Budget pain will not be healed by a debt levy

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By Leith van Onselen

Following Treasury Secretary, Martin Parkinson’s, defining speech at the Sydney Institute earlier this month detailing the stiff headwinds facing the Federal Budget, which is facing decades of heavy deficits without major reforms to taxes and expenditure, as well as rising productivity, the Australian Treasury has reportedly warned that the nation is facing its most sustained period of weak growth for at least 50 years, with the economy forecast still to be feeling the effects of falling commodity prices and weak income growth in 2020:

Treasury estimates of nominal GDP, or the value of goods and services produced in the economy, show it will grow by only 3.7 per cent this year and 3.4 per cent in 2014-15, little more than half its 20-year average growth of 6.3 per cent.

Nominal GDP… is expected to aver­age only 4.7 per cent out to June 2018, before rising to 5.6 per cent by June 2021.

The full national accounts published since 1961 show there has never been a period with more than three years of growth less than 5 per cent, while estim­ates going back to World War II also show no similar period of extended slow growth.

The Treasury is right to be concerned. Nominal GDP is the dollar value of what’s produced and earned. It’s also the measure that drives taxation revenue. Due primarily to the inexorable rise in commodity prices and the terms-of-trade between 2003 and 2011 (with the exception of a brief collapse during the GFC), the Government enjoyed strong nominal GDP growth and booming tax receipts from rising personal and company taxes, not to mention increased capital gains taxes as asset markets boomed. However, since then, the terms-of-trade has begun to trend down, meaning that nominal GDP growth has been weak, as have tax receipts (see next chart).

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The problem for the Federal Government going forward is that the terms-of-trade is likely to continue to trend down towards its longer-term average (see next chart), which will drag heavily on income growth and nominal GDP. As a result, personal and company tax collections will be soft relative to past experience, whereas Budget outlays could increase to the extent that weaker employment leads to higher welfare payments.

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Another related headwind is the decline of mining-related capital expenditures (see next chart), which will detract from Australia’s GDP growth and employment, again placing pressure on government budgets via lower personal and company tax receipts and GST, as well higher welfare payments.

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With these budgetary pressures in mind, it was interesting to read speculation emerged over the long weekend that the Abbott Government is considering introducing a temporary “Budget debt levy” on higher income workers in order to eliminate the Budget deficit:

Australia had debt and deficits “stretching out as far as the eye can see”, [Abbott] told reporters in Brisbane.

“It’s important that the mess be tackled,” the prime minister said on Sunday.

“Now we are going to do it in ways which are faithful to the commitments that we made to the Australian people.

“We will do it in ways which are fair, which are equitable, and which I believe will be seen to be fair by the Australian people.”

Introducing a “levy” is clever politics. In doing so, the Coalition can claim that it has not “raised taxes” – as it promised during the election campaign. By claiming that the levy is temporary only – designed merely to eliminate “Labor’s debt” – it can also placate the effected taxpayers, who are less likely to view the tax rise as an assault on workers.

That said, it is also poor economics as it does not address the crumbling structure of Australia’s taxation system associated with Treasury’s weak forecasts.

As argued numerous times before, Australia’s tax base is shrinking. Two of the three main sources of tax revenue – company taxes and indirect taxes (mainly GST and fuel excise) – are either falling or about to fall. Company taxes will fade as the once-in-a-century mining boom unwinds, which will weakening mining company profitability and reduce the corporate tax take. GST revenues are also growing more slowly than the economy (and will continue to do so) as Australians spend a higher proportion of their earnings on GST-exempted items, such as health and education. Likewise, the relative tax take from fuel excise has been shrinking for more than a decade following the Howard Government’s short-sighted decision to end indexation prior to the 2001 Federal Election.

This leaves personal income tax as the only prospective source of revenue growth left for the Federal Government, despite its base also shrinking in a relative sense as the population ages. In turn, the tax burden will increasingly be pushed onto the (shrinking) working population.

The Coalition’s proposed Budget debt levy would, therefore, exacerbate these pressures: increasing the burden on personal income taxes, when instead fundamental tax reform is required to spur productivity, broaden the tax base and share the tax burden.

As highlighted many times before, the Henry Tax Review found personal income tax (along with company taxes) to be highly inefficient, producing a “marginal excess burden” (i.e. the loss in consumer welfare relative to the net gain in government revenue) higher than most other forms of taxation (see next chart).

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By comparison, raising or broadening the GST in exchange for cuts to personal income taxes (or giving back bracket creep) would result in clear efficiency gains, with tax expert, Professor John Freebairn, claiming that “changing the tax mix from (income taxes to indirect taxes) brings gains of 20c to 30c in the dollar and beats anything that a major corporation could do on productivity”.

There are also compelling reasons to shift the tax system back towards resource rents, as well as broad-based land taxes, which as shown above (via the Petroleum Resource Rents Tax and Municipal Rates) have almost zero marginal excess burden, since they apply to a tax base that is completely immobile – land. Both taxes are also more equitable than either consumption taxes or income taxes.

