Should business buy into this round of government’s “return to surplus” plan?
Familiar with governments promising a return back to surplus, businesses have rightly become skeptical about whether the Federal Government’s expectations in the forward estimates are realistic.
In the 2017/18 Federal Budget handed down on Tuesday night, the government chartered the path to surplus through an assumed increase in taxation receipts.
Behind the tax revenue receipts was a forecast acceleration in GDP growth, with LNG exports a significant contributor in the short-term. The nominal GDP growth forecasts of 4 to 4.75 per cent seem a reasonable assumption.
At the same time, the Budget has also forecast that expenditure will remain on hold at around 25 per cent of GDP through the forward years.
Although not mentioned during the Budget Speech, the recent “good debt, bad debt” narrative by Treasurer Scott Morrison was apparent in the development of the budget.
New expenditure commitments in the key areas of education, health and housing – all recurrent expenditures – were tied to the newly announced tax measures.
By linking new spending to new funding arrangements, it meant these spending initiatives would not add to the deficit and couldn’t be tarnished with the “bad debt” label.
If all goes to plan, the Federal Government is looking at a Budget surplus of $7.4 billion in 2020/21.
Let’s look more closely at this pathway and whether the Federal Government can realistically bring this plan to fruition.
The latest Budget shows tax receipts are projected to rise from $406 billion in 2016-17 to $526 billion in 2020-21. As a proportion of GDP, this is expected to rise from 23.2 per cent to 25.4 per cent for that same time period.
In order to achieve these targets, the government is banking on a range of new revenue measures which are projected to raise $18 billion over the forward estimates. Such initiatives include:
- An increase to the Medicare Levy | The levy will rise from 2 per cent to 2.5 per cent of taxable incomes generating $8.2 billion in revenue over the forward estimates.
- A new Major Bank Levy | A 6 basis points charge on the five biggest banks is expected to raise $6.2 billion by 2020-21.
- A new Skilling Australians Fund Levy | Increased and new fees imposed on businesses employing foreign skilled workers are projected to raise $1.2 billion.
- Tightening Capital Gains Tax discounts for foreign investors | Projected to save the government $580 million.
- Restricting deductions for investment properties | Tightening on allowable deductions including the removal of travel deductions ($540 million) and limiting depreciation deductions ($260 million).
- Tightening laws around tax avoidance by multinationals | Treasury has not yet specified the additional revenue to be raised.
In addition to these measures, the Federal Government will also be looking to its main sources of taxation for increased revenue being the income tax, company tax and sales tax receipts.
As can be seen, the government relies heavily on income taxes to fund its operations given that income taxes represent almost half of all revenues.
The government has predicted that income tax collections will rise by 30 per cent to 2020-21, but to achieve this result, employment levels and wages need to rise strongly.
The Wage Price Index, while projected to stay weak in 2017-18, has been projected to return toward long-term averages and increase to over 3 per cent in the final years of the outlook period. These projections may be hard to meet, particularly in light of the current elevated unemployment rate and poor levels of workforce participation.
The Budget forecasts for employment growth to be 1.5 per cent over the next four years, lower than the average over the past decade of 1.7 per cent.
With regard to company taxes, which had represented roughly 20 per cent of government revenues for the past decade, its share of government revenue had slipped in recent years as commodity prices retreated.
Treasury is forecasting a 14.7 per cent increase in company tax receipts during 2017-18 following the recent spike in commodity prices (iron ore and coking coal) during this financial year.
Looking ahead, company tax receipts are expected to maintain a steady share of total government revenues with growth rates above 8 per cent annually to 2019-20.
These assumptions appear optimistic given the meagre growth in company tax revenues over the past decade.
Past Budgets have displayed a poor track record of forecasting the economic variables with underpin the budget revenue calculations. The main issue has been the assumption of a return to long-term averages despite the significant adverse impact of the end of the mining investment boom.
The economic assumptions underpinning this Budget appear reasonable and offer more conservative projections than those of last year.
Businesses are hoping that the Federal Government’s plan for a return to surplus will become a reality, but there is no doubt that may need to be a slice of luck for this to happen.