Economy

Dec 19, 2016

Costello could have saved the economy, ScoMo blew it up

If taxes were now what they were during 2008-09, there would be no deficit, writes The Australia Institute executive director Ben Oquist.

The debate surrounding the Mid-Year Economic and Fiscal Outlook and whether Australia has a credible path back to a surplus should start by remembering how we got here. If Scott Morrison had delivered much of Peter Costello’s taxation ratio, the budget would not be in deficit today. This government has set a target ceiling for the country’s tax-to-GDP ratio of 23.9%. If Australia had that rate over the last decade, net government debt today would be zero and for the last year alone there would have been an additional $30 billion in revenue for the Treasurer. These are the facts uncovered in an Australia Institute report -- Taxing times: The impact of the GFC on tax revenue in Australia -- from senior economist Matt Grudnoff, out today. Of course, it would not necessarily be sensible economic policy for Australian government debt to be zero in 2016. However, the absurdity of suggesting the budget can only be "fixed" via cuts to spending is laid bare by the startling fact that the current $329 billion net government debt would be wiped out if tax-to-GDP ratios delivered by Costello (and promised for the future by the current Treasurer) had been in place for the last eight years. The Australia Institute’s modelling shows that if tax revenue had not remained so low after the global financial crisis (GFC) in 2008, then there would have been only two years where the budget was in deficit during the term of the previous Labor government. These deficits in the model are of course caused mainly by Wayne Swan’s stimulus spending, which staved off a recession. Remarkably if the 2016 financial year had delivered a tax-to-GDP ratio nearer to that of the last years of John Howard, there would have been an extra $30 billion in cash for Treasury, a similar amount in 2015, and closer to $40 billion in extra revenue in 2014. The model also shows that the accumulated deficit, which is roughly equal to government debt, would have been effectively non-existent today had the tax to GDP ratio simply held at Costello-Howard levels. So the main factor leading to the post GFC deficits and the accumulation of government debt has been the remaining low tax revenue. The size of the accumulated deficit also gives an indication of what the low tax revenue has done to the size of the debt with the accumulated deficit in effect being the sum of all the deficits after the GFC. The graph below from today’s report shows the actual accumulated deficit (blue line) and the modelled accumulated deficit (red line). The actual accumulated deficit grows over the whole time period, but under the modelled scenario we see an initial deficit but this quickly vanishes with the final outcome almost in balance by 2015-16. This highlights that the current debt is mainly driven by the post-GFC low tax revenue. Put simply, because Australia did not have any net debt at the time of the GFC, if the tax-to-GDP ratio had stayed at 23.9% through to now, Australia debt would still be at zero.

deficitmodel

Actual and modelled accumulative deficit 2009-2016  

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11 comments

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11 thoughts on “Costello could have saved the economy, ScoMo blew it up

  1. old greybearded one

    In fact Costello did much har, to the budget and still more to the economy by piddling away money in taxcuts during a boom, increasing inflation and spending no money on very important key areas like transport and science. I agree with the rest, but Costello was a goose and Howard a fiscal fool.

    1. klewso

      Not to mention instilling an addiction to middle-class welfare – and being a member of the government that took us to an expensive, hubristic war in Iraq?

  2. zut alors

    Perhaps Morrison could raise some revenue by selling the remaining 80 tonnes of gold which Peter Costello decided not to flog off in 1997. Costello (in)famously sold 167 tonnes of the RBA’s gold when the price was low – before it soared. No doubt Costello’s admirers will spring to his defence by arguing what extraordinary foresight he had to retain 80 tonnes.

    So, for this reason & those given above by fellow Crikey readers, Costello is no financial whizz. And Howard enabled him.

  3. Graeski

    Ah yes! Good ol’ Crusty Trusty Pete – the wind beneath the Lying Rodent’s wings (or something to do with the Lying Rodent’s wind, at least.)

    1. klewso

      The Howard-Costello “Tax-cuts for electoral popularity” – what’s that done to revenue?
      Who’s going to address that and turn it around.
      They’ll happily subject us (especially those least able to go without) to service and infrastructure cuts long before they get to look at a necessary tax rise, even a modest one – and you can bet the worse-off will be first in line for that.

  4. Paddy Forsayeth

    John Howard always took it in his strides!

