S&P chops GST forecasts

S&P is out with something of a warning for state budgets, cutting its expectations of GST revenues:

We make adjustments to Australian states’ forecasts for GST revenues to make them consistent and comparable, and to ensure that our base case adequately reflects our view of any potential deviation between forecasts and actual GST receipts.

All Australian state and territory governments provide detailed three-year forecasts of all major sources of revenue and expenditure in their budgets annually. This level of detail demonstrates the high transparency of the Australian system.

However states take different approaches to forecasting GST and therefore arrive at different outcomes. To ensure consistency in our analysis, we standardize the GST forecasts for the states. Our judgments on these key inputs are in line with the outlook we have on the Australian economy.

Further more, recent volatility in GST receipts makes it ver y dif ficult to forecast. In fact, the Australian Commonwealth

government’s budget has over-forecast the GST pool four times in the past five years. In response to this volatility, we adjust the forecast to ref lect a more conser vative growth rate.

For example, the growth rate in the GST pool has varied considerably since its introduction. It has recently slowed to 0.3% in 2012 and 3.6% in 2013 (see chart 3), resulting in revenue write-downs to state budgets as growth was forecast to be about 5%.

We consider that due to the expected softness in Australian household consumption and the relatively stronger growth in non-taxable goods and ser vices, the GST growth rate will continue to be below trend, and less than the rate forecast for total GST growth by the Federal Treasur y department. Our forecast growth rate for the GST pool is 3.75%, 4%, and 4.25% for 2014, 2015, and 2016 respectively.

These forecasts still look aggressive to me. One might expect GST to grow at a similar rate as Household Final Consumption Expenditure in the national accounts, currently running at 3.8% per annum. However there is leakage in GST exempt areas such as basic food and education, which have been the faster growing areas of consumption:

Consumption will have to accelerate even for S&P’s forecasts to be met.