Apr 29, 2014

The band-aid levy: a new tax won’t fix the structural budget problems

The federal budget has serious structural problems. A debt levy will only exacerbate them, writes Leith van Onselen at MacroBusiness.

Treasury warns the nation faces its most sustained period of weak growth for at least 50 years, with falling commodity prices and weak income growth until 2020. It might be right. Nominal GDP is the dollar value of what’s produced and earned. It’s also the measure that drives taxation revenue. Due primarily to the inexorable rise in commodity prices and the terms of trade between 2003 and 2011 (with the exception of a brief collapse during the GFC), the federal government enjoyed strong nominal GDP growth and booming tax receipts from rising personal and company taxes, not to mention increased capital gains taxes as asset markets boomed. Since then, terms of trade have begun to trend down, meaning nominal GDP growth has been weak, as have tax receipts ...

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

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8 thoughts on “The band-aid levy: a new tax won’t fix the structural budget problems

  1. Jimmy

    More fantastic logic from this ridiculous govt – we will save everyone $9 a week by scrapping the carbon tax but charge them $15 (or more) for a deficit levy.
    We will scrap the tax on high income earning super funds but increase the pension age and make it harder to get.
    We will make you pay to go to the doctor but shell out $75k for you to have a baby.

    Those who voted liberal can’t say they weren’t warned!!

  2. JohnB

    It isn’t quite as you say.

    You said “Since then, terms of trade have begun to trend down, meaning nominal GDP growth has been weak, as have tax receipts …”

    The graph shows that real GDP growth has not trended down during the past decade – GDP continued to rise, even during a global financial crisis. Australia, from the data on the first graph, has been going quite well, thanks.

    You said:”Another related headwind is the decline of mining-related capital expenditures”. Graph 3 shows clearly that mining-related capex is not trending downward – it is bouncing along as a percentage of GDP, which itself is rising, so mining capex is in fact rising. That makes mining capex, at 6% o GDP, a tailwind, not a headwind.

    I could go on, but I choose not to do so.

    Stop smoking that stuff. It’s making you unreasonably pessimistic.

  3. Mark Duffett

    The ‘compelling reasons to shift the tax system back towards resource rents’ ignore that while the resources might be immobile, they also require huge, highly risky investments to identify, never mind utilise. Not really like ‘land’ at all. Any move to increase the tax burden on resources must have a negative impact on their availability.

  4. Jimmy

    Mark “they also require huge, highly risky investments to identify, never mind utilise” Hence why the tax only applies to profits past a certain (very watered down) point.
    The problem here is that Abbott is arguing for tax relief for big mining companies but slashing pensions, wanting to raise income tax but cut the carbon tax and pay polluters to do very little.

    If we have a budget emergency why would you take around $7 or $8 billion in revenue out of the forward estimates and add in $2.5b in additional spending?

  5. Suzanne Blake

    Hi Jimmy

    The Rudd, Gillard, Rudd, Swan Government has caused so much damage, it will take a decade to repair, and the Goverment that does will be unpopular, as you say.

    The Goveernment could kick the can down the road like USA and Greece and leave it for another generation. Would you porefer this

  6. Jimmy

    SB- Where is the damage – solid growth – reasonably low unemployment, low inflation, low interest rates, AAA credit ratings, big ticks from almost every economist and organisations like the IMF and world bank – the crisis is completely fabricated.

    As for “kicking the can down the road” of course at some point we need to reduce debt and the ALP had a plan to do so in roughly the same time frame as the Libs (although the libs won’t tell us their time frame). The issue is the libs policies all entirely confused.

    The claim a budget crisis but want to slash revenue from the mining and carbon taxes while keeping the compensation and then add on another $2.5b in spending on their direct action plan that everyone agrees is just terrible policy.

    They want to push back the pension age and make it harder to get because everyone has to do the heavy lifting but oppose the ALP’s plan to increase the tax rate on high income earning superannuation funds.

    The promised lower taxes but plan a deficit levy and a paid parental leave levy.

    They want harden the means testing on FTB and other welfare while introducing a paid parental leave scheme with absolutely no means testing.

    They plan to make you pay to go to the doctor and remove the low income super rebate (both impacting lower income earners) while reduding the taxes of high income earners and big miners.

    They want to cut spending on helath and education while increasing spending on defence.

    The claim we face long term problems but propose a “temporary levy” to fix it.

    It isn’t that they want to get the budget back into surplus it is that their policies are confused and contradictory and the burden falls harder on those who can least afford it.

    I am happy to pay a little more tax if we get free access to health and top class education but to try to slash and burn simply to pay for direct action, a rolls royce PPL scheme and so big miners can pay less tax is not what I call a good idea.

    And the major source of our “structural deficit” was the spending and tax cuts from the howard era, when he took windfall gains and used the for permanent spending.

  7. lloydois

    You’re barking up the wrong tree if you use logic on people like Suzanne Blake Jimmy.

    She’s clearly from the Abbott school of logic which posits a statement along the lines of everything Labor did was bad and we have to clean up this huge mess without giving a skerrick of evidence that there is a huge mess to clean up.

    The fact that under labor we were one of the few advanced economies that didn’t go into recession during the GFC and the fact that our government debt levels are low are meaning less to people like this.

    3 word slogans are about all they can comprehend which is why Tony appeals to them perfectly.

  8. Jimmy

    lloydois – I know you can’t reason with SB but I beli eve that one of the mistakes that has been made in political and economic debate is intelligent people thought that irrational arguments don’t need to be answered or exposed because people will see them for what they are – all that happenned was that the irrational and illogical became the accepted norm.

    I would also point out that SB was indignant about Gillard being a L ia r but is happy to have Tony claim no new taxes then bring one in.

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