The Abbott should, therefore, be seeking fundamental reform to Australia’s tax system, in order to reduce the tax burden on the shrinking working-aged population, and to improve efficiency, productivity, and equity, rather than introducing short-term politically expedient measures like a Budget debt levy, which exacerbate the flaws in Australia’s tax structure. It should also be seeking to plug Budget holes via clamping down on Australia’s world-beating tax expenditures, by limiting tax lurks like superannuation concessions and negative gearing.

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Leith van Onselen
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  1. The proposed debt levy is the budget pain, and it will force the RBA to reduce interest rates.

    • Yep. The private sector’s desire to save, and therefore the public deficit, will not reduce by increasing taxes. A reduction of the budget deficit requires;

      – reduced external desire to save (capital account)
      – reduced internal desire to save (domestic savings)

      To meet the budget goals and avoid a deep recession, lower interest rates appear to be the main lever.

      • +1 Peter and b_b.

        There doesn’t appear to be a particularly large stock of that kind of ammunition remaining though.

      • migtronixMEMBER

        War debt in the case of the UK, temporary it was too — I think they managed to remove it once — but not for long…

    • Thankfully we dont pay ANY bills apart from our Rates and Mortgage and then have the possibility of a rate reduction , also planting and growing veggies in our veggie garden.

  2. limiting tax lurks like superannuation concessions and negative gearing.

    Putting some numbers to these items, and other budget costs* (for context)

    – Age Pension $39.5b
    – Superannuation tax concessions $35b
    – Annual Military budget $25b
    – Family Tax Benefit $19.4b
    – Medicare $19b
    – Disability Support Pension $15.8b
    – Capital gains tax concessions $15b
    – Aged Care $12.8b
    – Pharmaceutical Benefits Scheme $9.3b
    – Newstart unemployment benefits $7.5b
    – Higher Education $7.1b
    – Diesel rebate $6b ($2.3b goes to mining sector)
    – Negative gearing tax concessions $5b

    How much will the debt levy raise? The Medicare copayment is supposed to raise $0.25b. Peanuts in the context of a $400b budget, when you have plenty of juicy tax concessions that can be wound back.

    * I’ve found different numbers from various sources, but these are in the ballpark.

      • PPL will cost between $4b and $6b but this is just an Abbott brain fart at the moment, and unlikely to ever become law seeing as the ALP, Greens and PUP (and any sane human being) are against it.

    • That Super number is astonishing.

      35 large per year for a policy that achieves none of its original objecrives?

      Given that and NG and CGT concessions I find it obscene that we are even considering a GST on medicine and schoolbooks.

  3. Levy = TAX

    We all know it – these politicians really must think the electorate is stupid – they may well be right.

    Now how about these plonkers tackle negative gearing and put $4b+ back in the coffers!!!!

  4. This is a devious plan. Instead of fixing anything they will just take people’s money. A government bail-in in disguise. After its done, spending might drop causing a possible rate cut. House prices will then go up and it’ll be another mission accomplished.

    I can’t help but be cynical about their intentions if they leave all the tax lurks alone and working people end up paying while asset rich retirees continue to milk the system.

  5. “…,There are also compelling reasons to shift the tax system back towards resource rents, as well as broad-based land taxes, ..”

    And that means a compelling reason to have a serious discussion about our Federal system which for too long has been dominated by big central govt enthusiasts from both ends of the spectrum arguing that making Canberra bigger is the solution to every problem.

    Instead of fighting the constitution and encouraging the High Court to twist it out of shape with centralist misinterpretations we should embrace the competition that is at the core of every Federal system of govt.

    While greater consistency in some areas across the nation is a good thing, there is a lot to be said for competition between administrative regions. 6-8 competiting entities should keep everyone on their toes.

    The entity spending the money should be the entity raising and justifying the raising of the money.

    Encourage the states to use land taxes, GST and mineral royalties to provide the bulk of their funding requirements.

    The Federal govt can then get by with excises, income and CGT.

    We dont need a big govt for a big role for organisation and co-operation in the community. In practice big government is what tends to disempower communities and reduce participation.

    Apologies – a bit OT.

    • States are too big. Get rid of them and give the councils more power. They can compete with each other and set their own fees and tariffs. The duplicate government sinks can be abolished. As an extreme example what if each state wished to run its own defense budget?

    • innocent bystanderMEMBER

      not OT
      let’s try more States too.
      split WA and Qld in two for starts.

  6. A debt levy to remedy ” debt and deficits going out as far as the eye can see” really it’s like making one months payment on a 25 year mortgage.

  7. I support the idea of a debt levy.

    Every debt owed to a bank has 0.1% interest rate levy placed on it.
    Every debt owed to a bank for “investment purposes” has 1.0% interest rate levy placed on it.
    This levy is paid directly to government.

