David Richardson and Scott
Kompo-Harms
Economics Section
This Budget is the first under the Rudd Government and the first
delivered by the new Treasurer, Wayne Swan. It is the first Budget
brought down by a Labor Government since Ralph Willis last Budget
in 1995. The main changes between the last Howard Government Budget
and the first Rudd Government Budget are discussed below.
This Budget has been framed in a challenging environment for
economic policy makers. On the one hand the Australian economy is
operating at, or very close to, capacity, creating domestic
inflationary pressures. The unemployment rate and participation
rates are both hovering around three-decade lows and underlying
inflation, now well outside the Reserve Bank of Australia (RBA)
target range of 2 to 3 per cent, has accelerated in recent
quarters. On the other hand, the global financial system is
experiencing the fallout from the US sub-prime crisis, resulting in
tighter credit conditions which are expected to slow growth in the
advanced economies over the forward estimates period. In his
speech, the Treasurer described the Budget in the following
terms:
This Budget is designed to meet the big
challenges of the future. It is a Budget that strengthens
Australia's economic foundations, and delivers for working families
under pressure. It is the responsible Budget our nation needs at
this time of international turbulence, and high inflation at home.
A Budget carefully designed to fight inflation, and ensure we meet
the uncertainties of the future from a position of strength. A
Budget with a $55 billion Working Families Support Package at
its very core. A Budget that begins a new era of strategic
investment in Australia's future challenges and opportunities. And
a Budget that helps plan, finance and secure Australia's long-term
national security and defence needs. These are the commitments the
Government gave to the Australian people at the election. Mr
Speaker, this Budget honours those commitments. The Government has
made sure every single cent of new spending for the coming year has
been more than met by savings elsewhere in the Budget. Our
commitments have been honoured by redirecting spending. Difficult
spending cuts have helped fund our Working Families Support Package
and our new priorities for the nation.[1]
These comments reflect the uncertainty for economic policy
makers going forward, but nonetheless reveal a commitment from the
government to implement their election promises in a disciplined
manner. They also reflect the government s desire to contain
spending to combat domestic inflationary pressures.
Most of the major items in the Budget
had been revealed prior to its release. These included: personal
income tax cuts; changes to the excise on other excisable beverages
, known as alcopops ; introduction of, or changes to existing,
means-tests for Family Tax Benefit Part B, the Baby Bonus and
the Medicare levy; increases in the Child Care Rebate; and tax
refunds for educational expenses. In general, the Budget contained
no real surprises .
In the immediate aftermath of the Budget, the main focus of much
of the media was on the tax cuts, the three nation-building
infrastructure funds and the degree of fiscal restraint
exercised.[2] The
issue of whether fiscal settings are tight enough to have any
impact on inflation tended to dominate the headlines. For example,
on the morning of 14 May 2008 the headlines said:
- Swan Lite on Inflation in The Australian
- Swan s Nip and Tuck Budget in the Australian Financial
Review
- It s a Highwire Act - $41 billion for nation building but risk
of pressure for inflation in the Sydney Morning Herald,
and
- Softly, softly: Labor s cautious first steps in The
Age.
This brief succinctly covers some of the main features of the
Budget by examining the economic forecasts contained in the Budget
as well as the outlook for other macroeconomic aggregates,
including inflation, unemployment, the current account and interest
rates. It then discusses the main revenue and spending aspects of
the Budget.[3]
Statement 2: Economic Outlook in Budget Paper No. 1 2008
09 details estimates (2007 08), forecasts (2008 09) and
projections (2009 10 to 2011 12) of the main macroeconomic
aggregates that underpin the revenue and expenses figures presented
in Statement 3: Fiscal Strategy and Outlook , Budget Paper No.
1 2008 09.[4] In
a time of uncertainty given the countervailing forces that exist,
both internationally and domestically, these numbers assume a
greater importance to the future Budget outlook. First, Statement 2
provides an overview of the parameters that underpin the Budget.
Second, it provides an indication of the government s expectations
of the state of the global economy up to the end of 2009. Third,
Statement 2 provides a detailed outlook for the domestic economy.
This section of the brief provides an analysis of the government s
forecasts, as well as comparing the outlook in the Budget to key
economic forecasts from other sources.
Table 1 from the Statement 2 examines the major economic
aggregates, estimates and forecasts (see Table 1 below).
Table 1: Major Economic Aggregates,
Estimates and Forecasts annual percentage change [5]
| |
Estimates 2007
08
%
|
Forecasts 2008
09
%
|
|
Demand and
Output
|
|
Household consumption
|
4
|
2
|
|
Dwelling investment
|
2
|
2
|
|
Business investment
|
9
|
8
|
|
Private final demand
|
5
|
4
|
|
Public final demand
|
4
|
3
|
|
Total final demand
|
5
|
3
|
|
Changes in
inventories[6]
|
|
-
|
|
Gross National
Expenditure
|
5
|
3
|
|
Exports
|
3
|
6
|
|
Imports
|
11
|
9
|
|
Net exports[7]
|
-2
|
-1
|
|
Real gross domestic
product
|
3
|
2
|
|
Non-farm product
|
3
|
2
|
|
Farm product
|
2
|
20
|
|
Nominal gross domestic
product
|
7
|
9
|
|
Other Selected
Economic Measures
|
|
External Accounts
|
|
Terms of trade
|
4
|
16
|
|
Current account balance
(per cent of GDP)
|
-6
|
-5[8]
|
|
Labour Market
|
|
Employment[9]
|
2
|
1
|
|
Unemployment rate (per
cent)
|
4
|
4 [10]
|
|
Participation rate (per
cent)
|
65
|
65 [11]
|
|
Prices and Wages
|
|
Consumer Price Index
|
4
|
3
|
|
Gross non-farm product
deflator
|
4
|
6
|
|
Wage Price Index
|
4
|
4
|
Source: Statement 2, Budget Paper No. 1 2008
09, p.2 6.
From these figures, it can be seen that the government expects
economic growth to slow to slightly below its long-run average at 2
per cent, down from an anticipated 3 per cent in 2007 08. Notable
aspects of these expectations include:
- a slowing of non-farm GDP, which will drive a moderation in
price and wage pressures although this will be cushioned by a
forecast rise in farm production, which is expected to add
percentage point to real GDP
- in line with the RBA forecasts, underlying and headline
inflation are still forecast to be outside of the Bank s 2 3 per
cent target band by the end of 2008 09
- the Wage Price Index is also forecast to remain steady but at
an elevated level
- the government is expecting that strong growth in the emerging
economies will continue, with a forecast of an incredibly
strong rise in the terms of trade of 16 per cent in 2008 09. This
is coming off the back of levels not seen since the Korean War wool
boom. The government stated that over the 2008 calendar year, the
terms of trade are forecast to rise by over 20 per cent which, if
realised, would be the largest in a generation. [12] This will lead to further strong
growth in Australian domestic incomes, thereby exacerbating
inflationary pressures, and
- the unemployment rate is forecast to rise slightly (from the
lowest level in over 30 years) by the end of 2008 09.
In terms of the international outlook, the government expects a
mild recession in the United States (US), driven by deteriorating
consumer confidence as a result of the recent falls in US house
prices and exacerbated by the recent stress in financial markets.
The Federal Reserve has responded by sharply lowering interest
rates in recent months and the US administration has implemented a
fiscal stimulus package (of around 1 per cent of US GDP), targeted
at boosting household consumption and business investment. The
effects of these stimuli are expected to be felt during the second
half of 2008. The US slowdown does imply that the US current
account deficit should narrow, although the risk of a disorderly
adjustment of current account imbalances remains a concern for the
US economy and global outlook .[13]
Other major advanced economies (Euro area and Japan) are also
tipped to slow, although not to the same degree as the US. In sharp
contrast, growth in emerging economies (particularly in Asia) has
continued and is forecast to continue virtually unabated to the end
of 2009. The Chinese economy is forecast to slow slightly, from a
decade-high growth rate of 11.9 per cent at the end of 2007 to 9.5
per cent at the end of 2009. Indian growth is also tipped to slow
slightly, from 9.1 per cent to 7.75 per cent over the same
period. Other East Asian economies are expected to experience a
moderation in growth through 2008 and a rebound in 2009.[14]
Other agencies and institutions also provide forecasts for
economic activity. In this section Budget forecasts are compared
with those made by the RBA, for the main economic aggregates of
GDP, non-farm GDP, and CPI. The RBA also provides forecasts of
underlying inflation (although this is not included in the Budget).
The RBA makes similar underlying assumptions to those made in the
Budget (these assumptions are discussed in more detail in the
section below). Table 2 below presents the RBA forecasts:
Table 2: RBA forecasts
Source: Reserve Bank of Australia, Statement on Monetary
Policy, 9 May 2008, p. 68.
These latest RBA forecasts are roughly in line with the Budget
forecasts, although the RBA s forecasts, particularly for CPI
inflation, tend to be a little more tilted to the upside
(notwithstanding the different basis for comparing change over time
the Budget forecasts are performed on a year-average change basis,
whereas the RBA uses year-to-quarter changes). However, it should
be noted the RBA forecasts for non-farm GDP are well below that
presented in the Budget. On inflation risks, the RBA states:
Risks to these forecasts can be identified in
both directions. A further deterioration in the outlook for global
growth would be the main source of downside risk to the forecasts
for domestic activity. In particular, if the weakness in the major
developed economies were to lead to a large moderation in growth in
China and India, it is likely that the outlook for the Australian
economy and commodity markets would deteriorate significantly There
are also upside risks to the domestic growth and inflation
forecasts. It is possible that the recent weakness in consumer
sentiment and domestic spending will prove to be mostly temporary,
especially in light of the large boost to national income arising
from the terms of trade. If demand were to be stronger than
expected, the forecast moderation in the inflation rate would
probably not eventuate. In addition, the persistence of inflation
at relatively high rates for some time could result in inflation
expectations becoming entrenched at higher than acceptable levels,
which could feed back into wage- and price-setting
behaviour.[15]
On the downside, the continuation of strong revenue gains as a
result of strong terms of trade increases experienced in recent
years depends heavily on whether domestic consumption and
investment in emerging economies will fill the void left by
flagging foreign demand from the major advanced economies. On the
upside, if domestic demand does not moderate as expected, inflation
is not likely to moderate posing serious risks to inflationary
expectations which have remained well-anchored to date. In the
short-term there is a risk that if domestic demand does not
moderate as expected, yet a sudden and dramatic fall in commodity
prices (and by implication the terms of trade) occurred, then at
least for a short time (perhaps a few months) inflation could rise
sharply as the AUD would also tend to fall suddenly, raising the
prices of imports (most importantly, the price of fuel). This would
only be a temporary phenomenon of itself (and usually not
much to worry about), but at a time of strong existing inflationary
pressures, a sharp temporary surge in inflation could just be the
trigger for inflationary expectations to surge and feed into
wage-and price-setting behaviour.
The following section summarises estimates of the key economic
aggregates from the four major banks (Table 3 below). Compared with
Table 1 above, the Budget forecasts are also roughly in line with
these private-sector forecasts.
