The federal government first committed to return to surplus by 2012-13 in May 2010. That promise – a courageous one – came amid a brief burst of budget sunshine as China’s stimulus sent global prices for coal and iron ore into the stratosphere.
But that sunshine has since clouded over. The government released updated budget forecasts the other day and it was the same old story – the economy is making it harder to get back to surplus, so the government has had to come up with extra savings.
That’s the fifth time this same story (“economy stumbles, more budget repair needed”) has been repeated. It was also heard six months ago, 12 months ago, 18 months ago and two years ago – in fact the news has been bad ever since the government first committed to a surplus.
The chart puts that in perspective. It shows revisions to budget estimates over four years due to changes in the economic outlook. These have been negative for five budget updates in a row – hence the continuing pressures in Canberra.
Before that was the burst of sunshine in 2010 that lead to the promise of a surplus. Earlier still was the sea of red as the global financial crisis led to big budget writedowns in 2009.
Finally, the bottom of the chart shows some of the rivers of gold – the period in which good news out of China was unalloyed joy for the taxman. That chart makes a basic point: the budget now swings more wildly than Liberace ever did. And that spelled trouble when the government released its latest update earlier than usual. Too early, as it turned out, because it meant the official update wasn’t able to take account of the first payment of the new mining tax.
Press reports suggest the new mining tax raised nothing. That’s no real surprise. Revenue is volatile, meaning that promising surpluses that are wafer thin is courageous. It’s too easy to see those surpluses melt amid relatively small shifts in the economy.
It is all the more courageous in 2012-13, the first year of the new mining tax. Reliant as it is on commodity and exchange rate markets and on construction cost inflation and state royalties, the new tax was always going to be hard to estimate. It is very difficult to estimate revenue from new taxes before any initial data is available regarding actual revenue impacts.
Mining tax shortfalls are a central reason why I think that unless the government takes further steps to raise taxes or cut spending, 2012-13 will see a deficit of $4.2 billion.
What will the government do in response? If the past couple of years are any guide, it will make some very good decisions but most of the heavy lifting will come via some sort of money shuffle.
I cheer the genuinely tough and admirable decisions announced the other day, including the cut to the baby bonus and to the indexation of subsidies for private health insurance. However, those measures save just $1.3 billion over the four years to 2015-16, of which only $0.2 billion is saved by 2013-14.
And the other decisions were rather less able to be called “reform”. The net savings of $13 billion over four years announced in the latest budget update can be divided into: 65 per cent of that saving being due to the company tax timing change; 8 per cent being due to getting unclaimed super and bank accounts earlier; 20 per cent being due to tax compliance measures; and about 7 per cent as “the remainder”.
The first two measures essentially are just timing changes – “money shuffling”. The third is based on the expectation that a change in ATO funding will lift revenue in the absence of any change in the tax law – in effect, that existing law will be more harshly enforced to raise more revenue.
None of those three are budget reforms that will bring lasting benefits. It’s fig leaf territory.