tag:theconversation.com,2011:/us/topics/mid-year-economic-and-fiscal-outlook-8364/articlesmid year economic and fiscal outlook – The Conversation2021-12-16T07:53:05Ztag:theconversation.com,2011:article/1739022021-12-16T07:53:05Z2021-12-16T07:53:05ZVital Signs. No return to austerity as Team Frydenberg prevails over the budget hawks<figure><img src="https://images.theconversation.com/files/437966/original/file-20211216-17-aobtzw.png?ixlib=rb-1.1.0&rect=833%2C284%2C2443%2C1269&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Lukas Coch/AAP</span></span></figcaption></figure><p>Thursday’s <a href="https://budget.gov.au/2021-22/content/myefo/index.htm">Mid-Year Economic and Fiscal Outlook</a> reminds us of some uncomfortable truths.</p>
<p>In the short term, MYEFO forecasts the economy bouncing back, with deficits shrinking, unemployment falling, and growth rebounding. </p>
<p>But that will largely play out in the next financial year, 2022-23. </p>
<p>Beyond that, the forecasts have us returning to the relatively low-growth economy we endured before COVID.</p>
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Read more:
<a href="https://theconversation.com/frydenbergs-myefo-budget-update-shows-big-election-war-chest-173905">Frydenberg's MYEFO Budget update shows big election war chest</a>
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<p>Economic growth is forecast to be 3.25% in this financial year, back briefly in the 3-4% range we used to regard as normal.</p>
<p>Next financial year it is forecast to remain high at 3.25% before falling back to 2.25% and then 2.5%, well within the historically low territory it occupied before COVID.</p>
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<p><strong>Annual financial year GDP growth, actual and forecast</strong></p>
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<span class="caption">Financial year on financial year growth, actual and forecast.</span>
<span class="attribution"><a class="source" href="https://www.abs.gov.au/statistics/economy/national-accounts/australian-system-national-accounts/2020-21#data-download">ABS and MYEFO</a></span>
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<p>Unemployment, which is forecast to fall to an impressively low 4.25% by mid-2023, is forecast stay there in the following forecast years, improving no further.</p>
<p>The broader takeaway is that not only did the government do the right thing by providing massive financial support during the pandemic – some A$337 billion of it – it is continuing to do the right thing by not prematurely withdrawing it.</p>
<p>The ongoing (if significantly smaller) budget deficits in coming years are a testament to the lesson learnt about the importance of spending to get economic growth up, and unemployment down.</p>
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<p>Perhaps the most uncertain forecast is for wages. Growth in the wage price index is forecast to increase from 2.25% this year to 2.75% in 2022-23 and then on to 3.0% and 3.25% in the follow years.</p>
<p>Sluggish wages growth has been a persistent problem in advanced economies since the 2008 financial crisis. In the US, wages didn’t really get moving again until unemployment dropped to near 3%. </p>
<p>Perhaps an analogous thing will happen in Australia, or perhaps it might require a terminating unemployment rate lower than the forecast 4.25%.</p>
<h2>We need an economic engine</h2>
<p>Of course, economic and employment growth don’t just happen. They are driven, in no small part, by business investment. </p>
<p>As the following chart shows, this is forecast to bounce back strongly after a big drop during the pandemic. In part this simply reflects that kind of catch-up, but it also follows from an increase in business confidence.</p>
<p>Non-mining business investment, expected to grow 1.5% this financial year at budget time, is now expected to climb 8.5%.</p>
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<p>What is now absolutely beyond doubt is that confidence is fragile, and depends on support from the government.</p>
<p>The old days of the 1980s, when it was seriously argued that government spending “crowds out” or frightens away rugged capitalists, are long behind us.</p>
<p>Treasurer Josh Frydenberg’s MYEFO statement makes clear there will be no return to austerity, no return (probably ever) to getting <a href="https://theconversation.com/tax-giveaways-in-frydenbergs-back-in-the-black-budget-114177">back in the black</a> for its own sake.</p>
<p>The massive financial force used during the pandemic worked. </p>
<h2>Government has to keep doing the heavy lifting</h2>
<p>In due course the budget will need to return to something closer to balance. But there is no case whatsoever for a sharp U-turn – not one that Frydenberg and Treasury Secretary Steven Kennedy would countenance.</p>
<p>Team Frydenberg-Kennedy has prevailed over the Coalition budget hawks. </p>
<p>There are plenty on both the Coalition front and backbenches who still think the Liberal Party is the party of thrift. If that was ever true or sensible, it isn’t now. </p>
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Read more:
<a href="https://theconversation.com/16-billion-of-the-myefo-budget-update-is-decisions-taken-but-not-yet-announced-why-budget-for-the-unannounced-173654">$16 billion of the MYEFO budget update is 'decisions taken but not yet announced'. Why budget for the unannounced?</a>
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<p>One might think that Herbert Hoover’s disastrous austerity in the United States in the early 1930s proved the folly of that approach. Or the UK’s version following the 2008 financial crisis. </p>
<p>But, in any case, the dominant forces in the Coalition seem to have learnt their economic lesson. As they say in the classics: “however you get there…”</p>
<p><iframe id="tK4Qx" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/tK4Qx/1/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p><img src="https://counter.theconversation.com/content/173902/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is President of the Academy of the Social Sciences in Australia.</span></em></p>The dominant forces in the Coalition seem to have learnt their lesson: Australia’s economy still needs serious budget support.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1739052021-12-16T02:10:22Z2021-12-16T02:10:22ZFrydenberg’s MYEFO Budget update shows big election war chest<p>The Morrison government has given itself a massive “war chest” for spending in the run-up to next year’s election, the budget update released on Thursday reveals.</p>
<p>The <a href="https://budget.gov.au/2021-22/content/myefo/index.htm">Mid-Year Economic and Fiscal Outlook</a> (MYEFO) shows $15.9 billion in expenditure “decisions taken but not yet announced and not for publication” over the forward estimates.</p>
<p>It is believed that roughly half of this refers to commercial-in-confidence and like decisions, such as vaccine purchases and support for airlines – leaving the rest for pre-election spending.</p>
<p>Last year’s MYEFO had only $1.5 billion for unannounced spending.</p>
<p>On the revenue side, the unannounced decisions amount to only $940 million over the forward estimates. </p>
<p>This is despite the government being expected to announce tax cuts for low and middle income earners before the election.</p>
