The Government has been on a spending spree since last November, splurging  $30b over Forward Estimates, but has offset nearly all of it with $28b worth of savings and tax increases, according to Budget papers. This year and in 2010-11, the Government will spend approximately $4.2b in net terms – but expects to come out $544m ahead in the long run.

When it comes to savings, however, the Government is relying heavily on two new taxes — the RSPT, although that only fully kicks in in the last year of Forward Estimates, so it plays no role in the return to surplus, and the tobacco excise, which while hypothecated to health spending, frees other revenue up that would otherwise be required for health purposes (for the problems of this sort of earmarking of revenue, advocates should Google “hypothecation” and “fungibility”).

Together, those two furnish $17b of the $30b of “savings” identified over Forward Estimates in the Budget.

Greater GST compliance is forecast — with remarkable accuracy — to also yield $1.1b.

The only true, big-ticket savings in the Budget are PBS reform, which yields nearly $1.3b and which, along with changes to the new Community Pharmacy Agreement ($480m) represents the hard work of Nicola Roxon and her bureaucrats; a fortuitous, but apparently legitimate, change in national accounts methodology affecting the foreign aid budget ($1b), cuts to the Green Car program ($200m, and the Rudd Government’s first anti-protectionist decision) and some fiddles to superannuation concessions to yield over $800m.

These superannuation fiddles — the Government played the same trick last year — tend to fly beneath the radar (they are listed separately in the Budget documents to look more innocuous) but are a lucrative source of revenue for a Government otherwise unwilling to seriously reform our absurdly generous superannuation-related tax concessions, on the basis that it doesn’t want to keep tinkering with super.

There’s also nearly $400m from changes to the taxation arrangements applying to companies that split and merge.

And Martin Ferguson has belatedly responded to the Government’s own internal review of the Howard-era ethanol excise arrangements (including the outrageous Manildra-inspired tariff on overseas-produced ethanol) by phasing out the tariff and implementing a energy-based taxation regime for fuel.

The Government’s ditching of the CPRS has also saved it a total of $3b over Forward Estimates, but only in accrual terms; in cash terms between now and 2010-11 to 2013-14 it only amounts to $415m (the reason Wayne Swan was so adamant the expenditures allocated to the CPRS in MYEFO weren’t available for spending in the Budget; it turns out he was correct); with departmental savings, the government has redirected $650m from the CPRS to new renewable energy fund.

But the real heroes of return to surplus will be personal income tax and company tax receipts, which are expected to surge as a proportion of GDP.  Personal income tax will lift from this year’s low of 9.5% of GDP up to 9.8% next year then 10.2% in 2011-12, and company tax will lift from 4.1% of GDP to 4.7% and then 5.2%, delivering a $34b revenue increase in 2011-12.

With such a surge in taxation receipts, it only needs a Government to sit on spending in order to start building surpluses.  And that’s exactly what this Government is doing.

Peter Fray

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