Table 3: Economic forecasts, ANZ,
CBA, NAB and Westpac
| |
|
Financial
years
|
Calendar
years
|
| |
2007
08
%
|
2008
09
%
|
2007[16]
%
|
2008
%
|
2009
%
|
|
ANZ
|
Real GDP
|
3
|
2
|
3.9
|
2.5
|
2.4
|
|
Employment
|
2
|
1
|
2.8
|
2.4
|
1.4
|
|
Unemployment Rate (%)
|
4
|
4
|
4.4
|
4.2
|
4.6
|
|
WPI
|
4
|
4
|
4.1
|
4.3
|
4.1
|
|
CPI
|
4
|
4
|
2.3
|
4.1
|
3.5
|
|
CBA
|
Real GDP
|
3.6
|
3.1
|
3.9
|
3.0
|
3.4
|
|
Employment
|
2.5
|
2.0
|
2.8
|
2.2
|
2.1
|
|
Unemployment Rate (%)
|
4.3
|
4.6
|
4.4
|
4.5
|
4.5
|
|
WPI
|
4.2
|
3.9
|
4.1
|
4.1
|
3.9
|
|
CPI
|
3.1
|
3.0
|
2.3
|
3.5
|
2.8
|
|
NAB
|
Real GDP
|
3
|
2
|
4.0
|
2.8
|
2.8
|
|
Employment
|
2
|
2
|
N/A
|
2
|
2
|
|
Unemployment Rate (%)
|
4
|
4
|
4.4
|
4.3
|
4.7
|
|
Average earnings
|
3
|
4
|
N/A
|
4
|
4
|
|
CPI
|
3
|
2
|
2.3
|
3.8
|
2.3
|
|
Westpac
|
Real GDP
|
3.5
|
3.0
|
N/A
|
N/A
|
N/A
|
|
Employment
|
2.7
|
1.8
|
N/A
|
N/A
|
N/A
|
|
Unemployment Rate (%)
|
4.2
|
4.4
|
N/A
|
N/A
|
N/A
|
|
WPI
|
4.3
|
4.4
|
N/A
|
N/A
|
N/A
|
|
CPI
|
3.2
|
3.3
|
N/A
|
N/A
|
N/A
|
Sources: ANZ - Economic Outlook (2 May
2008), ANZ Federal Budget Report (14 May 2008), CBA
Research - Forecasts Economic (9 May 2008), NAB -
Monthly Business Survey (8 April 2008), NAB - 2008/09
Budget Download (14 May 2008), Westpac Australian Budget
2008/09 (14 May 2008).[17]
Overall, private-sector bank economists expect the Budget s
impact on inflation and interest rates to be neutral. For example,
Saul Eslake, chief economist at ANZ stated:
The Budget embodies a very modest tightening of
fiscal policy and as such is more appropriate for the circumstances
than recent Budgets have been. It won t add [Eslake s
emphasis] to upward pressure on interest rates as the previous
government s last few budgets did but nor can it really be said
that the Budget exerts maximum downwards [Eslake s
emphasis] pressure on interest rates.[18]
NAB Capital chief economist, Rob Henderson stated that the
current Budget represented a structural tightening of fiscal
policy, equivalent to per cent of GDP, but also reminds us that the
1996 97 Budget delivered a tightening of 1 per cent of GDP.
According to Henderson, the tightening in the current Budget
is:
[n]ot sufficiently frugal to represent a
quantum change to the outlook.[19]
It should be noted there are a number of underlying assumptions
made when these forecasts are generated. For 2008 09, the key
assumptions are:
- the bilateral AUD/USD exchange rate is assumed to be around 93
US cents, with a trade weighted index of around 71
- domestic interest rates are assumed to remain unchanged
- world oil prices (using the West Texas Intermediate benchmark)
are assumed to be around US$115 per barrel, and
- farm sector forecasts assume average seasonal conditions but
take account of low water storage levels.[20]
Were any of these assumption violated, the forecasts would need
to be altered. Previous Budgets usually presented a table
containing information on the impact of deviations from some
assumptions on revenue and expenses this budget does not contain
such a table. Rather, the 2008 09 Budget presents two illustrative
scenarios:
- a permanent decrease in commodity prices, consistent with a 1
per cent fall in nominal GDP, and
- a 0.5 per cent ongoing increase in both labour productivity and
the participation rate, consistent with a 1 per cent increase in
real GDP.
The scenarios reproduced below are presented as deviations from
the baseline forecasts in the year after the change
occurred.[21] The
first scenario can be categorised as a negative demand shock, while
the second scenario can be thought of as a positive supply shock,
and thus, the opposite cases can also be considered (i.e. the sign
of the estimated effects on receipts and payments will change).
Table 4a: Illustrative impact of a
permanent commodity price fall consistent with a 1 per cent fall in
nominal GDP (per cent deviation from baseline level)
| |
Year
1
|
Year
2
|
| |
%
|
%
|
|
Real GDP
|
0
|
-
|
|
Non-farm GDP deflator
|
-
|
-
|
|
Employment
|
-
|
-
|
|
Wages
|
0
|
-
|
|
CPI
|
0
|
-
|
|
Company profits
|
-3
|
-3
|
|
Consumption
|
-
|
-
|
Table 4b: Illustrative sensitivity
of the budget balance to a 1 per cent reduction in nominal GDP due
to a fall in the terms of trade
| |
Year
1
|
Year
2
|
| |
$b
|
$b
|
|
Receipts
|
|
|
|
Individuals and
withholding taxation
|
-0.5
|
-1.9
|
|
Superannuation
taxation
|
-0.1
|
-0.1
|
|
Company tax
|
-1.3
|
-2.7
|
|
Goods and services
tax
|
-0.1
|
-0.2
|
|
Excise and customs
duty
|
-0.1
|
-0.1
|
|
Other taxation
|
0.0
|
0.0
|
|
Total
Receipts
|
-2.0
|
-5.0
|
|
Payments
|
|
|
|
Income support
|
0.1
|
0.1
|
|
Other payments
|
-0.2
|
-0.3
|
|
GST payments
|
-0.1
|
-0.2
|
|
Total
Payments
|
-0.2
|
-0.4
|
|
Interest change on surplus
change
|
-0.1
|
-0.3
|
|
Underlying cash
balance impact
|
-1.9
|
-4.8
|
Table 5a: Illustrative impact of an
ongoing (equal) increase in both the participation rate and labour
productivity consistent with a 1 per cent rise in real GDP (per
cent deviation from baseline level)
| |
Year
1
|
Year
2
|
| |
%
|
%
|
|
Real GDP
|
|
|
|
Non-farm GDP deflator
|
-
|
-
|
|
Employment
|
|
|
|
Wages
|
|
|
|
CPI
|
-
|
-
|
|
Company profits
|
1
|
1
|
|
Consumption
|
1
|
1
|
Table 5b: Illustrative sensitivity
of the budget balance to a 1 per cent rise in real GDP due to an
ongoing (equal) increase in both the participation rate and labour
productivity
| |
Year
1
|
Year
2
|
| |
$b
|
$b
|
|
Receipts
|
|
|
|
Individuals and
withholding taxation
|
1.5
|
1.7
|
|
Superannuation
taxation
|
0.0
|
0.1
|
|
Company tax
|
0.8
|
1.6
|
|
Goods and services
tax
|
0.4
|
0.4
|
|
Excise and customs
duty
|
0.4
|
0.4
|
|
Other taxation
|
0.0
|
0.0
|
|
Total
Receipts
|
3.0
|
4.1
|
|
Payments
|
|
|
|
Income support
|
0.0
|
0.1
|
|
Other payments
|
-0.1
|
-0.2
|
|
GST payments
|
0.4
|
0.4
|
|
Total
Payments
|
0.3
|
0.3
|
|
Interest change on surplus
change
|
0.1
|
0.3
|
|
Underlying cash
balance impact
|
2.8
|
4.1
|
The most significant thing to note from these tables is that
most of the action, in terms of impact on the underlying cash
balance, occurs on the receipts side. The impact on payments is
small. The government also states:
To the extent that the increase in productivity
and participation are temporary rather than permanent, the impact
on the economic and fiscal position would be more subdued.
As mentioned above, it is also possible to consider the reverse
cases (i.e. a positive demand shock and a negative supply shock),
merely by reversing the sign of the impacts on receipts and
payments.
This Budget forecasts an underlying cash balance, or surplus, of
$21.7 billion for 2008 09 up from the estimated $16.8 billion
balance in the last Budget brought down by the former treasurer,
Peter Costello. It is also dramatically different from the last
Keating Government budget brought down by Ralph Willis. That Budget
produced a balance of minus $11.1 billion or a deficit of 2.1 per
cent of GDP.
As far as can be ascertained, all commentators have accepted
that the surplus will be $21.7 billion for 2008 09. However, when
examining the historic series, we are told that the figure of $21.7
billion does not include the earnings of the Future Fund. If we add
that back into the surplus then the true figure is in fact $25.2
billion. As a share of GDP, the figure would rise to approximately
2.3 per cent. There is no reason for excluding the earnings of the
Future Fund from the budget balance and in other places in the
Budget Papers it is added into the cash balance.[22] In most of what follows we
continue to use the government s chosen figure (excluding Future
Fund earnings) so as to enable cross checking with the Budget
Papers.
Surpluses are projected to continue into the forward estimates
at roughly the same value. The budget surpluses for 2008 09 and
2009 10 will be allocated towards three new funds: the Building
Australia Fund, the Health and Hospitals Fund and the Education
Investment Fund. This Budget continues the recent trend towards
allocating surpluses to specific purposes. Of course the allocation
is largely notional, the presentation in the Budget Papers and the
definitions of revenue, spending and balance remain the same.
The fiscal balance for 2008 09 is forecast to be $23.1 billion
up from $20.4 billion in 2007 08.[23] The following table shows how that balance comes
about.
Table 6: Budget revenue,
expenditures and balance
| |
Budget
Estimates
|
| |
2007
08
($b)
|
2008
09
($b)
|
Increase
%
|
|
Revenue
|
303.8
|
319.5
|
5.2
|
|
% GDP
|
26.9
|
25.9
|
-3.7
|
| |
|
|
|
|
Expenses
|
280.6
|
292.5
|
4.2
|
|
% GDP
|
24.9
|
23.8
|
-4.4
|
| |
|
|
|
|
net capital investment
|
2.8
|
3.9
|
39.3
|
| |
|
|
|
|
Fiscal
balance
|
20.4
|
23.1
|
13.2
|
|
% GDP
|
1.8
|
1.9
|
5.6
|
Source: Statement 3, Budget Paper No. 1 2008
09, p. 3 5.
There are a number of interesting features of this table. The
table shows that revenue will increase from $303.8 billion in 2007
08 to $319.5 billion in 2008 09: an increase of 5.2 per cent.
However, as a share of GDP, revenue falls from 26.9 per cent to
25.9 per cent. The reason for that is the large forecast increase
in nominal GDP of 9.25 per cent. The forecast increase in real GDP
is more modest at 2.75 per cent but prices (using the gross
non-farm product deflator) are expected to increase by 6.25 per
cent.[24]
Expenses will increase from $280.6 billion in 2007 08 to $292.5
billion in 2008 09, an increase of 4.2 per cent.[25] Incidentally, the forecast
increase in the consumer price index suggests there will be a very
modest increase in real expenditure for 2008 09. The Budget Papers
claim that spending growth has been held to a 1.1 per cent real
increase.[26] As a
share of GDP, those figures imply a fall in spending from 24.9 to
23.8 per cent of GDP in 2008 09.
This Budget introduces a new table that shows not only the
effect of policy decisions on the budget balance but splits the
decisions into spending and savings decisions.[27] This is a useful innovation;
especially at a change of government when there will be interest in
how the priorities are changing. The total effect of policy
decisions since the Pre-Election Economic and Fiscal Outlook (PEFO)
in October 2007 was to add $1996 million to the cash balance for
2008 09. The new table shows us that this was made up of:
- new spending worth $5274 million, offset by
- cuts to other spending of $5338 million, plus
- new revenue measures costing $13 million, offset by
- revenue increases worth $1918 million.
While this breakdown is new and useful it does not extend to the
forward estimates.
The government has stressed its preparedness to make savings to
finance its new spending. In the Budget Speech the Treasurer said
[e]very single dollar of new spending is more than offset by
savings. We have delivered our commitments by redirecting spending
to more pressing priorities. [28]
The government has grouped a large number of those savings
measures together under the heading Responsible Economic Management
. Those appear on pages 321 to 427 in Statement 2.[29] They are described there as
measures that cut ineffective and wasteful programs, target welfare
payments and realise efficiencies in the public sector. There is no
equivalent heading for receipts savings measures.
In addition to the effect of policy decisions, the government
also had the advantage of the parameter and other variations that
added $5388 million since the PEFO. These are basically the effects
of the economy doing much better than initially expected. Going
back further it is useful to examine how we got from the last
Costello Budget with its projection of a $12.7 billion surplus for
2008 09 to the present estimate of $21.7 billion. For that purpose
we can also look at how the forward estimates are changed. Those
figures are presented in the following table.