<p>The MYEFO shows only a very small fall in the predicted deficit compared to the May budget. This is because of some spending blowouts, including for the National Disability Insurance Scheme, and the government’s decision to leave maximum room for election sweeteners.</p>
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<p>The deficit for this financial year is expected to be $99.2 billion (4.5% of GDP), which is $7.4 billion better than the budget forecast.</p>
<p>Across the four-year forward estimates, there is an improvement of only $2.3 billion compared to the budget.</p>
<h2>Improving economy, growing expenses</h2>
<p>The update paints an optimistic picture, declaring “the Australian economy is rebounding strongly from the impact of the Delta outbreaks”. </p>
<p>It comes as the Omicron variant is hitting the country, with estimates of a quick spread in coming weeks and months.</p>
<p>But Treasurer Josh Frydenberg told a news conference the expectation was that Omicron would not derail the recovery.</p>
<p>Economic growth, which was 1.5% in 2020-21, is forecast to be 3.75% in this financial year and 3.5% in 2022-23.</p>
<p>The unemployment rate is forecast to fall to 4.5% by mid-2022, and 4.25% by mid-2023.</p>
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<p>The unemployment figure for November, released on Thursday just ahead of MYEFO shows a dramatic fall from 5.2% in October to 4.6% in November.</p>
<p>Wage growth is expected to climb from 2.25% this financial year to 2.75% next financial year and to 3.25% by 2024-25.</p>
<p>Non-mining business investment, expected to grow 1.5% this financial year at budget time, is now expected to climb 8.5%.</p>
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<p>The update says that the resilience of the economy has contributed to an upgrade in tax receipts of $95 billion over the forward estimates.</p>
<p>Both gross and net debt are projected to be lower in the forward estimates and the medium term than forecast in the budget.</p>
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<p>Gross debt is expected to be 41.8% of GDP at June 30, 2022 and to stabilise at about 50% of GDP in the medium term.</p>
<p>Net debt is expected to be 30.6% of GDP in June next year and to peak at 37.4% in mid 2025, before improving over the medium term to reach 35.5% in June 2032.</p><img src="https://counter.theconversation.com/content/173905/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Budget update shows the government has a big election war chest, and an optimist economic outlookMichelle Grattan, Professorial Fellow, University of CanberraPeter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1738512021-12-15T11:41:14Z2021-12-15T11:41:14ZBudget update forecasts unemployment falling to 4.25% by mid-2023<p>Thursday’s budget update will forecast one million jobs will be created over the next four years and unemployment will fall to 4.25% by June 2023.</p>
<p>In an upbeat economic assessment, the Mid-Year Economic and Fiscal Outlook will estimate that more than 13.8 million people will be employed by June 2025. This is 150,000 more people employed across the economy than the May budget estimated.</p>
<p>Unemployment – 5.2% in October – is forecast to be 4.5% in the June quarter next year. The 2023 June quarter 4.25% level would be the lowest since September 2008.</p>
<p>Strong employment growth is expected to see the employment to population ratio reach a record high of 63.1% by the September 2022 quarter, compared to 61.5% when the Coalition was elected.</p>
<p>The update will show a reduced deficit figure compared to the $342 billion across the forward estimates that was forecast in the budget.</p>
<p>But the government this week leaked details of a blow out in the cost of the National Disability Insurance Scheme to counter the suggestion by Deloitte Access Economics that the deficit figure could have improved by more than $100 billion.</p>
<p>One feature of prime interest in the update will be the amount set aside for decisions taken but not yet announced, which will be the government’s war chest for the run up to the election, to be held by May.</p>
<p>Among the election sweeteners, tax cuts are expected to be provided for low and middle income earners.</p>
<p>The government has a budget scheduled for March 29, for a May election. But the option of going to the polls in March also remains open.</p>
<p>Treasurer Josh Frydenberg said while Australia had avoided the labour market “scarring” that resulted from recessions in the 1980s and 1990s, “there are still many more new jobs to create,” and the government had the economic plan to do this.</p>
<p>“We have been working to a clear fiscal strategy to drive down the unemployment rate to historically low levels as we emerge from the greatest economic shock since the great depression,” Frydenberg said.</p>
<p>“It’s not that long ago that the Treasury was contemplating a collapse in GDP of more than 20% and feared the unemployment rate could rise to as high as 15%.”</p>
<p>“The Labor Party has repeatedly said ‘the biggest test of this government’s management of the recession and its aftermath will be what happens to jobs’ and ‘whether or not unemployment stays too high for too long’.”</p>
<p>“Not only is the unemployment rate today lower than when Labor left office, despite being in the middle of pandemic, we are now are poised to see the unemployment rate fall to 4¼% and sustained below 5% for only the second time in more than half a century.”</p>
<p>“Now our tax cuts and business investment incentives are helping to create a new wave of economic activity as the baton is passed to the private sector helping to create more jobs and secure the recovery.”</p>
<p>Shadow Treasurer Jim Chalmers said the budget would be in better shape if it “wasn’t so riddled with rorts.” His comment followed an investigation by <a href="https://www.smh.com.au/interactive/2021/electorates-government-grants/">Nine newspapers of more than 19,000 grants across 11 programs that showed Coalition seats received $1.9 billion in three years while Labor seats got less than $530 million. </a></p>
<p>Chalmers also said that Labor wanted to make sure that as the economy recovered working families were not “getting absolutely smashed by the skyrocketing cost of living at the same time as their real wages are going backwards.</p>
<p>"It’s not a real recovery if Australian working families get to the other side of this valley and all they face then is declining real wages and the skyrocketing costs of living,” Chalmers said.</p><img src="https://counter.theconversation.com/content/173851/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michelle Grattan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Thursday’s budget update will forecast one million jobs will be created over the next four years and unemployment will fall to 4.25% by June 2023.Michelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/705292016-12-19T06:32:33Z2016-12-19T06:32:33ZWhat’s behind the numbers? MYEFO in seven charts<p><em>With all the data in the government’s Mid Year Economic and Fiscal Outlook (MYEFO) for 2016-17 we’re breaking it down for you in seven charts.</em> </p>