    Interestingly banks used to place their own 1% levy on loans for property investment vs occupier.

    • migtronixMEMBER

      The only problem I have with that Claw (and its not much of a problem really) is that one is generating a loan from thin air and then imposing a hair-cut on it.

      Seems rather peculiar to me, why not just create the 0.1% also? Or more?

      • Taxing borrowing allows government to put the brake on debt accumulation. This levy could be adjusted as necessary.

      • He’s right though Mig. What better than taxing debt since it could be the fastest growing source of tax revenue for a Government or a stable source of income given everyone is up to their eye balls. They could even make it a significant amount and eliminate income tax thus killing two birds (NG and shrinking tax base) in one hit.

      • migtronixMEMBER

        @Krazy like I said I have no real problem with that it just strikes me that if you’re going to make up the principle why not make up the levy too?

      • Interesting.

        I’d love to find a good comparison of all the different taxation systems. Fors and againsts and so on. Does anyone know if one exists?

      • There are many ideas for replacing all taxes with one super dooper tax. Most of them are very nutty.

        The debit tax would not work because it would encourage a massive shift to using cash for transactions. It would raise very little money and could not replace other taxes.

      • Who would bother going to great lengths to avoid 1% tax?
        Also cash withdrawls would be taxed anyway so dealing in cash would be far less attractive than it is under the current GST.

  8. This is pretty much symptomatic of the state of affairs regarding politics in Australia today.

    What this really is, is correcting the structural deficit in place since 2004 because the historically high terms of trade can no longer be relied upon to mask it.

    In real speak, this is called ‘paying your way’ however the bogan electorate lacks the economic sophisticatation, as well as being too selfish to think anything but ‘its someone else responsibility to pay. Concurrently our political leaders are too weak to say it how it is, and have to infer that this is a ‘levy’ that is temporary in nature.

    Enjoy the decline people, we deserve thisl

    • migtronixMEMBER

      Not entirely sure what you mean here Rus (I wasn’t here in 04) which structural deficit are you referring to?

      After Howard “paid-down debt” where did the structural deficit come from? Do you mean the private sector debt gorge?


      • No, I mean they cut taxes too much, particularly in light of the fact they put so much more welfare there. Over the course of the business cycle, taxes were now insufficient

        A once in a century boom, as well as the increase in service jobs on the back of a debt gorge, disguised it and the cyclical highs had enough receipts. However once the business cycle smoothed and tax receipts reverted to mean, only deficits wouldoccur

      • migtronixMEMBER

        @Rus Aaaah so that’s how it went down — sell the front and back yards, pay-down the mortgage on the bricks, then accept a pay-cut while promising to take on more work. Sounds brilliant….

      • “However once the business cycle smoothed and tax receipts reverted to mean, only deficits wouldoccur”


        It was easily predictable but government prefer to think that the good times will last forever despite obvious clues that they will not. (e.g. massive private debt increases, record TOT, large and persistent CAD)

        I fear we’re due a massive awakening from our national slumber…

  9. Top ten most valuable budget sacred cows
    “AMP chief economist Shane Oliver says changes to negative gearing or the CGT exemption on the family home would be seen as “unAustralian”.
    “If you have spent your life paying the family home off and then might be forced to sell it to get enough income, that would be very unpopular politically,” he says. “There may be some economic logic in getting rid of the CGT exemption since the family home is an asset like any other, so why should it be the only asset that’s tax free when a capital gain is made? But I think [the] odds of that [the government scrapping it] occurring is next [to] zero.”
    It is unlikely the government would move on negative gearing, Mr Oliver says, and he was not convinced it would be a good idea given the backlash Paul Keating suffered when he tried to do it in the 1980s.
    “Last time it happened, investor interest dissipated overnight and rental rates started to shoot up [in some capital cities],” he says.”
    The only thing “unAustralian”, Mr Oliver, is you and your FIRE spruiker mates cheer-leading the structural malinvestment that is distorting and damaging our economy.

      • Maybe I should have said logarithmic. Heh! Stand by the other point though. And nice of UE to debunk his crap in no more than 5 minutes.

  10. [Lisa Simpson, as President of the United States]

    If I’m going to bail the country out, I’ll have to raise taxes, but in my speech I’d like to avoid calling it a, “painful emergency tax.”

    What about, “colossal salary-grab.”

    See, that has the same problem. We need to soften the blow.

    Well, if you just want to out-and-out lie … [Lisa doesn’t object] Okay, we could call it a, “temporary refund adjustment.”

    I love it.
    [Later, Lisa is on TV]

    My fellow Americans and voting illegal aliens, I will not mince words. Your country needs you. That’s why today I’m proposing a temporary refund adjustment.

    Refund adjustment? Hey, sounds good to me.

    Sure beats a tax.

    We love you, President Simpson.