Table 7: Policy and parameter
effects on the budget balance.
| |
2008
09
|
2009
10
|
2010
11
|
|
May 2007 Budget estimates:
underlying cash balance
|
12712
|
13812
|
12447
|
|
Effect of policy
decisions
|
-8897
|
-13835
|
-16157
|
|
Effect of parameter and
other variations
|
17889
|
19692
|
22706
|
|
May 2008 Budget estimates:
underlying cash balance
|
21703
|
19669
|
18996
|
Source: Statement 3, Budget Paper No. 1 2008
09, p. 3 11.
It is interesting to note that the policy measures have a
substantially greater effect in the out-years then they do in the
budget year. The effect of policy decisions in 2010 11 is almost
twice the effect in 2008 09. In each year the policy effects are
clearly dominated by the effects of parameter and other variations.
Those parameter and other variation effects have been particularly
strong this year with a powerful effect on the expected cash
balance going well into the future. Most of the impact is on the
revenue estimates to which we return later in this brief.
In the rest of the world there is a wide variety of experience
so it is worth comparing Australia s surplus with some other
countries.
Table 8: International comparisons:
Budget Balance as Percentage of GDP 2008 Forecast
|
Country
|
Budget
Balance
% of
GDP
|
Country
|
Budget
Balance
% of
GDP
|
Country
|
Budget
Balance
% of
GDP
|
|
USA
|
- 2.4
|
Netherlands
|
0.6
|
Hong Kong
|
3.0
|
|
Japan
|
-2.9
|
Spain
|
-0.7
|
India
|
-3.1
|
|
China
|
0.5
|
Czech Rep.
|
-2.5
|
Singapore
|
1.0
|
|
Britain
|
-3.2
|
Denmark
|
3.6
|
South Korea
|
0.2
|
|
Canada
|
0.4
|
Hungary
|
-4.1
|
Argentina
|
1.1
|
|
Euro Area
|
-0.8
|
Norway
|
17.5
|
Brazil
|
-1.8
|
|
Austria
|
-0.4
|
Poland
|
-2.0
|
Chile
|
7.0
|
|
Belgium
|
-0.4
|
Russia
|
2.5
|
Luxembourg
|
1.2
|
|
France
|
-2.9
|
Sweden
|
2.4
|
New Zealand
|
3.1
|
|
Germany
|
1.0
|
Switzerland
|
0.9
|
Saudi Arabia
|
17.9
|
|
Greece
|
-2.6
|
Turkey
|
-2.0
|
|
|
|
Italy
|
-2.6
|
Australia
|
1.5
|
|
|
Source: The Economist, 16 May 2008
Australia is one of a hand full of surplus countries, some other
high-income countries being Canada, Denmark, Germany, Netherlands,
Norway, Russia and Sweden. Of course, other countries are at
different stages in their economic cycles and are subject to a host
of other influences. One important difference between Australia and
many other countries is that they are experiencing the inverse of
Australia s favourable terms of trade movements. Other notable
countries are China and Saudi Arabia. China is interesting because
of its importance for Australia and Saudi Arabia because it is a
major resource-rich country. Saudi Arabia, like Norway, is one of
the extreme outliers with a surplus approaching 18 per cent of
GDP.
Other nations are running significant deficits at the moment. It
is interesting to look at some of the absolute amounts of budget
deficits throughout the world. This figure is available on a
consistent basis in $US from the International Monetary Fund World
Economic Outlook database.[30] For all the countries we can measure, combined budget
balance is a deficit of $US867 billion forecast for 2008 of which
the US alone accounts for $US634 billion.
Budget surpluses are expected to continue into the future at
least in part driven by revenue growth in the recent past which is
expected to persist into the future. The following table projects
the revenue figures into the future. It also includes the estimates
and projections for GDP itself. The Budget Papers project revenue
of $366.9 billion in 2011 12 or 26.1 percent of GDP. That is only
marginally above the 25.9 per cent of GDP estimated for 2008
09.
Table 9: Revenue growth in the
forward estimates.
| |
Revenue
($b)
|
Increase
%
|
|
2006 07
|
278.0
|
|
|
2007 08
|
303.8
|
9.3
|
|
2008 09
|
319.5
|
5.2
|
|
2009 10
|
336.9
|
5.4
|
|
2010 11
|
350.9
|
4.2
|
|
2011 12
|
366.9
|
4.6
|
Source: Statement 3, Budget Paper No. 1 2008
09, p. 3 5.
Australia s recent experience suggests a tendency for revenue to
come in much higher than expected. There is even more reason than
normal to think that the revenue growth in the out-years (2009 10
to 2011 12) will exceed the Budget figures. The reasoning is simply
that the revenue growth in these years is based on the projection
assumption of 2.5 per cent growth in the CPI. The RBA has published
inflation forecasts through to December 2010 which significantly
exceed these projections. If the RBA is correct, then we would
expect revenue projections are underestimated on that count. In
addition, it is worth stressing that the forward projections for
2011 12 come in at roughly the same share of GDP as the 2008 09
estimate; 26.1 per cent and 25.9 per cent respectively. However,
the scatter plot published in the Budget Papers shows that the
elasticity of revenue with respect to GDP growth tends to exceed
unity by a substantial margin.[31] If so, we would expect that estimates of revenue
to GDP would show an upward trend in the forward estimates, at
least once the effects of new measures wash out of the system. On
that ground, the figures given in the Budget could be substantial
underestimates. On the other hand, the RBA forecasts a period of
economic growth well below the projections in the Budget Papers. If
this occurs it could produce a large downward movement in revenues
as discussed earlier.[32]
This year the Budget Papers contain a good deal of discussion
about the disappointing performance in forecasting government
revenue.[33] The
errors discussed there relate to recent years in which outcomes
have been much greater than forecasts. A lot of the error is
explained by underestimates in the forecast economic growth. When
the economy is growing strongly there is a tendency to
underestimate. If we look at the historic performance we find that
when the economy is weak there is a tendency to overestimate
economic growth historically the Budget Papers did not forecast any
of the recessions Australia has experienced since the early
1950s.[34] It might
be hoped that economic forecasts would gradually improve. However,
that may not be the case. The former Governor of the Reserve Bank
of Australia, Mr Ian Macfarlane, in evidence to the House of
Representatives Committee on Economics, Finance and Public
Administration made the following point about economic
forecasting:
Economic forecasting is a very imperfect art I
would not use the word 'science.' It, by and large, has not
improved in 30 years. I have been through all the attempts to
improve it all the large econometric models, the small econometric
models, the leading indicators, all the surveys of expectations and
basically it is about the same as it always was.[35]
Tax Summit
Following the 2020 Summit the Prime Minister announced a tax
summit. There were no details, just that bald statement. The 2008
09 Budget clarifies the nature of the review of the tax
system.[36]
Essentially the review will consider:
1.
the balance of taxes on work, investment and consumption
2.
the role for environmental taxes
3.
the interaction of the tax and social security system on affected
people and families
4.
taxes on savings, assets, investment income and company income
5.
taxation of consumption but excluding the GST
6.
simplifying the total tax system at all levels of government,
and
7.
the interrelations between the various taxes and with the proposed
emissions trading system.
A discussion paper is due to be released by the end of July 2008
and a final report is to be produced by the end of 2009.
The China effect on revenue
Treasury presents a useful discussion of the effects of the
terms of trade increase on the tax revenue. Over recent years,
there has been discussion to the effect that the resources boom has
created windfall tax revenue that can disappear as quickly as it
arrived. Hence, it is argued that the windfall tax should not add
to recurrent spending levels that would be unsustainable when the
resources boom dies down.
The Budget estimates that the terms of trade effect will have
increased tax revenue by $33 billion in 2008 09.[37] That may seem a large increase
to be generated by mining which contributed a gross real value
added of a modest $65 billion in 2006 07, the latest full year
figure available.[38]
The implication of the Budget Paper estimate seems to be that
the resources boom has increased revenue by $33 billion and,
without any commensurate increase in spending, the surplus would
have been higher by that amount. In other words, the resources boom
has given the government another $33 billion in new revenue to do
with as they will. Certainly, that is the message from people such
as Chris Richardson from Access Economics, a respected private
consultancy company, although his own estimate differs from the
latest Budget Paper figure.[39] However, this sort of approach may significantly
overstate the effect of the resources boom on revenue. Before
explaining that issue, it should be pointed out that the $33
billion estimate of the effect of the resources boom is only ever
mentioned in Box 2 on pages 5 14 and 5 15 in Statement 5 of
Budget Paper No. 1 2008 09. That estimate is not referred
to in commentary anywhere else in the Budget Papers. Perhaps the
authors of the Budget Papers have provided that estimate as a
service to readers but are not confident enough in the methodology
to use it in their discussion. Nevertheless it is worth going
through the exercise.
The effect of the resources boom on revenue is calculated by
adjusting the national accounts magnitudes for the terms of trade
effect. The Australian Bureau of Statistics (ABS) does that when
they estimate the real net national disposable income . The full
account may be too technical, but essentially what they do is boost
the export component by the amount export prices have exceeded
import prices. That gives a measure of the extent to which the
country is wealthier when Australia s exports can purchase more
imports. That is the purpose of making the calculations. However,
this is a pure valuation effect. A simplified example is given in
Appendix A.
To argue that taxes are higher as a result of these new
valuations, it has to be admitted that the value of expenses must
also have risen by a similar amount. In fact, what the ABS has done
in calculating national accounts magnitudes is to revalue all of
the magnitudes that are recorded in the national accounts. If the
value of taxation has risen, then so too has the value of the
unemployment benefit, the cost of infrastructure projects and many
other items. There need not be any more resources available to
government.
This is not to argue that the mining boom has not generated some
windfall gain in revenue. Clearly it has and we can see that in the
extraordinary increases in the profits being earned by BHP
Billiton, Rio Tinto and other mining companies. Those profit
increases have generated commensurate increases in company tax by
those companies. However, the amounts are likely to be much more
modest than the Budget Papers suggest.[40]
This section examines the changing priorities in the new
Government s spending initiatives. In the Budget Speech the
Treasurer announced emphasis on the Working Families Support
Package together with emphasis on the themes of education, health,
climate change and others. The purpose in this section is to
examine how those priorities affect the patterns of spending and
taxing.
Table 10: Expenses by
Function
| |
2007
08
|
2008
09
|
2011
12
|
| |
$m
|
%
total
|
$m
|
%
total
|
$m
|
%
total
|
|
General public
services
|
16631
|
5.93
|
17261
|
5.90
|
19653
|
5.79
|
|
Defence
|
17366
|
6.19
|
17896
|
6.12
|
20274
|
5.98
|
|
Public order and
safety
|
3788
|
1.35
|
3807
|
1.30
|
3881
|
1.14
|
|
Education
|
18620
|
6.64
|
18764
|
6.42
|
21800
|
6.43
|
|
Health
|
44455
|
15.85
|
46032
|
15.74
|
52190
|
15.38
|
|
Social Security and
Welfare
|
97230
|
34.66
|
102439
|
35.03
|
114077
|
33.63
|
|
Housing and community
amenities
|
3083
|
1.10
|
3197
|
1.09
|
2917
|
0.86
|
|
Recreation and culture
|
2826
|
1.01
|
2907
|
0.99
|
2736
|
0.81
|
|
Fuel and energy
|
5103
|
1.82
|
5574
|
1.91
|
6080
|
1.79
|
|
Agriculture, forestry and
fishing
|
4085
|
1.46
|
3058
|
1.05
|
3119
|
0.92
|
|
Mining, manufacturing and
construction
|
1846
|
0.66
|
1834
|
0.63
|
1515
|
0.45
|
|
Transport and
communication
|
4486
|
1.60
|
4727
|
1.62
|
5265
|
1.55
|
|
Other economic affairs
|
6467
|
2.31
|
6770
|
2.31
|
6791
|
2.00
|
|
Other purposes
|
54564
|
19.45
|
58202
|
19.90
|
78942
|
23.27
|
|
total
expenses
|
280551
|
100.00
|
292470
|
100.00
|
339241
|
100.00
|
Source: Statement 6, Budget Paper No. 1 2008
09, p. 6 5.