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<p>The A$0.6 billion drop in the 2016-17 deficit in MYEFO compared with the budget figure from earlier in the year is flattering for the government. It actually misses the big story which is the impact of the unexpectedly lower GDP growth in the September quarter of this year, which fell by 0.5%. </p>
<p>This will put a large hole in tax revenue to the tune of A$5.3 billion, reflected in the fiscal balance but not the cash balance in this financial year. These are the two measures of the budget deficit. </p>
<p>The underlying cash balance, which is the measure in this chart, is a cash measure that records revenue that’s received and expenses paid. The fiscal balance (not shown here) is an aggregated measure that instead records revenue when it’s earned and expenses when they are incurred. </p>
<p>The difference between the two measures is essentially due to timing. This is very important this year given the sudden sharp drop in tax revenue earned by the government in this year, but most of which will not be received until next year. </p>
<p>MYEFO estimates that the fiscal balance worsens by A$4.4 billion this financial year even though the cash balance improves by A$0.6 billion. At least three quarters of the drop in tax revenue is income tax, the remainder being GST and other taxes on goods such as excise and customs duties.</p>
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<p>The significantly worsening cash balance in future years, from 2017 to 2020, compared with the corresponding projections in the 2016-17 Budget, reflects the deteriorating economic outlook. The drop in GDP in the September quarter this year was not an aberration. It was due to unexpectedly <a href="https://theconversation.com/its-not-just-a-drop-in-gdp-that-should-worry-us-70203">lower private sector investment</a>, reflected <a href="http://business.nab.com.au/wp-content/uploads/2016/11/2016m10-NAB-business-survey.pdf">in a drop in</a> business confidence. </p>
<p>This has led to downward revisions to GDP growth over the next few years. MYEFO forecasts GDP growth of 2.75% in 2017-18 compared with a 3% forecast in the 2016-17 Budget. Accompanying weaker GDP growth is slower wages growth and prices for goods and services (see the chart below), which lowers revenue from income tax and indirect taxes (mainly the GST). </p>
<p>On the positive side however, prices of iron ore and coal have been growing much more strongly since the 2016-17 Budget and the subsequent 2016 Pre-Election Fiscal Outlook (PEFO). In the battle between slower GDP growth and rising commodity prices, the former is projected to win, with projected total tax receipts lower by a very large A$30.7 billion over the four years to 2019-20. This consists of about A$20 billion in lower income tax from individuals, A$6 billion from lower company tax revenue and A$5 billion from lower taxes on goods and services.</p>
<p>Slower government spending growth is also playing its part. Over the next four years it is projected to grow slower than GDP. The upshot of the revenue and expenditure revisions is that the projected return to surplus in 2020-21, reflected in the 2016 PEFO, is maintained. This represents an average annual pace of deficit reduction of 0.5% of GDP. </p>
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<p>However this crucially depends on the government legislating its very substantial agenda of spending cuts and revenue increases that remain baked into the fiscal projections.</p>
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<p>The big ticket items here are the A$2.4 billion of university funding cuts, the A$2.1 billion of cuts to pensions from lifting the pension age to 70, although this would not come into effect fully until 2026, A$1 billion of saving paid parental leave, and against these savings is the child care package that would cost the government A$3.2 billion. </p>
<p>The worst case for the budget bottom line would be to lose the battle on the savings and be obliged to follow through with the child care package, a net effect of at least A$10 billion. This would be the final straw for the increasingly tetchy credit rating agencies, and the end of our AAA credit rating.</p>
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<span class="attribution"><a class="source" href="http://www.budget.gov.au/2016-17/content/myefo/html/">Budget.gov.au/The Conversation</a>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
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<p>The net effect of new budget measures since the 2016 PEFO is to worsen the deficit by more than A$2 billion in total this year and next, and to improve the deficit by about A$1.3 billion in the following two years, hence a net worsening of the accumulated deficits over these four years to the tune of about A$0.7 billion. On the positive side of the ledger is more than A$1 billion in interest payments on the 19 billion of loans from the government to NBN Co for the national broadband network rollout over the four year period. </p>
<p>Similarly the reductions in Family Tax Benefits A and B will save the budget A$1 billion over the four years. Offsetting these measures are additional expenses associated with the Australian Renewable Energy Agency of A$0.6 billion, and spending on infrastructure and regional development of A$0.7 billion, and a host of smaller ticket items.</p>
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<p>The unexpected rise this year of 62% in the iron ore price and 100% in the thermal coal price has partially cushioned the effect on tax revenue of the slowdown in GDP. Commodity prices are notoriously volatile and hard to forecast and have large effects on the budget bottom line. </p>
<p>According to MYEFO, a 10% fall in non rural commodity prices could reduce nominal GDP by 1% which in turn would reduce the underlying cash balance by around A$4.6 billion in 2017-18. Changes in commodity prices of 10% are quite common over a 12-month period, or even less, as shown in the chart.</p>
<p>Consequently, Treasury has just announced a change in the way it forecasts commodity prices. Instead of using recent average prices it now assumes a graduate phased return to a long run average which would imply lower price forecasts in over the budget projection period and therefore lower revenue projections. </p>
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<img alt="" src="https://images.theconversation.com/files/150684/original/image-20161219-24263-1i8iz1e.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/150684/original/image-20161219-24263-1i8iz1e.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=575&fit=crop&dpr=1 600w, https://images.theconversation.com/files/150684/original/image-20161219-24263-1i8iz1e.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=575&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/150684/original/image-20161219-24263-1i8iz1e.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=575&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/150684/original/image-20161219-24263-1i8iz1e.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=723&fit=crop&dpr=1 754w, https://images.theconversation.com/files/150684/original/image-20161219-24263-1i8iz1e.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=723&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/150684/original/image-20161219-24263-1i8iz1e.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=723&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="attribution"><a class="source" href="http://www.budget.gov.au/2016-17/content/myefo/html/">Budget.gov.au/The Conversation</a>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
