From the AFR this morning comes the awakening of Wayne Swan and his Treasury:
Treasurer Wayne Swan says the federal government will need to cut and cancel whole spending programs to return the budget to surplus next financial year, as it fights a structural decline in the tax base that will keep revenue at depressed levels for years.
…The surplus is a “vital economic objective and because [revenue is] being written down, we need to find even more substantial savings in the budget than we had earlier anticipated”, Mr Swan will say. “I’m not talking about slash-and-burn. I’m talking about responsible additional savings.”
…government revenue is also being hit by “structural changes to the tax base over time”. “When it comes to the structural underpinnings of the revenue base we are in a tough new world,” he will say, warning that “even if we were to witness an enduring global recovery, we should not expect to see a similar recovery in revenue”. The economy has recovered ground lost in the GFC, but tax revenue has not recovered in the same way. “Revenues were at an unsustainable peak in the period leading up to the GFC,” Mr Swan’s speech says.
“In this period, we saw the first big commodity boom combine with strong equity prices, a maturing capital gains tax system with strong receipts, and a low household saving rate.
“The reality is that we will need to cut and cancel existing programs if we are to meet our targets, and we’ll need to redirect some spending to where it is needed most.
“I can also tell you there won’t be a lot of new spending in this budget.” The speech says there will be more revenue write-downs in the budget this year, on top of those recorded in the 2011-12 budget and the Mid-Year Economic and Fiscal Outlook.
Well knock me over with a feather, the MYEFO got it wrong. This was forecast here and here by MB. Such trumpet blowing may be getting tiresome, but Hell, someone has to do it.
Anyways, it appears Mr Swan and his team at Treasury are starting to wake up to the fact that disleveraging means that yesterday’s magic pudding becomes today’s bottomless bowl:
“Collections, particularly relating to company profits, have been lower than expected,” Mr Swan says.
…Mr Swan will say capital gains tax was one of the fastest growing revenue sources in the boom years of the mid 2000s, tripling as a share of GDP in the five years from 2002-03 to 2007-08, from 0.5 to 1.5 per cent.
“This was primarily the result of rapidly growing asset markets, particularly in housing and equities, with some contribution from the falling away of tax-exempt assets that predated 1985,” he will say.
But after the GFC, in 2010-11, CGT was back at 0.5 per cent of GDP – a fall of $11 billion compared with the peak in 2007-08.
Asset markets have stayed sluggish, he says, and “there’s an unprecedented stock of losses that remain to be absorbed by future gains before tax will be payable – which will probably take until at least 2014-15, and maybe longer.”
…The Treasurer says the GFC was “a watershed moment” in the attitudes of consumers, “and we’re unlikely to return to the debt-fuelled, low-saving, pre-crisis world any time soon”.
But I only say starting to wake because, as Delusional Economics summarised neatly when addressing the November MYEFO, there is no way out without more debt:
…I can’t see anything to suggest that rates of credit issuance are about to return to the levels that would provide taxation revenues required to meet surplus targets. It must also be noted that at a time when the private sector is showing signs of an attempt to deleverage an attempt by the public sector to do the same in the absence of a current account surplus is likely to be counter-productive.
In short, more cuts will encourage greater private sector saving and possibly outright deleveraging and, as the surplus drive continues, so the surplus will become more unattainable.