We have already noted that total spending will decline gradually
as a share of GDP over the forward estimates. The following table
is constructed to illustrate how the actual spending priorities
have changed from the last Howard Government Budget to the first
Rudd Government Budget as expressed in the estimates for 2008 09
and through to the end of the forward estimates period in the year
2011 12. That gives a total run of five years to observe the change
in priorities.
Most of the categories here show a downward movement except for
other purposes which show an increase from 19.45 per cent of
outlays in 2007 08 to 23.27 per cent in 2011 12. This is the only
spending category to increase as a share of total expenses. The
main reason is that other purposes includes the payment of the GST
revenue to the states and territories. Those GST payments will
increase as a share of expenses only because they would be expected
to grow at roughly the same rate as GDP, whereas total expenses are
projected to fall as a share of GDP. The following table attempts
to adjust for that bias by excluding other purposes .
Table 11: Expenses excluding Other
purposes as a share of the total
| |
2007
08
|
2008
09
|
2011
12
|
| |
% total
|
% total
|
% total
|
|
General public
services
|
7.36
|
7.37
|
7.55
|
|
Defence
|
7.68
|
7.64
|
7.79
|
|
Public order and
safety
|
1.68
|
1.63
|
1.49
|
|
Education
|
8.24
|
8.01
|
8.38
|
|
Health
|
19.67
|
19.65
|
20.05
|
|
Social Security and
Welfare
|
43.02
|
43.73
|
43.83
|
|
Housing and community
amenities
|
1.36
|
1.36
|
1.12
|
|
Recreation and culture
|
1.25
|
1.24
|
1.05
|
|
Fuel and energy
|
2.26
|
2.38
|
2.34
|
|
Agriculture, forestry and
fishing
|
1.81
|
1.31
|
1.20
|
|
Mining, manufacturing and
construction
|
0.82
|
0.78
|
0.58
|
|
Transport and
communication
|
1.99
|
2.02
|
2.02
|
|
Other economic affairs
|
2.86
|
2.89
|
2.61
|
|
Subtotal
|
100.00
|
100.00
|
100.00
|
Source: Parliamentary Library, calculations based
on Table 10 above.
With those adjustments, we are able to more clearly see the
changes in the pattern of expenses. We can appreciate that most of
the changes are fairly moderate, even going from the last Howard
Government Budget to the Rudd Government Budget four years out. The
main commentary is developed in the specific issues briefs
contained in this publication but some main points include:
- General public services shows a modest increase in its
share of spending. That seems to be mainly a result of a new
commitment to foreign aid reflecting the commitment to gradually
increase aid to 0.5 per cent of Australia s Gross National
Income
- Defence was promised a guaranteed real increase of 3
per cent per annum in the underlying funding base but that has not
showed up as a major increase in defence as a share of the
functions in Table 11. Rather defence increases its share by a
modest 0.11 per cent
- Public order and safety actually shows a significant
decline over the forward estimates. Expenditure in this category
seems to have levelled out in nominal values
- Education shows a minor increase over the whole period
but with a low in 2008 09 which seems to be mainly due to a gap
between the end of the higher Education Special Projects scheme and
the start of spending from the Higher Education Endowment Fund
- Social Security and Welfare, the biggest item by far,
gets a boost mainly through family payments and the age
pension
- Housing and community amenities experience a
decline
- Recreation and culture experience a decline
- Fuel and energy increases slightly compared with the
previous year but remains constant after that
- Agriculture experiences quite a reduction down to 0.58
per cent of spending, mainly because of the cessation of drought
assistance
- Mining, manufacturing and construction experience a
substantial fall due to the winding down of some assistance
programs
- Transport and communications remain roughly constant,
and
- Other economic affairs will see a decline, mainly as a
result of the restructuring of labour market services.
The comments above do not take account of any of the major
changes within the functional categories. The detail is left for
the specific issues briefs below. In addition, our discussion here
does not take account of any changes in tax expenditures which are
similar to expenses in most respects. Tax expenditures receive only
brief treatment in Budget Paper No. 1 2008‑09 in a
two page appendix to Statement 5.[41] Note also that the tax expenditure statement is
usually produced around six months after the Budget Papers.
The pattern of revenue
Turning now to the revenue patterns, the following table
simplifies some of the figures in the Budget Papers and gives the
share of revenue raised by the various tax categories.
Table 12: Revenue by
Function
| |
2007
08
|
2008
09
|
2011
12
|
| |
%
total
|
%
total
|
%
total
|
|
Individual and withholding
tax
|
41.6
|
39.8
|
39.9
|
|
Fringe Benefits Tax
|
1.3
|
1.3
|
1.1
|
|
Super funds
|
4.0
|
3.1
|
3.4
|
|
Companies
|
21.2
|
22.9
|
23.3
|
|
Petroleum Resource Rent
Tax
|
0.6
|
0.8
|
0.8
|
|
Total income
tax
|
68.7
|
67.9
|
68.5
|
|
Sales tax (incl GST
|
14.8
|
14.9
|
15.4
|
|
Excise duty
|
8.0
|
8.0
|
7.5
|
|
Customs duty
|
1.8
|
1.8
|
1.5
|
|
other
|
0.8
|
0.9
|
0.8
|
|
Total indirect
tax
|
25.5
|
25.6
|
25.2
|
|
Non tax receipts
|
5.8
|
6.5
|
6.3
|
|
Total
|
100.0
|
100.0
|
100.0
|
Source: Statement 5, Budget Paper No. 1 2008
09, p. 5 44.
It has to be stressed first that this table examines tax shares
while, as we saw above, total tax revenue is expected to decline as
a share of GDP. The first interesting thing to note is that
individual and withholding tax is forecast to decline significantly
in 2008 09 as tax cuts are introduced but will remain approximately
constant after that. This category remains just under 40 per cent
over the forward estimates. The next biggest category is company
tax which is expected to increase substantially in 2008 09 and
slightly more through to 2011 12. That appears to reflect
anticipated healthy company profits over the forecast period. The
contribution from super funds is expected to decline in 2008 09 and
bounce back slightly after that. Changes to the treatment of super
funds announced in earlier budgets are still flowing through.
As noted above, the government has budgeted for a strong surplus
for 2008 09 and into the future. According to the Budget Papers,
the government s strategy involves achieving budget surpluses over
the medium term. The only attempt at justifying that is the
sequitur that surpluses contribute to a strong government balance
sheet .[42] This
does not seem entirely consistent with the remark by the Treasurer
in the Budget Speech that:
We have no intention of hoarding the strong
surplus for its own sake. This money is not ours, it belongs to the
Australian people.[43]
The government has put a strong argument for a
short-term surplus strategy. It wants to make substantial
contributions to the three new funds out of which spending will be
made in the future. Second, a surplus now suits the strategy to
moderate the growth in aggregate demand on macroeconomic grounds.
It can be appreciated that the government has a difficult
macroeconomic balancing act. Moderating aggregate demand may well
ease the risk of higher inflation and lessen the need for the RBA
to take action. However, reducing aggregate demand will most likely
reduce employment growth at a time when the unemployment rate is
forecast to increase from the present 4.2 per cent to 4.75 per cent
in the June quarter 2009. The macroeconomic aspects of the Budget
are discussed in the Economic Outlook section above.
A consequence of the run of surpluses is that the net worth of
the Australian Government is expected to increase by $25.2 billion
in 2008 09, equal to the real cash surplus in 2008 09 (when the
Future Fund is added back). Net worth is expected to increase by
similar amounts in the subsequent years.[44] By the end of 2012, it is anticipated
that the government will hold financial assets with a gross value
of $283.6 billion or approximately 20 per cent of GDP.[45] That would be a
significant share of the total capitalisation of the Australian
stock market. At the moment the market capitalisation of the stock
market is around 135 per cent of GDP. If that ratio is maintained
then the government could be holding financial investments worth
around 15 per cent of the companies listed on the stock
exchange.
Governments from both sides of politics have in the past shed
various businesses that they regarded as more appropriately owned
and managed in the private sector. After two decades of selling
assets to the market, we now have governments accumulating assets
once more. That raises a series of awkward questions. Recently,
there was a suggestion that Chinese interests might want to
purchase a share of BHP Billiton (BHPB).[46] It is not inconceivable that soon the
government may have to consider a foreign takeover submission for a
company such as BHPB while at the same time it owns a large share
in that company leading to a real and perceived conflict of
interest.
This illustrates the double-edged sword that the surpluses
represent. To run persistent surpluses means acquiring claims on
the private sector. The alternative is to buy back old government
debt but that came to an end when the former government was able to
announce zero Commonwealth debt.[47]
A further concern is that surpluses become a measure of the
fiscal responsibility of the government no matter what else is
happening. Not that long ago the Budget Papers had to argue the
case for a stimulatory fiscal stance. If there is an economic
downturn in Australia there could well be an end to surpluses on
the present settings. The automatic stabilisers would kick in as
tax revenue contracts and expenditures increase. The effect is to
cushion any macroeconomic downfall. A commitment to continuing
surpluses would be incompatible with the appropriate macroeconomic
response to a downturn.
Appendix A: Adjusting national accounts magnitudes for the
terms of trade effect
We can think of an economy producing 100 units of output of
which 25 are exports. From the production of 100 units we all earn
100 units. We spend that on 75 units of home product and imports of
25 units of goods not available here.
Now, let the terms of trade double so that for every export we
can now buy twice as many imports. We can still spend our 100 units
on 75 units of home production and 25 units of imports. But we can
buy twice the number of imports that we used to buy. So our
spending is now the equivalent of 125 units if we calculate using
the old import and export prices. That is true even though current
production is unchanged at 100 units. We can now say the value of
the economy is 25 per cent higher. The doubling of our terms of
trade has now boosted our measure of well being by 25 per cent.
Now we can ask if there is any more tax revenue. Suppose we tax
all Australians at 20 per cent raising 20 units so that the
government can buy Australian products worth 20 units. Before and
after the change in the terms of trade nothing has changed. We can
now say that those taxes and spending are now worth 1.25 times 20
using the new valuation technique, but there is still nothing left
over for the government as a surplus. A surplus would only arise if
the government spent money on 20 units of imports and so did not
need to spend as much after the doubling of the terms of trade.
We can take this example further and consider various other
combinations but the point is made. Terms of trade effects
themselves do not necessarily change the government tax take.
However, it should be pointed out that the above example assumes
the change is due to a fall in import prices which alters the terms
of trade. But it would also apply to the case where export prices
increase but the exchange rate and other adjustments are made so
that the value of non-traded goods increases in line with export
prices. The RBA Statement on Monetary Policy includes a graph that
shows the real exchange rate has indeed closely tracked the terms
of trade.[48]
Jonathan
Chowns
Economics Section
There were few new communications initiatives announced in the
2008 09 Budget. The high value measures such as the cancellation of
the OPEL contract, the building of a national broadband network and
the extension of the Australian Broadband Guarantee were announced
prior to the Budget.
National Broadband Network
The Budget makes no allocation for the construction of the
National Broadband Network (NBN) because the extent and timing of
the Commonwealth s commitment will not be known until the
procurement process for the NBN has been completed.[49] However, allowance for
the NBN, and other measures, is made in a contingency
reserve.[50] There
is also provision for departmental expenses for managing the NBN
process.[51]
The election
platform of the Australian Labor Party in 2007 included an
undertaking to contribute $4.7 billion towards the building of a
national broadband network .[52] It is intended that the network will reach 98 per
cent of households and businesses and will provide speeds of no
less than 12 megabits per second. Labor promised that work would
commence on the network before the end of 2008.
Of that funding, $2 billion was to come from the
Communications Fund which was set up provide an income stream
to fund the previous government s response to the recommendations
of the Regional
Telecommunications Independent Review Committee (the RTIRC).
The RTIRC is reviewing the adequacy of telecommunications services
in regional, rural and remote parts of Australia.