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<p>Wage growth and company profits are important drivers of tax revenue. Wage growth has been moderate and company profits volatile. Both indicators tend to be underlying drivers of GDP growth, so the weaker GDP outcome in the September quarter may well flag more weakness in wages and company profits to come which would in-turn put further pressure on tax revenue.</p>
<hr><img src="https://counter.theconversation.com/content/70529/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ross Guest does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Economist Ross Guest unpacks some of the key numbers in the government’s mid year budget update, with seven charts.Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/522982015-12-15T03:55:33Z2015-12-15T03:55:33ZMYEFO 2015 at a glance<figure><img src="https://images.theconversation.com/files/105957/original/image-20151215-23186-18cy0sv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Scott Morrison and Mathias Cormann unveil the Mid Year Economic and Fiscal Outlook for 2015-2016.</span> </figcaption></figure><figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/105958/original/image-20151215-23179-1ytqt4q.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/105958/original/image-20151215-23179-1ytqt4q.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=3472&fit=crop&dpr=1 600w, https://images.theconversation.com/files/105958/original/image-20151215-23179-1ytqt4q.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=3472&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/105958/original/image-20151215-23179-1ytqt4q.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=3472&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/105958/original/image-20151215-23179-1ytqt4q.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=4363&fit=crop&dpr=1 754w, https://images.theconversation.com/files/105958/original/image-20151215-23179-1ytqt4q.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=4363&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/105958/original/image-20151215-23179-1ytqt4q.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=4363&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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The government has revised down its forecast for economic growth to 2.5% and an expected deficit of $37.4 billion.Charis Palmer, Deputy Editor/Chief of StaffWes Mountain, Social Media + Visual Storytelling EditorLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/371722015-02-13T03:42:54Z2015-02-13T03:42:54ZFactCheck: is Australia spending over $100m a day more than collected in revenue?<blockquote>
<p>“At the moment, we are spending over $100 million a day more than we’re collecting in revenue. Now that’s unsustainable, particularly given we’re spending nearly $40 million a day on the interest on the debt that we have.” – Treasurer Joe Hockey, <a href="http://jbh.ministers.treasury.gov.au/transcript/007-2015/">interview</a> with Alison Carabine on RN Breakfast, February 3, 2015.</p>
</blockquote>
<p>Mr Hockey has made <a href="http://jbh.ministers.treasury.gov.au/transcript/015-2015/">similar</a> statements in <a href="http://jbh.ministers.treasury.gov.au/transcript/005-2015/">multiple</a> interviews to support the government’s position that cuts to spending are needed to reduce the deficit.</p>
<p>To get $100 million of “overspending” a day, the Treasurer has relied on the Commonwealth Government fiscal balance recorded in the Mid Year Economic and Fiscal Outlook statement (MYEFO). The MYEFO, released in December mid-way through our financial year, updates the figures from the <a href="http://www.budget.gov.au/2014-15/index.htm">May Budget</a> – including the deficit.</p>
<p>MYEFO states that the 2014-15 estimated deficit is $40.362 billion. It’s listed in MYEFO as the <a href="http://www.budget.gov.au/2014-15/content/myefo/html/13_appendix_b-01.htm">underlying cash balance</a>. </p>
<p>The estimated deficit is a net fiscal balance for the entire year, so it does not really make sense to think about it on a daily basis. But ignoring that quibble for now, the numbers in Mr Hockey’s statement more or less check out.</p>
<p>In fact, dividing $40.362 billion by 365 and rounding <a href="https://www.google.com.au/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=40%2C362%2C000%2C000%20divided%20by%20365">produces</a> a figure of $111 million – even more than the $100 million a day that the Treasurer stated.</p>
<p>That’s <a href="http://www.budget.gov.au/2014-15/content/myefo/html/01_part_1.htm">up</a> from the estimate of the annual fiscal deficit of $29.8 billion - $80 million a day in the Treasurer’s language - that was in the May Budget.</p>
<p>MYEFO also tells us that the expected 2014‑15 deficit, or underlying cash balance, is 2.5% of GDP. </p>
<p>The interest of <a href="http://www.budget.gov.au/2014-15/content/myefo/html/16_appendix_d.htm">$40 million a day</a> also comes from MYEFO. It’s a figure for the interest on Commonwealth government-issued debt, listed in table D7 of that document as $14.2 billion. <a href="https://www.google.com.au/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=14200000000+divided+by+365%3D">Divide that by 365</a> and you get $39 million: Mr Hockey’s “nearly $40 million a day”.</p>
<p>Let’s put it in context: with a population of <a href="http://www.abs.gov.au/ausstats/abs@.nsf/0/1647509ef7e25faaca2568a900154b63?OpenDocument">23,742,527</a> as I write, each Australian is “overspending” by <a href="https://www.google.com.au/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=110580821+divided+by+23742527%3D">$4.66</a>
per day, or just over $1,700 per year. And we’re each paying <a href="https://www.google.com.au/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=38900000+divided+by+23742527%3D">$1.64</a> in interest a day on our debt.</p>
<h2>What do the numbers mean?</h2>
<p>Internationally, we are doing OK. In 2012, the latest year with full comparable figures, <a href="http://data.oecd.org/gga/general-government-deficit.htm">all OECD members except for Norway and Germany</a> had an operating fiscal deficit and most of them had a larger deficit than Australia.</p>
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<p>What about government debt? This is difficult because there are <a href="http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook43p/nationaldebt">different measures</a>, including net or gross debt, central or general government debt, or the value of Commonwealth-issued securities. </p>
<p>In 2012, Australia’s gross general government debt (at all levels) was 57% of GDP as recorded by the OECD <a href="http://data.oecd.org/gga/general-government-debt.htm#indicator-chart">here</a>. But at the Commonwealth level, the May budget indicated that government debt on issue would have a <a href="http://www.budget.gov.au/2014-15/content/bp1/html/bp1_bst7.htm">face value of 23.3% of GDP</a>, while Commonwealth net debt is estimated as 15.2% of GDP in <a href="http://www.budget.gov.au/2014-15/content/myefo/html/03_part_3.htm">Table 3.4 in MYEFO</a>. </p>
