Budget black hole hits $60 billion

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The ever-expanding black hole formerly known as the Budget significantly broadens its circumference today. From The Australian:

SAVINGS of more than $60 billion a year will have to be found by 2023-24 for the Abbott ­government to reach its surplus target, according to the Commission of Audit, which presented a bleaker outlook for tax revenue than was contained in the midyear budget update.

The commission’s pessimism is understood to be based both on a further downgrade in tax revenue growth and on its belief that it is not realistic to assume there will not be any personal income tax cuts over the next 10 years.

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You may recall that Joe Hockey recently released Treasury estimates showing that bracket creep will be the stealthy tax hikes needed to help push up revenue and prevent this kind of blowout. The commission, however, argues that:

…it is realistic to assume there would not be any tax cuts over the next 10 years. The political cost of imposing such a burden on lower -income households would be too great, while it would also lead to lower workforce participation. Its projections reduce the government’s revenue by an allowance for tax cuts, based on the historic trend. The report also contains a further markdown in the underlying trend for revenue growth.

…Stephen Anthony, director of consultancy Macroeconomics, said yesterday the budget in the this financial year was broadly in line with the mid-year budget update, which had severely marked down the revenue projections in Treasury’s pre-election budget analysis.

…He said a revenue downgrade by the Commission of Audit may either reflect a more pessimistic view about Australia’s terms of trade (export prices compared with import prices) or new Treasury estimates of the losses outstanding from the global financial crisis, which have been depressing company and capital gains tax revenue.

Sounds to me like the commission is doing a pretty good job. The terms of trade projections from Treasury are still too high, as are its forecasts for business investment, though I’ll reserve judgement until I see the commission’s assumptions. On the unreality of no more tax cuts just to fend off bracket creep, it’s a fair point but it’s possible to cut lower income taxes while raising others so the assumption of bracket creep gains is not indefensible. That’s more of judgement call by the commission, erring on the side of conservatism.

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Anyway, it’s a big number and rightly so. Ross Gittins does a nice job today of explaining why:

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.