The budget papers elaborate on the proposed method of funding
for the NBN. The Commonwealth will set up the Building Australia
Fund (the BAF) which will be used to finance infrastructure
projects, including the NBN and the government s response to the
RTIRC recommendations. Amongst other funding, the BAF will receive
the $2.4 billion in the Communications Fund, which will then be
closed. The BAF will also receive $2.7 billion of the $6.6 billion
in final instalment payments from the most recent sale of the
Commonwealth s interest in Telstra (known as the T3 sale), which
are due on 29 May 2008.[53]
On 11 March 2008, the Minister for Broadband, Communications and
the Digital Economy
announced the membership of the Expert Panel which was to
determine the manner in which the request for proposals/tender
(RFP/T) for the NBN would be conducted and to assess any proposals
that are submitted.[54]
On 11 April 2008, the Minister announced
the issue of the
request for proposals/tender for the national broadband network
and
called for submissions on regulatory issues concerning the
NBN.[55]
Submissions on regulatory issues are due on 25 June 2008 and the
RFP/T closes on 25 July 2008. The outcome of this process will
inform the Commonwealth s consideration of scale and timing of its
financial commitment.
Cancellation of OPEL contract
The budget papers report savings of $959.3 million over three
years from the termination of the contract with OPEL Networks (a
joint venture between Optus and Elders). This provided for the
development of infrastructure to provide broadband services to
about 3.7 million premises in rural and regional Australia. The
contract had been entered into in June 2007, during the term of the
previous government and the termination was announced
on 2 April 2008.[56]
The funding was originally to be $600 million but was extended,
controversially, to approximately $958 million prior to the
contract being awarded. The original funding was from the $600
million Broadband Connect infrastructure program (which in turn was
part of the previous government s $1.1 billion Connect
Australia initiative which was
announced by the previous government on 17 August
2005).[57]
From the time of the 2007 election, there had been speculation
about whether the new government would continue with the OPEL
contract because the Minister, when in opposition, had been
critical of the wireless standard (WIMAX) that was to be used by
OPEL, but he gave assurances that the contract would
continue.[58] That
assurance was honoured, but the
contract was terminated on the basis that OPEL had failed to
meet a particular contractual obligation concerning the area to be
covered by the network extension.
Extension of Australian Broadband Guarantee
On 13 May 2008, the Minister announced
the continuation of the Australian Broadband Guarantee
(ABG).[59] The ABG
was an initiative of the previous government that was announced by
the then Minister for Communications, Information Technology and
the Arts on 7 March 2007.[60] The ABG evolved from the Broadband Connect incentive
scheme (the other limb being the infrastructure scheme already
mentioned). The ABG, like the Broadband Connect incentive scheme,
provides broadband service subsidies (rather than infrastructure
funding). The subsidies aim to provide metropolitan-comparable
services to underserved areas until the NBN is built and for the
remaining two per cent of the population outside the reach of the
NBN. Some of the increased funding for the ABG is attributable to
the termination of the OPEL contract which aimed to provide
broadband services in regional and rural Australia within the
period for which ABG funding has been increased.
Leslie
Nielson
Economics Section
In contrast to previous Budgets, this one was remarkable for not
including further reductions in personal income tax. The government
has also announced that it will extend the current Capital Gains
Tax (CGT) small business concessions and provide CGT relief for
shares received as the result of a demutualisation of health
insurers. Additionally, the government will also alter the way
receipts arising from the cancellation of interest in widely held
entities are treated for CGT purposes.
There were initiatives to reduce the amount of personal income
tax paid, but these initiatives were carefully targeted. Further,
the income threshold for the payment of both the Medicare Levy and
Surcharge were also increased. However, there were some significant
changes in the eligibility for some personal income tax deductions
for higher income earners. Following are further details of these
changes.
Personal Income Tax
The proposed reductions in personal income tax are contained in
Tax Laws Amendment (Personal Income Tax Reduction) Bill 2008, which
is before the Senate as at the date of writing. In general, the
Treasurer confirmed that the proposed reductions in personal income
tax, and increases in the Low Income Tax Offset (LITO) would go
ahead.[61] Table 1
summarises these changes for resident tax payers.
Table 1:
Proposed changes in personal income tax rates
and thresholds for resident tax payers
|
From 1 July
2008
|
From 1 July
2009
|
From 1 July
2010
|
|
Thresholds
|
Rate
|
Thresholds
|
Rate
|
Thresholds
|
Rate
|
|
0
|
6 000
|
0
|
0
|
6 000
|
0
|
1
|
6 000
|
0
|
|
6 001
|
34
000
|
15
|
6 001
|
35
000
|
15
|
6 001
|
37
000
|
15
|
|
34
001
|
80 000
|
30
|
35
001
|
80 000
|
30
|
37
001
|
80 000
|
30
|
|
80 001
|
180 000
|
40
|
80 001
|
180 000
|
38
|
80 001
|
180 000
|
37
|
|
180 001
|
and over
|
45
|
180 001
|
and over
|
45
|
180 001
|
and over
|
45
|
|
LITO value
|
$1 200
|
LITO value
|
$1 350
|
LITO value
|
$1 500
|
Source Budget Paper No.2, 2008 09, p. 14.
Impact of changes
Table 2 shows the amount of tax paid, at various income levels,
taking into account the changes in the low income tax offset only.
The figures in bold represent average weekly ordinary time
earnings.
Table 2: Tax paid and tax paid as a
proportion of 2007 08 gross income 2006 07 to 2010 11.
| |
Tax payable, including low income tax
offset
|
|
Tax as a proportion of base
income
|
|
Annual
Income
|
2006 07
|
2007 08
|
2008 09
|
2009 10
|
2010 11
|
|
2006 07
|
2007 08
|
2008 09
|
2009 10
|
2010 11
|
|
$10,000
|
$0
|
$0
|
$0
|
$0
|
$0
|
|
0.00%
|
0.00%
|
0.00%
|
0.00%
|
0.00%
|
|
$20,000
|
$1,500
|
$1,350
|
$900
|
$750
|
$600
|
|
7.50%
|
6.75%
|
4.50%
|
3.75%
|
3.00%
|
|
$30,000
|
$3,950
|
$2,850
|
$2,400
|
$2,250
|
$2,100
|
|
13.17%
|
9.50%
|
8.00%
|
7.50%
|
7.00%
|
|
$31,000
|
$4,290
|
$3,190
|
$2,590
|
$2,440
|
$2,290
|
|
13.84%
|
10.29%
|
8.35%
|
7.87%
|
7.39%
|
|
$32,000
|
$4,630
|
$3,530
|
$2,780
|
$2,630
|
$2,480
|
|
14.47%
|
11.03%
|
8.69%
|
8.22%
|
7.75%
|
|
$33,000
|
$4,970
|
$3,870
|
$2,970
|
$2,820
|
$2,670
|
|
15.06%
|
11.73%
|
9.00%
|
8.55%
|
8.09%
|
|
$34,000
|
$5,310
|
$4,210
|
$3,160
|
$3,010
|
$2,860
|
|
15.62%
|
12.38%
|
9.29%
|
8.85%
|
8.41%
|
|
$35,000
|
$5,650
|
$4,550
|
$3,500
|
$3,200
|
$3,050
|
|
16.14%
|
13.00%
|
10.00%
|
9.14%
|
8.71%
|
|
$40,000
|
$7,350
|
$6,250
|
$5,200
|
$4,900
|
$4,450
|
|
18.38%
|
15.63%
|
13.00%
|
12.25%
|
11.13%
|
|
$45,000
|
$8,850
|
$8,100
|
$6,900
|
$6,600
|
$6,150
|
|
19.67%
|
18.00%
|
15.33%
|
14.67%
|
13.67%
|
|
$50,000
|
$10,350
|
$9,600
|
$8,600
|
$8,300
|
$7,850
|
|
20.70%
|
19.20%
|
17.20%
|
16.60%
|
15.70%
|
|
$55,000
|
$11,850
|
$11,100
|
$10,300
|
$10,000
|
$9,550
|
|
21.55%
|
20.18%
|
18.73%
|
18.18%
|
17.36%
|
|
$57,730
|
$12,669
|
$11,919
|
$11,228
|
$10,928
|
$10,478
|
|
21.95%
|
20.65%
|
19.45%
|
18.93%
|
18.15%
|
|
$60,000
|
$13,350
|
$12,600
|
$12,000
|
$11,700
|
$11,250
|
|
22.25%
|
21.00%
|
20.00%
|
19.50%
|
18.75%
|
|
$65,000
|
$14,850
|
$14,100
|
$13,500
|
$13,350
|
$12,950
|
|
22.85%
|
21.69%
|
20.77%
|
20.54%
|
19.92%
|
|
$70,000
|
$16,350
|
$15,600
|
$15,000
|
$14,850
|
$14,550
|
|
23.36%
|
22.29%
|
21.43%
|
21.21%
|
20.79%
|
|
$75,000
|
$17,850
|
$17,100
|
$16,500
|
$16,350
|
$16,050
|
|
23.80%
|
22.80%
|
22.00%
|
21.80%
|
21.40%
|
|
$80,000
|
$19,850
|
$19,100
|
$18,000
|
$17,850
|
$17,550
|
|
24.81%
|
23.88%
|
22.50%
|
22.31%
|
21.94%
|
|
$85,000
|
$21,850
|
$21,100
|
$20,000
|
$19,750
|
$19,400
|
|
25.71%
|
24.82%
|
23.53%
|
23.24%
|
22.82%
|
|
$90,000
|
$23,850
|
$23,100
|
$22,000
|
$21,650
|
$21,250
|
|
26.50%
|
25.67%
|
24.44%
|
24.06%
|
23.61%
|
|
$95,000
|
$25,850
|
$25,100
|
$24,000
|
$23,550
|
$23,100
|
|
27.21%
|
26.42%
|
25.26%
|
24.79%
|
24.32%
|
|
$100,000
|
$27,850
|
$27,100
|
$26,000
|
$25,450
|
$24,950
|
|
27.85%
|
27.10%
|
26.00%
|
25.45%
|
24.95%
|
|
$105,000
|
$29,850
|
$29,100
|
$28,000
|
$27,350
|
$26,800
|
|
28.43%
|
27.71%
|
26.67%
|
26.05%
|
25.52%
|
|
$110,000
|
$31,850
|
$31,100
|
$30,000
|
$29,250
|
$28,650
|
|
28.95%
|
28.27%
|
27.27%
|
26.59%
|
26.05%
|
|
$120,000
|
$35,850
|
$35,100
|
$34,000
|
$33,050
|
$32,350
|
|
29.88%
|
29.25%
|
28.33%
|
27.54%
|
26.96%
|
|
$130,000
|
$39,850
|
$39,100
|
$38,000
|
$36,850
|
$36,050
|
|
30.65%
|
30.08%
|
29.23%
|
28.35%
|
27.73%
|
|
$140,000
|
$43,850
|
$43,100
|
$42,000
|
$40,650
|
$39,750
|
|
31.32%
|
30.79%
|
30.00%
|
29.04%
|
28.39%
|
|
$150,000
|
$47,850
|
$47,100
|
$46,000
|
$44,450
|
$43,450
|
|
31.90%
|
31.40%
|
30.67%
|
29.63%
|
28.97%
|
|
$200,000
|
$70,350
|
$69,600
|
$67,000
|
$64,850
|
$63,550
|
|
35.18%
|
34.80%
|
33.50%
|
32.43%
|
31.78%
|
|
Notes:
|
Tax payable
demonstrates the tax liability for an individual on the specified
in come levy, after the low income tax offset is applied
|
| |
Tax as a
proportion of the base income demonstrates the percentage of the
specified income being paid out in taxation.
|
| |
These data
do not include the Medicare levy or Medicare levy
surcharge
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Source: Parliamentary
Library
As can be seen, the overall tax burden rises with income in each
year. However, this impost decreases over time. Table 3 shows the
percentage decrease in overall tax paid, taking only the low income
tax offset changes into account, compared to the 2007 08 financial
year.