<p>Most other governments had <a href="http://data.oecd.org/gga/general-government-debt.htm#indicator-chart">higher gross debt</a> than Australia. Some governments, like Germany, had a fiscal surplus but high debt (89% of GDP in 2012). The UK had debt of <a href="http://data.oecd.org/gga/general-government-debt.htm#indicator-chart">101%</a> of GDP and a deficit of <a href="http://data.oecd.org/gga/general-government-deficit.htm">6%</a> in 2012.</p>
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<p>The Commonwealth government is AAA rated. It does not have any problem borrowing. </p>
<p>As the deficit and debt trend up, the credit rating agencies have started to mutter. The agencies, like Moody’s, rely on the value of issued government securities – on this basis, Moody’s <a href="https://www.moodys.com/research/Moodys-maintains-Australias-Aaa-rating-despite-higher-fiscal-deficits-outlook--PR_315114">states</a> that “consolidated gross general government debt, which includes state and local government debt, is about 32% of GDP, whereas the median for AAA-rated countries is around 45% of GDP”. </p>
<p>On any comparative measure of government debt, we are still ahead of the curve.</p>
<h2>How can we fix it?</h2>
<p>We don’t need to worry too much, not right now. Partly because, as <a href="https://theconversation.com/why-the-federal-budget-is-not-like-a-household-budget-35498">others</a> have recently explained, the government budget is not like your household budget.</p>
<p>However, both the <a href="http://www.aph.gov.au/%7E/media/05%20About%20Parliament/54%20Parliamentary%20Depts/548%20Parliamentary%20Budget%20Office/Reports/01-2013%20Estimates%20of%20the%20structural%20budget%20balance/Report%2001-2013%20-%20Estimates%20of%20the%20stuctural%20budget%20balance%20pdf.pdf">Parliamentary Budget Office</a> and the <a href="http://grattan.edu.au/report/balancing-budgets-tough-choices-we-need/">Grattan Institute</a> argue that our fiscal deficit and government debt are structural and need fixing in the medium to long term.</p>
<p>To do that, the government can either cut spending or raise taxes.</p>
<p>Commonwealth government taxes this year are estimated to be <a href="http://www.budget.gov.au/2014-15/content/myefo/html/13_appendix_b-01.htm">$353.6 billion</a> (total revenue is $385.9 billion) but government expenses are over $400 billion. More or less, that is what causes our “overspend”.</p>
<p>Today, our federal taxes are falling. They were estimated at $360 billion in the May budget for 2014-15, or <a href="http://www.budget.gov.au/2014-15/content/bp1/html/bp1_bst5-01.htm">22.1% of GDP</a>. </p>
<p>This is lower than a decade ago: under the Howard government, federal receipts <a href="http://www.budget.gov.au/2014-15/content/bp1/html/bp1_bst10-05.htm">reached 24% of GDP</a>. And tax revenues are predicted to decline further in MYEFO, <a href="http://www.budget.gov.au/2014-15/content/myefo/html/03_part_3.htm">by several billions</a>, because of lower commodity prices and because your wages are not growing as fast as before. The GST raises only a small percentage of GDP in revenue and revenue growth is slowing.</p>
<p>In the May 2014-15 budget, the government proposed to cut expenditures including unemployment benefits and the age pension, and raise fees for doctors and universities. The government claims that <a href="http://www.budget.gov.au/2014-15/content/myefo/html/03_part_3.htm">$10.6 billion</a> in budget savings have not been enacted because of the Senate’s refusal to pass these unpopular budget measures.</p>
<p>We could collect more taxes, if we choose, to fund public goods, redistribution and services. </p>
<h2>Verdict</h2>
<p>It is true we are spending over $100 million a day more than we’re collecting in revenue and nearly $40 million a day on the interest on the debt. However, we compare favourably to other countries on deficit and debt. </p>
<p>You don’t need to worry too much right now about your $4.66 a day in “overspend”. But you do need to join a debate about tax reform that asks what you want government to do, how we can reform taxes to ensure prosperity, and how we can fund public goods fairly and sustainably for the future.</p>
<hr>
<h2>Review</h2>
<p>The article has verified the statement made by Treasurer Joe Hockey, and put Australia’s budget problem in per capita terms. Each Australian is overspending by $4.66 per day of which $1.64 is to service the debt.</p>
<p>The article also notes that Australia’s budget problem is not dire, although there is some concern that the problem is structural. The verdict deserves support - we need to discuss the prospect of raising taxes and/or cutting government expenditures in a framework that considers the long-term implications for growth, employment and income inequality. Economic sustainability requires an understanding of key economic rates (the interest rate, exchange rate, growth rate and the inflation rate) but let us not forget that changes to taxes and government expenditures also have implications for welfare and equity. – <strong>Guay Lim</strong></p>
<hr>
<p><em>Since publication a change has been made to clarify the correct percentage of tax receipts collected under the Howard government.</em></p>
<p><div class="callout"> Have you ever seen a “fact” that doesn’t look quite right? The Conversation’s FactCheck asks academic experts to test claims and see how true they are. We then ask a second academic to review an anonymous copy of the article. You can request a check at checkit@theconversation.edu.au. Please include the statement you would like us to check, the date it was made, and a link if possible.</div></p><img src="https://counter.theconversation.com/content/37172/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Miranda Stewart receives funding from the Australian Research Council, Academy of Social Sciences of Australia and Victorian government.</span></em></p><p class="fine-print"><em><span>Guay Lim receives funding from ARC.</span></em></p>“At the moment, we are spending over $100 million a day more than we’re collecting in revenue. Now that’s unsustainable, particularly given we’re spending nearly $40 million a day on the interest on the…Miranda Stewart, Professor and Director, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/355372014-12-18T19:48:06Z2014-12-18T19:48:06ZWithout revenue, Australia can only have half a budget debate<figure><img src="https://images.theconversation.com/files/67629/original/image-20141218-31043-1ty6zj1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">In the dark? Ignoring revenue has stymied Australia's budget debate.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The missing element in this week’s mid-year economic and fiscal outlook, and more broadly, in current government policy, stares Australians in the face. Revenue needs to be increased. <a href="https://theconversation.com/australia-needs-higher-taxes-not-spending-cuts-34657">Increasing taxes</a>, reducing tax concessions and eliminating loopholes are all options, which I and other commentators have argued for.</p>
<p>For example, journalist Peter Martin has <a href="http://www.smh.com.au/federal-politics/political-opinion/advice-for-hockey-sting-super-and-fix-the-budget-in-one-hit-20141215-1272tu.html">shown</a> that if compulsory superannuation contributions were taxed as income, i.e. like wages (rather than being taxed at a concessional rate) there would be a net gain to the budget of approximately A$12 billion a year. But there are many other measures to consider, all designed to increase revenue. Prominent is the ending of negative gearing. </p>
