If a line in Treasury Secretary Martin Parkinson’s speech a few days ago is to be taken at face value, all the argument about tax cuts is academic. Tax increases are needed.

Parkinson said the tax to GDP ratio had fallen by 4 percentage points since the GFC and “is not expected to recover to its pre-crisis level for many years to come”.

The tax to GDP ratio in 2007-08 was 23.7%, which implies that it’s now 19.7% of GDP, or $308.7 billion. However in the mid-year economic and fiscal outlook statement last November, produced by Parkinson’s department, the ratio was 22.3%, or $349.2 billion.

The implication of this, as pointed out by former Treasury Deputy Secretary Des Moore, is that about $40 billion in tax revenue has evaporated in the past six months.

Despite this, federal Treasurer Wayne Swan is still expressing confidence that he will produce a surplus for 2012-13 in the budget that’s due in two months.

Bear in mind that the MYEFO predicted a deficit for the current financial year of $37.1 billion — that’s BEFORE the apparent loss of $40 billion in tax revenue, according to the Parkinson speech.

That suggests the final outcome for 2011-12 will be a much larger deficit than $37.1 billion: perhaps not $77 billion, because there will be savings and fiddles, but certainly more than predicted in November.

So the question for both Wayne Swan and the alternative treasurer, Joe Hockey, is: how, exactly, will you produce a surplus in 2012-13 if economic growth is below previous forecasts and tax revenue is $40 billion short?

Both parties are basing their politics on the latest Treasury numbers — that is, the MYEFO. But as they both have learnt year after year, that is always a dangerous thing to do. Treasury forecasts are always wrong. During the boom they were always too conservative and now they are apparently too high.

It means both Hockey and Swan are going to be mugged by reality, the difference being that Swan is in government and Hockey is therefore able to blame him, not Martin Parkinson.

Swan will need to do more than impose a mining tax that raises — at most — $10.9 billion over three years, that’s for sure. Tax cuts for business — big or small — need to be off the agenda. And Joe Hockey needs to do more than sack 12,000 public servants, which would probably save not much more than $1 billion a year.

In short, all bets are off. Either that, or both sides of politics, in a rare show of bipartisanship, must give up on returning the budget to surplus in 2012-13.

If it’s true that $40 billion in tax revenue has evaporated, that would be by far the best course of action. Slashing that much out of government spending, or raising taxes to that extent, would be a crushing blow to an economy that is struggling under the weight of a currency sitting near a 30-year high at 78.3 on the trade weighted index.

*This article was originally published at Business Spectator

Peter Fray

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