Table 3: Percentage reduction in
tax paid compared to 2007 08
|
Annual
Income
|
2008
09
|
2009
10
|
2010
11
|
|
$10,000
|
0%
|
0%
|
0%
|
|
$20,000
|
33%
|
44%
|
56%
|
|
$30,000
|
16%
|
21%
|
26%
|
|
$31,000
|
19%
|
24%
|
28%
|
|
$32,000
|
21%
|
25%
|
30%
|
|
$33,000
|
23%
|
27%
|
31%
|
|
$34,000
|
25%
|
29%
|
32%
|
|
$35,000
|
23%
|
30%
|
33%
|
|
$40,000
|
17%
|
22%
|
29%
|
|
$45,000
|
15%
|
19%
|
24%
|
|
$50,000
|
10%
|
14%
|
18%
|
|
$55,000
|
7%
|
10%
|
14%
|
|
$57,730
|
6%
|
8%
|
12%
|
|
$60,000
|
5%
|
7%
|
11%
|
|
$65,000
|
4%
|
5%
|
8%
|
|
$70,000
|
4%
|
5%
|
7%
|
|
$75,000
|
4%
|
4%
|
6%
|
|
$80,000
|
6%
|
7%
|
8%
|
|
$85,000
|
5%
|
6%
|
8%
|
|
$90,000
|
5%
|
6%
|
8%
|
|
$95,000
|
4%
|
6%
|
8%
|
|
$100,000
|
4%
|
6%
|
8%
|
|
$105,000
|
4%
|
6%
|
8%
|
|
$110,000
|
4%
|
6%
|
8%
|
|
$120,000
|
3%
|
6%
|
8%
|
|
$130,000
|
3%
|
6%
|
8%
|
|
$140,000
|
3%
|
6%
|
8%
|
|
$150,000
|
2%
|
6%
|
8%
|
|
$200,000
|
4%
|
7%
|
9%
|
Source: Parliamentary Library
The above mentioned personal income tax changes appear to have
the greatest impact on low income earners. That is, this group
receives the greatest percentage reduction in terms of a reduction
in tax paid.
Further, statistical analysis of the proposed tax changes can be
found in the Parliamentary Library s Bills Digest on the Tax
Laws Amendment (Personal Income Tax Reduction) Bill
2008.[62]
The proposed changes in personal income tax rates are consistent
with the tax policy announced by the Australian Labor Party before
the recent election.[63]
Eligibility for deductions
A significant change in personal income tax arrangements is the
denial of a tax offset in respect of various classes of dependents
of taxpayers earning $150 000 or more from 1 July 2008. The
dependents in question are dependent spouses, housekeepers, child
housekeepers, invalid relatives and parents/parents-in-law.
In addition, the definition of income, for
dependency offset (as well as the Senior Australian s Tax Offset
SATO) purposes will, from 1 July 2009, include:
- net financial losses from investments, and
- net rental property losses.
Essentially, this means that losses arising from various
negative gearing arrangements will be added into a person s
assessable income for these purposes. This already occurs if a
person is assessed for access to various social security and family
tax benefits and allowances.[64]
Political donations
In Schedule 1 of the Tax Laws Amendment (2008 Measures No. 1)
Bill 2008 the government proposes to remove the current deduction
for political donations. This Schedule is the subject of an inquiry
by the Joint Standing Committee on Electoral Matters. The Bill is
yet to be passed by the Senate, and savings arising from this
measure are included in the forward estimates from the 2009 2010
year.[65]
Tax offsets
Both the LITO and the SATO are further increased in this year s
budget.
The maximum LITO is currently $750, ceasing to apply where a
taxpayers assessable income is $30 000 p.a. or more. From 1 July
2008, the maximum LITO will be $1200 for those with annual
assessable income of $34 000 or more. For the 2008 2009 financial
year a taxpayer with an assessable income of $14 000 p.a. will pay
no tax. This figure rises to $16 000 in the 2010 2011 year as the
LITO will increase in the following two years.[66]
The maximum SATO for a single eligible retiree is currently
$2230 p.a. When combined with the LITO single retirees with an
assessable income of less than $25 867 p.a. do not pay any tax.
Under the proposed changes, from 1 July 2008 a single retirees
income would have to be above $28 867 before they paid income tax.
They are not subject to the Medicare Levy until they commence to
pay tax. Similar changes are foreshadowed for the following years.
As noted above, the definition of income for SATO purposes is also
to be amended.
Of particular interest is the income threshold at which the LITO
ceases to apply. The following table indicates recent and
prospective changes in this threshold.
Table 4: Changes in LITO Cutout
threshold 2006 07 to 2010 10
|
Year
|
2006
07
|
2007
08
|
2008
09
|
2009
10
|
2010
11
|
|
Cutout threshold $
p.a.
|
40 000
|
48 750
|
60 000
|
63 750
|
67 500
|
Source: Parliamentary Library
Education Tax Offset
The government has announced that an Education Tax Refund will
be available from 1 July 2008 in respect of primary and secondary
students. The edibility for this payment is based on a family s
ability to qualify for a Family Tax Benefit. It is paid, if the
taxpayer otherwise qualifies, irrespective for their income tax
liability.[67] This
means that it is paid even if the taxpayer has a zero tax
liability. As such, despite its name, it appears to have little
actual connection with the personal income tax system. This payment
is further discussed in the education section of this series of
briefs.
Medicare Thresholds
Normally the Medicare low income thresholds are increased by the
rate of annual increase in the Consumer Price Index. In 2006 07,
these thresholds were $16 740 (single) and $28 240 (family). These
thresholds were determined at the start of the 2007 08 financial
year and relate to the previous financial year. The government has
announced that these thresholds will be $17 309 and $29 207
respectively with effect from 1 July 2007. The increase is about
3.3 per cent and is greater than the percentage change in the CPI
over the 2006 07 year (2.1%) but a little less than the current
annual inflation rate of about 4.2 per cent.[68]
The most significant change is the increase of the income
threshold for the payment of the Medicare Surcharge, from $50 000
p.a. to $100 000 for singles and from $100 000 to $150 000 for
those who are members of a family.
This particular threshold had remained unaltered from the
introduction of the Medicare Surcharge in 1997. Since that time
average weekly wages have increased from about $685 to $1110, an
increase of about 62 per cent.[69]
Capital Gains Tax
The following changes to the CGT regime will have some impact on
the tax paid by individuals.
Extension of CGT small business concessions
The government has announced that it will enhance the small business CGT concessions. The proposed changes will
allow a taxpayer who owns a CGT asset that is used in a business by
an affiliate or a connected entity of the taxpayer, to access the
small business CGT concessions through the $2m
aggregate turnover test. The $2m per annum test will be applied to
the entity owning the asset, its affiliates and connected entities
(including the business entity).
This change will enable a wider range of entities, including a
sole trader or a partnership, to access the small business CGT
concessions.
There are four CGT concessions specifically for small business which apply to CGT events happening after
11.45 am EST on 21 September 1999. Briefly, these concessions
are:
(1) the small business 15-year asset
exemption
(2) the small business 50% active asset
reduction
(3) the small business retirement exemption,
and
(4) the small business asset roll-over.
For CGT purposes a small business is one that:
- carries on a business, and
- satisfies the $2m aggregated turnover test.
This measure was first announced by the previous government and
simply appears to be restated in the current budget.[70]
CGT Demutualisation of health insurers
The government has proposed amendments to provide CGT certainty
to policyholders of health insurers who receive shares as part of
the insurer's demutualisation (effective 1 July
2007). The government proposes that shares received by post-CGT
policyholders will have a cost base derived from their share of the
insurer's net tangible assets. Shares received by pre-CGT
policyholders would inherit a market value cost base. CGT was first
introduced for assets acquired after 19 September 1985.
Demutualisation refers to the process by which a body corporate,
such as a mutually owned health insurer, becomes a publicly owned
company listed on the Australian Stock Exchange or overseas
exchange. Again, this particular initiative was first announced by
the former government.[71]
Currently, the Medical Benefits Funds of Australia (MBF) is
subject to a takeover offer by a large UK based health insurer
BUPA.[72]
CGT cancellation of interests in widely held entities
The Budget papers also referred to changes in the way CGT was
calculated in relation to receipts arising from the cancellation of
shares or other interests in widely held entities. Briefly, this
change means that the CGT is calculated on the basis of the actual
receipt, rather than the market value of interest cancelled.
This change appears to be the same as amendments to tax law
currently before Parliament in Schedule 3 of the Tax Laws Amendment
(2008 Measures No. 2) Bill 2008.
Bernard Pulle,
Richard Webb, Barbara Harris and Paige Darby
Economics Section
This paper deals with the proposals in the 2008 09 Budget for a
comprehensive review of the Australian Tax System and the measures
classified as fairness and integrity measures in Appendix F, titled
Major Savings in the 2008 09 Budget , of the
Budget Overview 2008-09.[73]
Comprehensive review of the Australian Tax System
The Treasurer in his
Budget Speech on 13 May 2008 proposed the most comprehensive
review of Australia s tax system since World War II , the object of
which was stated as follows.
We need a tax system that is fairer, that is
simpler, that better rewards people for their hard work, that
responds to our environmental and demographic challenges, that
makes us internationally competitive, and that creates the
incentives to invest in our productive capacity. One that supports
national prosperity beyond the mining boom.[74]
Budget Paper No. 2 at page 259 gave further details of the
proposed review over the next two years which will encompass
Australian Government and state taxes, except the GST, and
interactions with the transfer system:
The review should make coherent recommendations
to enhance overall economic, social and environmental wellbeing,
with a particular focus on ensuring there are appropriate
incentives for: workforce participation and skill formation;
individuals to save and provide for their future, including access
to affordable housing; investment and promotion of efficient
resource allocation to enhance productivity and international
competitiveness; and reducing tax system complexity and compliance
costs.[75]
Budget Paper No. 2 also indicated that the review process will
be conducted in several stages and an initial discussion paper will
be released by the end of July 2008. The review panel will provide
a final report to the Treasurer by the end of 2009.
The following table lists savings from measures aimed at
improving fairness and integrity in the tax system in Appendix F of
the Budget Overview with links to press releases issued on Budget
day, where available, and references to Budget Paper No. 2
2008 09.
Fairness and Integrity in the Tax
System
Source: Adapted from Appendix F: Major Savings in
the 2008 09 Budget, Budget Overview 2008 09.
The following comments on the above measures include extracts
from Budget Paper No. 2 2008 09.
The Government will deliver in full the tax cuts it announced
during the 2007 election campaign. These tax cuts included
deferring the previously budgeted reductions in the top marginal
tax rate for taxpayers on incomes of more than $180,000 per annum
until beyond 2010 11. The savings of $5.3 billion over the forward
estimates period will be diverted to the Government s other
spending priorities including the Education Tax Refund, reducing
elective surgery waiting lists and to the budget surplus.
Personal income tax
changes
Source: Budget Paper
No. 2 2008 09, p. 14.
An article by Les Nielsen titled, Personal Income Tax and
Personal Capital Gains Tax, in this Budget Review Brief gives
further analysis of the proposed changes.
The government proposes to increase the excise (and customs
duty) on ready-to-drink alcoholic beverages, commonly called
alcopops. This measure is expected to raise $628 million in 2008
09, $704 million in 2009 10, $787 million in 2010 11 and $881
million in 2011 12.
This proposal raises broader issues surrounding the taxation of
alcoholic beverages. Alcohol is subject to three taxes. One is a
specific tax, namely, excise which is levied on a litre of alcohol
basis. There are also two value taxes: the wine equalisation tax
(WET) and the GST. Wine is subject to the WET and GST, while beer
and spirits are subject to excise and GST. Alcopops, being spirit
based, are subject to excise and GST.