<p>Many of these possibilities, and more, were discussed in the <a href="http://taxreview.treasury.gov.au/content/content.aspx?doc=html/pubs_reports.htm">Henry tax review</a>, with many more expected to be discussed in the forthcoming <a href="http://www.afr.com/p/national/tax_white_paper_calls_for_urgent_O86gWE7hkKvs9qy7wZJGQK">white paper on tax reform</a>. But this should have been the first order of business. This is where the solution to the “budget crisis” lies. There is, indeed, no reason why there should be a crisis.</p>
<p>Corporations and households all borrow – and as a result go into debt. Why can’t governments do the same? At present Australia’s federal public debt is modest (relative to GDP) compared with the debt of most comparable countries. Why then create this air of panic or, at least, guilt?</p>
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<a href="https://images.theconversation.com/files/67607/original/image-20141218-31037-hb3uuo.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/67607/original/image-20141218-31037-hb3uuo.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/67607/original/image-20141218-31037-hb3uuo.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=719&fit=crop&dpr=1 600w, https://images.theconversation.com/files/67607/original/image-20141218-31037-hb3uuo.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=719&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/67607/original/image-20141218-31037-hb3uuo.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=719&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/67607/original/image-20141218-31037-hb3uuo.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=904&fit=crop&dpr=1 754w, https://images.theconversation.com/files/67607/original/image-20141218-31037-hb3uuo.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=904&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/67607/original/image-20141218-31037-hb3uuo.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=904&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<p>There are two explanations.</p>
<p>The first is that the Coalition has demonised deficits. In its view Labor produced deficits for several years but it – the Coalition - will produce surpluses by some specified time. It seems they believed in the demons they created, and as a result made unwise promises. Perhaps they genuinely believe that deficits are “bad”“. Some of them even thought that the deficits of 2008-9, which were produced deliberately for Keynesian reasons to avoid excessive unemployment during the global financial crisis, were dangerous.</p>
<p>There is a second, more rational, explanation for being concerned about budget deficits and setting the attainment of a surplus as a target. Too much debt leads to having to pay higher interest rates and, with the accumulation of debt, a bigger burden on the budget. All this is obvious. But there is the problem of political discipline. Less discipline on spending leads to more debt. Someone who has a tendency to alcoholism is wise to stay off alcohol altogether. This is the argument from prudence. But it can be carried to extremes, as it is at present.</p>
<p>It is quite surprising that in the mid-year update there is a massive concern about a budget deficit and the objective of getting to surplus, relative to a concern about the state of the economy at a time when there is excessive unemployment. Is the government’s focus sensible?</p>
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<a href="https://images.theconversation.com/files/67606/original/image-20141218-31028-15dpiwe.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/67606/original/image-20141218-31028-15dpiwe.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/67606/original/image-20141218-31028-15dpiwe.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=574&fit=crop&dpr=1 600w, https://images.theconversation.com/files/67606/original/image-20141218-31028-15dpiwe.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=574&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/67606/original/image-20141218-31028-15dpiwe.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=574&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/67606/original/image-20141218-31028-15dpiwe.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=721&fit=crop&dpr=1 754w, https://images.theconversation.com/files/67606/original/image-20141218-31028-15dpiwe.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=721&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/67606/original/image-20141218-31028-15dpiwe.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=721&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<h2>The blame game</h2>
<p>Treasurer Joe Hockey blames (1) the sharp fall in the iron ore price, (2) the Senate and (3) the adverse inheritance from the previous government. With regard to commodity prices, one can never foresee world price changes precisely, but way back in the Howard years, when the iron ore price rose so much, there were plenty of people who saw the probability – not the certainty - of a later decline, and recommended caution (Ross Garnaut was one of them). </p>
<p>With regard to the cross-bench Senators, they have reflected public opinion. They simply bear out the observation that the biases of the budget, as originally presented by the Treasurer, were not in tune with Australian historical attitudes and public opinion. </p>
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<p>To what extent are the policy decisions of previous governments to blame for excessive spending commitments? The Gonski education reforms and the proposed establishment of a Disability Insurance Scheme under the Gillard government can take some of the blame. Perhaps there were other (possibly irresponsible) decisions as well. But what the budget statement seems to ignore is the severe harm done by the "Howard Gift”, namely the five personal income tax reductions and superannuation concessions of the Howard Coalition government. </p>
<h2>The elephant in the room</h2>
<p>Commentators like me are sometimes accused of being “economic rationalists”. Well, this is an area where more rational thinking is needed. The GST might be broadened and increased (though Hockey seems <a href="http://www.theaustralian.com.au/national-affairs/treasury/joe-hockey-rejects-international-calls-to-raise-gst/story-fn59nsif-1227160479980">loathe to do so</a>). Even the carbon tax might be reinstated, since it would both help to finance the budget substantially and bring about a desirable reduction in carbon emission. Both these widely-canvassed and very rational ideas, while economically sound, would encounter political and public opposition, particularly the broadening of the GST. Bipartisanship is needed here.</p>
<p>Given the missing elephant of revenue, the mid-year update can be summarised as follows: Government spending can and will be cut, but the possibility of increasing revenue is not considered. The Australian government is required to live within its means, the means being defined as ruling out measures that generate extra revenues. The aim is to minimise the size of government irrespective of the purposes and efficiencies of the various governmental activities.</p>
