sense for the government to fight against the automatic fiscal stabilisers to avoid a deficit. So the government’s plan for a surplus, no matter how tiny, can’t be set in stone regardless of what it says.
Leaving that important qualification aside, the worry is whether and how it will avoid another deficit even in the absence of a recession. The latest estimate for this year is a deficit of
$37 billion. Going from there to the surplus of $1.5 billion projected for next year represents a huge turnaround – as a percentage of GDP, that kind of turnaround has been seen only twice in the last 40 years, and on each of those occasions it was not from deficit to surplus but from surplus to deficit, which is a lot easier to accomplish.
The mid-year review of the budget shows the government expects to accomplish this feat partly through large increases in revenue that far outstrip the growth in the economy. While such a large increase in revenue is possible, it is subject to many uncertainties. But in addition, the 2012–13 balancing act depends on a degree of expenditure restraint that has been matched only once in the last 40 years – a 3% real cut in Commonwealth spending. In fact, for the first time in recorded history, spending will not increase at all in nominal dollar terms. Given this track record, there is a good chance that spending won’t be held down to this extent, even though it should be.
For these reasons, the projected surplus is a dubious proposition. The government will have to do more in the May budget to make a surplus in 2012–13 believable. If history is any guide, the government will not find sufficient spending cuts to meet its targets, and will then resort to tax increases. So watch out for more tax hikes. The Rudd and Gillard governments have proven to be tax happy. Think of the increase in the luxury car tax, the alcopops duty increase, the huge increase in tobacco excise, the flood levy, assorted cuts in superannuation tax concessions, and of course the mining and carbon taxes.
Wayne Swan probably has a list of possible tax increases in his top drawer, and if he doesn’t, his department could quickly supply one. A tax increase to watch out for in the May budget will be a 12-month extension of the flood levy, which is supposed to expire on 30 June. (After all, there have been more floods since then.) A 12-month extension would help balance the books in 2012–13 but still allow the levy to expire before the federal election due in 2013. It would of course be extremely cynical, but that wouldn’t stop the government from concluding that it is politically easier than other options.
Politics is one thing, but there is plenty of international evidence that deficit reduction works best when achieved through spending cuts rather than tax increases. Spending cuts generate more lasting results, while tax increases do more economic harm. It would make a welcome change this year for the government to rule out tax increases at the outset and determine to balance the budget entirely through spending cuts.
Robert Carling is a Senior Fellow at The Centre for Independent Studies.