Alcohol is taxed for two main reasons: to raise revenue and to
reduce the social costs of alcohol abuse. If the main purpose is to
reduce social costs, it could be argued that the alcohol in all
alcoholic beverages should attract the same amount of tax per unit
of alcohol. From this perspective, the taxation of alcohol is
riddled with inconsistencies because the amount of tax paid per
litre of alcohol varies considerably.[76]
In the case of alcopops, the excise rate on the spirits in
alcopops is $39.36 per litre of alcohol whereas the general rate of
excise on the alcohol in spirits (e.g., whisky and rum) is $66.67
per litre of alcohol. When the effect of the GST is taken into
account, the excise plus the GST on excise on the spirits in
alcopops is $42.30 ($39.36 plus 10 per cent of $39.36) while the
amount on spirits is $73.33 ($66.67 plus 10 per cent of $66.67). In
other words, the amount for spirits is about 1.7 times the amount
for alcopops. The resulting relative cheapness of the alcohol in
alcopops compared with the alcohol in, say, whisky and rum is
probably a factor behind the popularity of alcopops.
The proposed increase in the excise on alcopops would be likely
to result in the substitution of other forms of alcohol for
alcopops because alcopops would be relatively more expensive.
Condensate is light oil extracted from so-called wet gas. It is
processed primarily for use as petrol in motor vehicles. The
government taxes profits from the extraction and production of
condensate and other unprocessed petroleum products such as crude
oil, liquid petroleum gas and, in certain cases, natural gas.
Currently, the following categories of condensate enjoy tax-free
status when it is:
- produced in a state or territory, or
- inside the outer limits of territorial sea, or
- marketed separately from a crude oil stream, or
- in the North West Shelf project area and therefore exempt from
the crude oil excise.
This concession results in revenue forgone. Treasury estimates
that the value of this concession is around $320 million
annually.[77]
The government proposes to abolish this concession with effect
from midnight (AEST) on 13 May 2008.[78] Under the proposal, production from
fields located in the North West Shelf project area and onshore
areas will be subject to the same excise rates as those applicable
to petroleum fields discovered after 18 September 1975. The
government has introduced the Excise Tariff Amendment (Condensate)
Bill 2008 and the Excise Legislation Amendment (Condensate) Bill
2008 to give effect to the proposal.
The Government will provide additional funding of $256.9 million
over four years from 2008 09 to the Australian Taxation Office
(ATO) to allow it to enhance compliance activities, particularly
for large businesses and high wealth individuals. This additional
investment in ATO activities is expected to increase revenue by
$1,980 million over the forward estimates period.
The previous government had provided $446 million over four
years from 2008 09 to the ATO for additional staff to enhance
compliance across all segments of the taxation system. According to
the
Mid-Year Economic and Fiscal Outlook 2007 08, the increased
investment in ATO activities was expected to increase revenue by
$3.7 billion over four years including $1.8 billion in 2011
12.[79]
It would appear that the present government has been more
cautious in its estimate of returns from ATO compliance activity
over the forward estimates years.
The Government will increase the period over which capital
expenditure on in-house computer software is depreciated from 2.5
years to 4 years. This will apply to expenditure incurred on or
after 7.30 pm (AEST) on 13 May 2008. The measure reduces a tax
concession and tax expenditure. Treasury estimates that the value
of the tax expenditure will be about $60 million in 2008
09.[80] The ongoing
gain to revenue is estimated to be $1.3 billion over the forward
estimates period.
A four year depreciation period for expenditure on in-house
computer software is the same period as the Commissioner for
Taxation's 'safe harbour' effective life for computer hardware.
The Government will tighten the current fringe benefit tax (FBT)
exemption for certain work-related items (including laptop
computers, personal digital assistants and tools of trade) by
ensuring the exemption only applies where these items are used
primarily for work purposes. The FBT exemption will generally be
limited to one item of each type per employee per year. The measure
will apply to items purchased after 7.30 pm (AEST) on 13 May 2008.
The measure reduces the FBT concession and tax expenditure for
work-related items.
Apart from the ongoing gain to revenue which is estimated to be
$650.0 million over the forward estimates period, this measure is
also expected to increase GST payments to the States by $120.0
million over this period.
The Government will amend FBT law to ensure that the full value
of a benefit that has been provided to both an employee and an
associate in relation to a jointly held asset will be subject to
FBT. This tax integrity measure will have effect for new
arrangements from 7.30 pm (AEST) on 13 May 2008. This measure will
have an ongoing gain to revenue which is estimated to be $49.0
million over the forward estimates period.
Where a meal is provided
to and is consumed by the employee at the employer's business
premises at any time on a working day, the benefit may qualify as
an exempt property benefit under section 41 of the Fringe
Benefits Tax Assessment Act 1986.
The Government will tighten the FBT exemption that applies to
the private use of business property on an employer s premises by
excluding meals under a salary sacrifice arrangement, with effect
from 7.30 pm (AEST) on 13 May 2008. The measure reduces the FBT
concession and tax expenditure associated with property provided on
the employer s business premises. This measure will have an ongoing
gain to revenue which is estimated to be $730.0 million over the
forward estimates period. This measure is also expected to increase
GST payments to the states by $120.0 million over this period.
The Government will increase the luxury car tax rate (LCTR) from
25 per cent to 33 per cent, with effect from 1 July 2008. This
brings the LCTR to the rate that prevailed under the wholesale
sales tax (WST).
There will be no change to the luxury car tax threshold
(currently $57,123) from which the luxury car tax applies. This
measure has an ongoing gain to revenue which is estimated to be
$555 million over the forward estimates period.
As luxury cars are predominantly imported cars, this measure may
have an adverse impact on the importation of these cars and hence
help the manufactured car industry in Australia,
The passenger movement charge (PMC) commonly called the
departure tax was first introduced for persons departing Australia
for another country. The PMC was introduced in July 1995 and
replaced the former departure tax. The PMC is levied under the
Passenger
Movement Charge Act 1978 and collected under the Passenger
Movement Charge Collection Act 1978. The PMC was
introduced as a cost recovery measure to recoup the cost of
Customs, Immigration and Quarantine processing of passengers
entering and leaving Australia and the cost of issuing short-term
visitor visas. In law, the PMC is a tax. The Australian Customs
Service administers the PMC legislation.
Generally speaking, the PMC is payable by all passengers
departing Australia by air and sea. Section 5 of the Collection Act
contains a number of exemptions. The PMC is not levied on incoming
passengers.
The PMC was increased to $30 per passenger on 1 January 1999. In
the 2001 02 Budget, the government announced that it would increase
the charge by $8 to $38 to offset the increased cost of inspecting
passengers, mail and cargo at Australia's international airports.
While initially a cost recovery measure, the PMC became more
controversial over allegations that it has become yet another
general revenue raising measure.
The table shows revenue in millions of dollars.
Passenger Movement Charge
Revenue
|
Year
|
1999 00
|
2000 01
|
2001 02
|
2002 03
|
2003 04
|
2004 05
|
2005 06
|
2006 07
|
|
Revenue
|
226.13
|
242.83
|
283.64
|
290.58
|
329.79
|
363.84
|
374.57
|
393.22
|
Source: Australian Customs Service annual reports
It is not clear whether the PMC is now over-recovering costs.
The PMC has not been increased since 2001 so it s real (that is,
inflation-adjusted) value has fallen. Costs would have risen over
the same period.
The government proposes to increase the PMC from 1 July 2008 by
$9 to $47.[81] The
increase is estimated to raise $459.3 million over four years.
According to the government, the increase will contribute to
offsetting the cost of a range of aviation security initiatives
that until now have not been cost recovered.
The government has, over the forward estimate years, anticipated
effecting a total saving of $16.5 billion by the measures which it
has categorised as directed at Fairness and Integrity in the Tax
system. This is significant in relation to the anticipated budget
surplus of $21.7 billion as it represents 76 percent of the surplus
for 2008 09.
As mentioned above under Personal Tax Cuts, deferring the
previously budgeted reductions in the top marginal tax rate for
taxpayers on incomes of more than $180,000 per annum until beyond
2010 11 will effect savings of $5.3 billion over the forward
estimates period.
In effect, the government has been able to increase revenue by
the other measures indicated in the above table by $11.3 billion
over the forward estimate years.
A question mark must hang over the anticipated $1.98 billion
additional revenue over the forward estimate years from ATO
compliance activity if an attempt is made to identify and quantify
the dividend from that activity at a future date. What is certain
is that the launch of enhanced ATO compliance activity will have a
direct and indirect impact on revenue. The direct impact is that
those targeted for audit may end up paying additional tax and the
indirect impact is that those who hear of the proposed ATO
compliance activity may avoid the pitfall of non-compliance. The
indirect impact of ATO compliance activity was described by the
Commissioner of Taxation in relation to the outcome of Project
Wickenby at the biannual appearance before the Joint Committee on
Public Accounts and Audit on 30 April 2008 as follows:
Mr D Ascenzo
The whole idea of Project Wickenby is basically to send a clear
message to the community that the Commonwealth will act in a
concerted way to ensure that the country s tax and superannuation
systems are not abused by the abusive use of tax havens. Over time
we have done a lot of hard work in trying to get information,
following up the information, getting cases from a criminal
perspective on course and at the same time following up similar
matters through the tax and ASIC powers. We are now at a stage
where we are seeing the fruits of that work. As you can see from
press reports, the people involved on the ground are saying that
there is more to come. So it really is starting to send a good
message. The anecdotal comments that people are making are that
this is right, that a few people have been trying to get a free
ride from the rest of the community and it is about time that they
are brought to book. I think it is a good message.[82]
Michael
Priestley
Economics Section
Public support for research and development
Universally, governments seek to increase business investment in
research and development (R&D) and encourage innovation.
Global competition and the under performance of manufacturing
have generally been the catalysts for governments to offer tax and
other incentives for business to increase R&D, especially in
developed countries.
In the EU, new tax incentives have been introduced to stimulate
investment in R&D, which are geared primarily to companies
undertaking large-scale R&D projects and to small
R&D-intensive start-ups. The EU aims to increase spending on
R&D to 3 per cent of GDP by 2010, which compares to current
spending on research in the United States and Japan of 2.85 per
cent and 3.1 per cent of GDP respectively.
In China, the catalyst behind increased R&D has been China s
target to raise R&D spending to 2 per cent of GDP by 2010. At
present, 1.23 per cent of China s GDP is devoted to R&D, which
is far below the standard of developed countries, while China s
dependence on foreign technology exceeds 50 per cent. The target is
to be achieved by establishing a national innovation system and
enhancing innovation in key technologies in the resources and
energy sectors.
The general trend in public support for R&D has been to
recognise that improving the innovation and research capacity of
the business sector is influenced by a spectrum of
policies.[83]
Consequently, the mix of mechanisms for supporting innovation
comprises competitive and merit-based R&D grant programs and
the more widely available tax incentives. However, support for
venture capital and other programs that focus on growing exports
sectors and R&D commercialisation are gaining ground.
Innovation and economic growth
Public support and mechanisms for supporting R&D and
innovation build on OECD findings that industry competitiveness and
long-term employment growth are driven by innovation and
technological change.[84]
There is extensive theoretical and empirical research on the
aggregate or overall effects of innovation including R&D on
productivity and economic growth. Briefly, R&D is a means by
which businesses and firms accumulate knowledge and ideas to create
new products and new processes. By drawing together suppliers,
technology firms, R&D providers, research institutions and
commercial participants on a national basis, firms influence the
absorption and development of technology.[85] Economic models have been developed
to explain how innovation emerges from the economic system to
generate returns and drive continuing growth.[86]
Evidence shows that individual firms and the economy benefit
from business R&D and that the social benefits of increased
business R&D are wide-ranging. An OECD report found that:
Countries with large increases in the intensity
of business R&D to GDP and in the share of business R&D in
the total R&D, including Australia, Denmark, Finland, Ireland
and Sweden, appear to have experienced a pick-up in [productivity]
growth in the 1990 s.[87]
The report also noted that links between innovation and economic
growth were well established:
R&D provides an important
contribution to output and total factor productivity.
The empirical evidence typically shows that a 1% increase in the
stock of R&D leads to a rise in output of 0.05-0.15%. There is
also evidence that R&D may play a different role in small and
large economies (Griffith et al., 1998) ... in smaller ones, it
primarily serves to facilitate technology transfer from abroad.