<p>The only hopeful sign is the admirable recent decision of the government to produce its tax white paper in 2015, which presumably includes the possibility of increasing revenue – the missing element in the budget update.</p><img src="https://counter.theconversation.com/content/35537/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Max Corden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The missing element in this week’s mid-year economic and fiscal outlook, and more broadly, in current government policy, stares Australians in the face. Revenue needs to be increased. Increasing taxes…Max Corden, Professorial Fellow in the Department of Economics , The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/354962014-12-17T01:14:16Z2014-12-17T01:14:16ZWhy it’s time to hike the GST and levy an inheritance tax<p>The government’s recent budget <a href="http://www.budget.gov.au/2014-15/content/myefo/html/index.htm">outlook</a> (MYEFO) confirmed that the Australian government budget is rotten at the core. </p>
<p>The government is hopelessly living beyond its means, with expenditure greater than revenue and debt ballooning throughout the next decade and probably beyond.<br>
The government’s debt is our debt. A technical point: this would not be true if we were a closed economy without recourse to foreign borrowing – in that case the government would be borrowing from us. But Australia is very much an open economy with easy access to foreign credit - and we’ve been using it. This means we face higher taxes and weaker government services (health, education and so on) in the future unless we start living within our means.</p>
<p>Feasible spending cuts will not be enough. We must find more tax revenue in a way that is fair and does minimal damage to incentives to work, save and invest. </p>
<p>The Organisation for Economic Cooperation and Development (OECD) has just released its <a href="http://www.oecd.org/eco/surveys/economic-survey-australia.htm">Economic Survey of Australia</a> which points out what just about everybody except for Australian politicians knows: we must increase the GST. </p>
<p>Australia’s GST rate is one of the lowest in the world. New Zealand has 15%, the UK has <a href="http://www.ey.com/GL/en/Services/Tax/Worldwide-VAT-GST-Sales-Tax-Guide---Country-list">up to 20%</a> for example. </p>
<p>Here are some ballpark numbers from the recent MYEFO. The GST revenue in 2015 is expected to be A$54 billion. The budget deficit is A$44 billion. So if we increased GST revenue by half we would wipe out more than half the budget deficit. Roughly the same amount of revenue could be achieved by increasing the GST rate by just 2% to 12% and removing most of the GST exemptions on health, education and financial services which together cost, in lost revenue, A$11 billion in 2015. </p>
<p>A higher GST is not necessarily unfair, especially if it’s combined with higher taxes on the wealthy (which I’ll get to below). A tax that seems to hit low income people is not so tough when you take a lifetime perspective or consider people living in households. </p>
<p>Low-income people are often young people with good lifetime income prospects, like university students. Yes they pay more tax now, but they benefit when they are older as the GST takes a lower proportion of a higher income. Also, low income individuals in Australia, including students, are almost as <a href="http://www.natsem.canberra.edu.au/storage/dp33.pdf">likely to be in a high-income household</a> as in a low-income household.</p>
<h2>Sending the right message</h2>
<p>The GST does less damage to incentives to work, save and invest than most other taxes, such as income tax which discourages work and saving, and stamp duties which discourage people from moving to places where there are better job opportunities, and payroll tax which is a direct tax on employment. </p>
<p>The GST can also help to insulate tax revenue from an ageing population, since fewer workers relative to consumers means less labour income relative to consumption. Consumption will be a more stable tax base than labour income in the coming decades. </p>
<p>An increase in the GST would have to be accompanied by higher taxes on wealth, for the sake of fairness and hence political success. </p>
<p>One option is an inheritance tax which a number of countries <a href="http://www.ey.com/Publication/vwLUAssets/2013-international-estate-and-inheritance-tax-guide/$FILE/2013-international-estate-and-inheritance-tax-guide.pdf">have in one form or another</a> including the US, the UK and a number of European countries.</p>
<p>One problem is that a pure inheritance tax may not generate much revenue based on current asset holdings of older Australians. Total net wealth of Australian households aged over 75 in 2012 was <a href="http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6554.02011%E2%80%9312?OpenDocument">a little over half a billion dollars</a>, according to the Australian Bureau of Statistics. This is a very small base from which to collect revenue. However our existing capital gains tax is a kind of defacto inheritance tax, and it could be changed. </p>
<p>Currently, capital gains tax concessions on the family home and other assets cost, in lost revenue, <a href="http://www.budget.gov.au/2014-15/content/myefo/html/06_attachment_c.htm">in excess of A$20 billion</a>, according to the latest MYEFO. So, combining an inheritance tax with a tightening of capital gains tax concessions could wipe out a significant proportion of the current A$40 billion budget deficit.</p>
<p>Inheritance taxes could deliver more revenue in the future when the current baby boomers die, as they have seen their asset values – housing and superannuation - rocket over the past couple of decades. And many of these baby boomers are probably also receiving large inheritances from their elderly parents. Such windfall increases in wealth tend to discourage labour force participation – exactly the opposite to what we need given our ageing population. </p>
<p>Importantly, an inheritance tax does relatively little damage to incentives to work and save. This is because we don’t know exactly when we are going to die or what our medical expenses will be in old age. This uncertainty leads many people to “over-save” in the sense that they die with wealth that they thought they might need for further old age expenses. This part of a deceased person’s bequest is unplanned and therefore taxing it after death cannot distort incentives to work or save during one’s lifetime. Of course an inheritance tax must be accompanied by a gift tax to prevent offloading of wealth on one’s death bed. </p>
<p>There could be exemptions for the first million dollars of the family home for example, and then the remainder taxed at either a fixed rate or a rising rate according to the value of the estate. </p>