  5. Nicholas

    Why should the federal government’s net financial position with respect to the domestic non-government sector be a surplus? That would mean that Australian households and firms as a whole would need to be in deficit with respect to the federal government. How would that be helpful to households and firms?

    1. Mike Smith

      Someone who gets it. You only want to do this to slow the economy down, and when we’re teetering on the edge of recession its not the time to do this.

  6. Karen

    Corporate tax cuts essentially into savings (of which there are huge private stockpiles ) and efficiency spending such as automation, not employment. How long do we have to put up with this crap?

  7. Brucead

    Here’s a radical counter-intuitive way to increase revenue..over the longer term, and reimagine a SIMPLE and FAIR pension system…
    Australia’s pension and retirement system is obviously broken, complex, unwieldy and grossly UNFAIR…. Sadly it has taken the actual implementation of the new pension arrangements for many to finally realise it.
    It MUST change.
    It does not need to be this way, and the answer is obvious for anyone who looks objectively at the situation in an unbiased and bipartisan way.
    The answer is simple….
    a. ALL Australians should qualify for the FULL pension. As absurd and counter intuitive as this sounds…please give it some thought and read on. …
    Take away ALL the crazy deductions, assets tests and thousands of costly public sector people who administer this crazy system, and restore it as a a right for everyone who has contributed to it throughout their working lives. Notably this is of course accepted practice in New Zealand, Canada and many European countries, amongst others.
    b. ALL income, including Superannuation should then be taxed at the standard rates.
    Hard to do. Yes, but Right. You bet…and doing the Right Things is what policy leadership is about.
    What are the implications of this simple resolution of our current retirement dilemma?
    1. FAIR. EVERY older Australian would be guaranteed a minimum income which is not handicapped or compromised by continuous manipulation of their future prospects.
    a. Existing pensioners would not be affected.
    b. Those older Australians who have worked and saved all their lives and have superannuation balances between around $400k and $900k would have receive an income commensurate with the commitment they made to save during their working lives.
    This is MIDDLE Australia; this is the group who are hardest hit by the constant changes to pension arrangements and the dramatic drop in interest rates. We simply do NOT want our older citizens taking investment risks and even a superannuation balance of $700,000 can only securely return around $25,000 per year.
    c. ..and yes, despite receiving the pension, a smaller number of wealthier Australians would ultimately pay more tax.

    2. GOOD ECONOMIC POLICY: Taxing all income ultimately makes it affordable for the country. Again while your initial reaction is “How can we possibly afford this?’; but modelling the impact to the country’s economy over 10 years will prove it makes sense.
    a. The current ‘breakeven’ position means that only those with balances in excess of around $1.6m or an income of around $75k will be slightly worse off.
    b. Those with excessive balances in Super will pay the taxes that are surely reasonable…their Costello tax holiday of the past 10 years will be over. A small ask.
    c. Large numbers of older Australians will not be penalised for working hard and saving..and accordingly will finally have the confidence to continue spending and contributing to Australia’s economic future.
    Finally, here is the political Genius of doing this at this time….
    1. While there is an urgent need to support those MIDDLE income older Australian’s today, as interest rates eventually rise…..so will the government’s revenue as their level of taxation rises and this will in turn will ultimately FUND the additional cost that temporarily needs to be incurred at this time.
    2. You could NOT do this at any other time. While there is universal agreement that removing tax on income from super rather than contributions and earnings was the flaw in the superannuation changes of earlier this Century, NO government could change this unless the impact was minimal…which it is under this initiative.

    Do the modelling and you will see it makes sense.
    In the end you will say, “How can we NOT afford to do this NOW?”
    I hope you will see the FAIRNESS and ECONOMIC LOGIC in this proposal and consider it as a radical new policy offer for this election which will have an ENORMOUS impact on how middle Australia votes.
    There are now hundreds of thousands of older Australians who would surely vote for Labor if you led with this policy initiative. Remember it is not only the 300,000+ Australians who are currently impacted by the changes, but many more who are in their 40’s and 50’s and are now had their retirement plans undermined by the Liberal government.

  8. gerald butler

    Taxation equals civilisation has long been a fact of life for modern economies. Look to Norway to see what can be achieved by strong taxation measures for fossil fuel companies. Australia’s efforts are comparatively piss poor to the detriment of our people. Our PM hides his gelt in a tax haven- don’t expect much from the rent seekers party.

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