In Australia, various studies have estimated the rate of social
return and the net benefits to a firm as a result of increased
spending on R&D. The Productivity Commission listed these and
similar studies that indicate a spillover rate ranging from 50 to
300 per cent. However, the Commission settled for a more reasonable
spillover rate for Australia of around 40 per cent.[88] While empirical models
confirm that R&D raises productivity, there is some doubt about
the magnitude of the effects from Australian business R&D and
overseas R&D.[89]
Innovation policy over the past decade
The Coalition Government s policy framework was fashioned by the
1997 Mortimer Report, Going for Growth: Business Programs for
Investment, Innovation and Export, and the December 1997
Investing for Growth industry statement.[90] Under the Mortimer strategy, the
government continued to provide longstanding support to the two
industries that traditionally were the most highly protected: the
automotive industry and the textile, clothing and footwear
industry. As well as focussing on sectoral support, the framework
recognised that technology and science-based industries presented a
potential area for export growth and an opportunity to expand
Australia s manufacturing base.
The Coalition Government s follow-up statements, Backing
Australia s Ability - Mark I in 2001 and Mark II in 2004 -
gave a boost to business R&D and innovation via R&D Start
(renamed the Commercial Ready Programme) and changes to the 125 per
cent R&D tax concession to allow loss making start-ups to
cash-out the concession and introduction of the 175 per cent
premium tax concession. The policy framework of Backing
Australia s Ability was aimed at leveraging new technologies
and their commercialisation. The changes to the R&D tax
concession were designed to raise business R&D intensity and
business innovation which had declined as a result of the closure
of syndication and abolition of the 150 per cent R&D tax
concession.
The May 2007 Industry Statement continued the policy
settings in Backing Australia s Ability but marked a shift
in support to growing sectors like export services, improving
business networking, collaborative research and technology
commercialisation. Support continued to be provided to
manufacturing, and the mechanisms for supporting business
innovation (the Commercial Ready Program and R&D tax
concession) were augmented to raise R&D in the target groups:
public research spin-off companies and foreign-owned subsidiaries
of multinationals. Another key change marking a shift in innovation
policy was the creation of the Innovation Australia Board, formed
by the merger of the Industry, Research and Development Board,
which was responsible for administering R&D grants programs and
the R&D tax concession, as well as the Venture Capital
Registration Board.
2008 09 Budget measures to promote innovation
The current government s innovation policy is set to be framed
by the innovation review which was announced on 22 January 2008.
The review, chaired by Dr Terry Cutler, will be assisted by an
international panel and is expected to release a Green Paper in
July 2008, followed by a White Paper response by the government.
Early indications are that there will be an intensification of
policies promoting R&D and innovation both nationally and at
the industry and small business level.[91]
In the meantime, the government has allocated in the 2008 09
Budget $500 million for the Green Car Innovation Fund over five
years commencing in 2011 12. It has also invested more than $500
million in the research sector, primarily in academic research
institutions, which was an area of identifiable systemic weakness
in the innovation system.[92] Specifically, $209 million has been allocated over four
years for Australian Postgraduate Awards and $326 million in Future
Fellowships to attract and retain the best Australian researchers.
Other innovation measures include $240 million for new Clean
Business Australia initiatives which comprises funding of $75
million for the Climate Ready competitive R&D grants
program.[93]
These Budget measures recognise that innovation is a key driver
of productivity and economic growth, particularly for developed
countries like Australia which has a declining manufacturing
industry. For policies promoting innovation, initiatives such as
the Green Car Innovation Fund, the doubling of the number of
Australian Postgraduate Awards and the Climate Ready R&D grants
give visibility to a more manufacturing and research
sector-focussed approach to encouraging business R&D and
innovation.
Richard Webb
Economics Section
The government announced that it would establish the
Building Australia Fund (BAF) to finance investment in economic
infrastructure notably roads, rail, ports and broadband.[94] The government
proposes to fund the BAF in three ways: from Budget surpluses in
2007 08 and 2008 09, and by transferring $2.4 billion from the
Communications Fund (which will be closed) and $2.7 billion
from the partial proceeds of the Telstra 3 sale. Areas identified
for spending from the BAF are up to $4.7 billion for the national
broadband network, funding for regional telecommunications
initiatives, and $75 million in 2007 08 for infrastructure
feasibility studies.
The projects to be investigated are: the upgrading of key
sections of the Bruce Highway in north Queensland and the Gateway
Motorway in southeast Queensland; upgrading of the M5 in Sydney and
constructing the Western Metro rail link in western Sydney;
upgrading the Western Ring Road and constructing designated
projects in the East‑West transport corridor in Melbourne;
developing an integrated transport plan for Perth airport; and
developing a transport sustainability study for Adelaide. The
government has not provided any explanation as to why these
projects are to be investigated at a time when there are other
transport projects vying for funds. It is also noticeable that
Tasmania, the Northern Territory and the Australian Capital
Territory do not feature on the list. Nor is it clear how these
studies will tie in with the proposed nationwide audit that
Infrastructure Australia will undertake. Some of the nominated
projects constitute a foray into the funding of urban passenger
transport, which the Howard Government considered to be primarily
the responsibility of the states.
The Commonwealth s intention to expand its funding of
infrastructure investment is another example of how power over
spending and policy-making is becoming increasingly concentrated
in the Commonwealth, and how the Commonwealth is becoming
increasingly involved in areas beyond those stipulated in the
Constitution.[95]
For example, the proposal to fund investment in ports is an
extension of traditional transport funding practice. Likewise, the
funding for the proposed broadband network is a major extension of
Commonwealth funding of communications investment.
Commonwealth funding of infrastructure has implications for
state budgets and creates new opportunities for cost-shifting . The
states, generally, are borrowing to fund infrastructure. But if the
Commonwealth increasingly funds infrastructure, the states could
respond by cutting their spending on infrastructure and/or by
borrowing less. Attempts to shift costs when the Commonwealth and
the states share functions have long been a feature of Commonwealth
state financial relations.
The main form of economic infrastructure the Commonwealth funds
is roads and, overall, it provides about 20 per cent of funding.
Table 2.2 of the Portfolio Budget Statements for the Department
of Infrastructure, Transport, Regional Development, and Local
Government shows land transport funding mainly roads of $3.5
billion up from an estimated $3.2 billion.[96] The Budget also allocates $20 million
over four years for the establishment of Infrastructure
Australia.
Richard Webb
Economics Section
For the first time, the general government sector financial
statements in Budget Paper No. 1 2008 09 are presented in
accordance with accounting standard AASB1049 Whole of
Government and General Government Sector Financial
Reporting.[97]
In essence, the general government sector comprises agencies which
are funded from the Budget and which provide services that are
mainly non-market in nature, or entail the redistribution of income
(for example, the age pension). The general government sector thus
excludes bodies such as the Reserve Bank and government business
enterprises such as Australia Post.
The
Charter of Budget Honesty Act 1998 requires that the
budget financial statements be presented on the basis of external
reporting standards. In the past, general government sector
financial statements were presented using two different accounting
standards: the Government Finance Statistics (GFS) standard, and
Australian Accounting Standards (AAS).
The GFS framework is a specialised
statistical system designed to assist economic analysis of the
public sector. The GFS standard used in the Budget was based on the
Australian Bureau of Statistics accrual GFS framework, which is
consistent with international statistical standards (the System
of National Accounts 1993 and the International Monetary Fund
s A
Manual on Government Finance Statistics 2001).[98]
AAS are standards that specify a range of accounting practices
and how financial information should be reported. AAS have two
components. The first the Australian Equivalents to International
Financial Reporting Standards (AEIFRS) are designed principally for
the private sector. AAS statements for the general government
sector were presented in accordance with the AEIFRS for the first
time in Statement 10 of Budget Paper No. 1 2006 07. This followed
from the decision that Australia would adopt international
accounting standards. The second component AAS No. 31,
Financial Reporting by Governments (AAS 31) is a standard
specific to government. Agencies use AAS when reporting their
financial statements.
The use of the GFS and the AAS was confusing, especially since
the two standards could yield quite different results. Following a
directive from the Financial Reporting Council, the Australian
Accounting Standards Board (AASB) harmonised AAS also known as
Generally Accepted Accounting Principles and GFS financial
reporting. The harmonised standard is AASB 1049 Whole of
Government and General Government Sector Financial Reporting
which, in effect, combines both AAS and GFS. On 10 October 2007,
the AASB
announced the approval of AASB 1049, which will come into
effect on 1 July 2008.[99]
The adoption of AASB 1049 will have several consequences. On the
one hand, it will reduce confusion by having only one set of
accounts in Budget Paper No. 1. On the other hand, there are no
AASB1049 data before 2007 08. The lack of comparable AASB1049 time
series data limits transparency. For comparable data, it will be
necessary to use ABS GFS data, but they are not available when the
Budget is brought down.
Agencies will continue to present their financial statements
using AAS while the AASB examines whether harmonisation should be
pursued for agencies within the general government sector of the
Australian government (and state and territory governments).
Steve
O'Neill
Economics Section
Budget allocations under the Education, Employment and Workplace
Relations portfolio commence the implementation of the government s
workplace relations policy, Forward with Fairness (April
2007).[100] The
Parliament passed the government s Workplace Relations Amendment
(Transition to Forward with Fairness) Bill on 17 March 2008 with
these amendments taking effect in the Workplace Relations
Act (WR Act) from 28 March 2008.
The amendments trigger an award modernisation process, terminate
the making of new Australian Workplace Agreements (AWAs) and set in
train the steps to create an employment regulator, Fair Work
Australia (which will subsume many of the agencies cited
below).
Award modernisation is placed under the responsibility of the
Australian Industrial Relations Commission (AIRC). The AIRC has
been allocated resources of $55.25m in 2008 09 (2007 08: $53.68m),
which is part of an increase of $13.2m over four years. The
legislation which created the recently replaced fairness test ,
also created two agencies: the Workplace Authority (WA), formerly
the Office of the Employment Advocate; and the Workplace Ombudsman
(WO), formerly the Office of Workplace Services.[101]
Workplace agreements are lodged with the WA. The WA s budget was
to increase by $303.5m over four years from 2007. The 2008 09
Budget trims the WA allocations to $113.13m in 2008 09 (2007 08:
$130.14m) reflecting the anticipated decreased use of individual
agreements. Its budget will be further cut in 2009 2010 by $106.2m
as a prelude for its subsumption into Fair Work Australia. The WO
was earmarked to gain an additional $64.1m over four years from
2007 for its role in policing breaches of the WR Act such as
forcing employees on to AWAs. Its budget for 2008 09 will be
$70.72m. (2007 08: $69.7m).
The Australian Fair Pay Commission determines the minimum wage
and pay scales (formerly known as award pay rates). It has had its
funding reduced by about $1m in line with the reduced functions
prescribed under the amended WR Act, with a further $1.3m reduction
planned for 2009 10. Its 2008 09 budget is $7.48m.
The Australian Building and Construction Commission polices
industrial relations in the high rise building industry. Its budget
has been maintained in line with pre-election commitments. It will
receive $32.814m for 2008 09 (2007 08: $29.596m).
Comcare is the authority which administers the Commonwealth s
health and safety legislation and workers compensation scheme.
Comcare s responsibilities have increased as a result of
legislation allowing certain private sector entities to seek
Comcare workers compensation coverage for their workforces while
allowing those businesses to come under Commonwealth health and
safety laws (replacing applicable state laws). Comcare estimates
its workers compensation system coverage has increased by 20 per
cent since May 2007.[102] The Budget does not increase allocations for Comcare,
however its appropriations are likely to total about $373m over
2008 09 by virtue of increased revenue from premiums and other
sources of income such as license fees (matched by increased
outlays).
The Budget also:
- provides $4m over four years to help develop and promote
accreditation of employers under the Homeworkers Code of Practice
for the textile, clothing and footwear industry and the No Sweat
Shop label in Australia
- increases funding for secret ballots prior to industrial action
with an extra $100 000 p.a. for three years
- terminates the $10m Employer Advisory Program, and
- introduces grants to small businesses to develop
family-friendly practices and facilities of between $5000 and $15
000 under a $3.6m program in 2008 09.
[16]. Actual
figures not a forecast.