<p>All of this would seem to fit well with the ethos of Labor and the Greens. So a package of higher GST and higher taxes on wealth might actually get through the Senate.</p><img src="https://counter.theconversation.com/content/35496/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ross Guest has previously received funding from the ARC.</span></em></p>The government’s recent budget outlook (MYEFO) confirmed that the Australian government budget is rotten at the core. The government is hopelessly living beyond its means, with expenditure greater than…Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/215072013-12-16T05:08:08Z2013-12-16T05:08:08ZStructural deficit is Hockey’s elephant in the room<figure><img src="https://images.theconversation.com/files/37840/original/m56fz4c2-1387160222.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Deficits in the longer term are not sustainable. </span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>Media reports preceding the mid year economic and fiscal outlook suggest we should expect a deficit of just under A$50 billion, a further deterioration of Australia’s budget position since the pre-election figures were released in late August. </p>
<p>Such a deterioration underlines the continuing budget policy conflict facing both the commonwealth and state governments in balancing the need to address the structural budget deficit against compelling expenditure priorities.</p>
<p>Over the medium and longer term, the underlying structural budget deficits are projected to increase with time. As a result, current expenditure and taxation policies are unsustainable. In the immediate future, there is considerable evidence of a flat economy with insufficient private sector demand to support full employment.</p>
<h2>Why our structural deficit will persist</h2>
<p>A number of reports, including Treasury’s 2010 Intergenerational Report, Grattan Institute’s <a href="https://theconversation.com/australian-governments-face-a-decade-of-budget-deficits-13616">Budget Pressures on Australian governments</a>, and <a href="http://www.pwc.com.au/media-centre/2013/tax-reform-jul13.htm">PricewaterhouseCoopers</a> project future government expenditure under current programs to increase as a share of national income. While the specific growth number and details vary across the reports, they all project the share of government expenditure to increase from the current level of about 32% of national income by another 2-4 percentage points by the 2020s and further increases into the future. </p>
<p>Increases in health expenditure per person are the principal driving force, in part as a result of technological gains contributing to longer life expectancy and good health. Ageing of the population also contributes, and especially a fall in the number of people in the workforce relative to the number of dependents. </p>
<p>These projections have not factored in anticipated new expenditure programs such as the National Disability Insurance Scheme, the Gonski education reforms (which the government at first announced it would dump (<a href="https://theconversation.com/from-gonski-to-gone-to-gonski-again-school-funding-future-remains-uncertain-21025">only to later resurrect</a> in an altered form), the Coalition’s $5.5 billion paid parental leave scheme and fast-tracked infrastructure projects designed to help offset the departure of Holden, or the proposed restoration of expenditures on defence and foreign aid to previous target levels.</p>
<p>Ultimately, government deficits have to be funded by higher taxation on future generations. Deficits raise borrowing costs, which further add to the budget challenge. Also, a larger and larger accumulated deficit reduces the ability of government to provide an effective fiscal stimulus to encounter inevitable future downturns of the economy. So, long term and growing deficits are unsustainable.</p>
<p>Governments, and the electorate, will have to confront major challenges to reduce the unsustainable structural deficits. Lower deficits require a combination of more efficient government expenditures, higher taxation, and reducing expenditures on lower priority projects. General consensus is that improved productivity is available, especially from rationalising commonwealth–state overlaps of education, health, and regulations, but not enough to solve the deficit problem. </p>
<p>Taxation reform, let alone taxation increases (such as expanding the GST), appear to have been deferred pending an inquiry with Abbott promising any changes would be taken to the next election. But by default, a comprehensive review of the reasons for, the structure of, and the delivery of, all government expenditure programs with a longer term horizon has to be a major component of future budgets. The Commission of Audit should provide a strong starting point for this expenditure review task.</p>
<h2>The need to tackle unemployment</h2>
<p>The slow rate of economic growth and higher unemployment (which has risen from 5.4% to <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/6202.0">5.8%</a>) suggest the need for a net contribution of fiscal policy to aggregate demand. Also, the economy is involved in a painful process of significant structural adjustment, and the fall in the terms of trade means a loss of real income. </p>
<p>A short term deficit position could be justified with <a href="http://www.investopedia.com/terms/a/automaticstabilizer.asp">automatic stabilisers</a> only. More contentious is the need for a discretionary fiscal stimulus, especially when monetary policy still has some room to move.</p>
<p>To argue that macroeconomic policy is fine because Australia’s unemployment rate is low by international standards, is an unsatisfactory and lazy conclusion. A more sensible policy question is: can we increase national income, equity and society wellbeing by reducing broadly defined unemployment (that is, the under-employed and workers who have dropped out of job search)?</p>
<p>Treasury and the Reserve Bank of Australia have forecast unemployment to increase to over 6% next year. Another 7.8% of the workforce are classified as underemployed, and wish to work more hours. In addition, the labour force participation rate has been falling, indicating some who would like a job have given up active labour market search. Much could be achieved by reducing unemployment and underemployment, and by raising the participation rate.</p>
<h2>The challenge of all governments</h2>
<p>An important focus of government fiscal policy has to be both to support job creation in the short run and to raise productivity and national income over the longer term. This task requires a focus on the reasons for and the structure of government expenditure and taxation policies. What is the rationale for and the objectives of government intervention in the economy, and how can government programs assist and not hinder private sector restructuring to move labour and capital from declining value-added activities to new higher value opportunities? </p>
<p>These questions are more important challenges for the economic policies of all tiers of government, and fiscal policy in particular, than a simple focus on the bottom line deficit number.</p><img src="https://counter.theconversation.com/content/21507/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Freebairn does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Media reports preceding the mid year economic and fiscal outlook suggest we should expect a deficit of just under A$50 billion, a further deterioration of Australia’s budget position since the pre-election…John Freebairn, Professor, Department of Economics , The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.