Australia's Tax Revenue Rise Lags Behind Economic Growth

by Mary Swire, Tax-News.com, Hong Kong

05 November 2009

The 2009-10 Mid-Year Economic and Fiscal Outlook (MYEFO), while predicting higher Australian growth than expected, also pointed to a lag before tax revenues catch up with budgetary forecasts.

Australia’s Treasurer, Wayne Swan, announcing the MYEFO’s release, suggested that despite the improved outlook, the economy is expected to continue to operate below capacity for some time and unemployment is still expected to rise, with a drag on domestic incomes and business investment.

Therefore, while the stronger economic outlook has resulted in an increase in estimated tax revenues, he revealed that the effects of the global recession will still mean that forecast tax receipts over the period from 2008-09 to 2012-13 remain AUD170bn (USD153bn) lower than forecast at the time of the 2008-09 budget.

In fact, the MYEFO points out that a main contributor to the weak collection levels and the delay in tax receipts recovering may be a stronger and earlier than expected flow-through of accumulated losses. Those losses are likely to encompass falls in the value of assets (for example, through falls in market prices and the write-off of debts) and operating losses of businesses.

In addition, the company and superannuation fund tax instalment system is likely to be suppressing near-term taxes more than anticipated.

Lower than expected hours worked in the first part of 2009-10 (and the last months of 2008-09) and higher estimates of tax exempt superannuation fund income have also reduced receipts relative to budget.

However, while corporate and individual income taxes have therefore been lower than anticipated, indirect taxes have held up and, with the stronger economic conditions in prospect, are now anticipated to be higher than at budget, as the improved outlook for consumer spending immediately translates into higher estimates of GST (Goods and Services Tax) and excise duty receipts.

Overall, therefore, 2009-10 tax receipts show stronger indirect tax and non-tax receipts partly offset by weaker income tax from companies and superannuation funds.

From 2010-11, income taxes are expected to recover in general, with larger increases foreseen later in the forward estimates.

In like fashion, recent upward revisions to company profits in 2009-10 and 2010-11 are anticipated to contribute to significant increases in company tax later in the forecast period, as tax collections catch up with the improved profit conditions.

Expected capital gains tax revenue has also been revised upwards as equity prices have recovered from their lows earlier in 2009.

Wayne Swan added that, while the impact of resumed economic growth will take time to be reflected in tax receipts, government savings mean that the forecast for its underlying cash deficit in 2009-10 is largely unchanged from budget at AUD57.7bn (4.7% of GDP). In the three years from 2010-11 to 2012-13, the expected underlying cash deficit improves by an average of 1% of GDP each year, with a return to surplus in 2015-16.

Stimulus tax measures, he continued, would be withdrawn gradually by the government as private sector demand recovers.

He went on to reveal that the impact of fiscal stimulus peaked in the June quarter, and its planned withdrawal will begin to detract from GDP from the March quarter 2010. The withdrawal of stimulus and the banking of increased tax receipts would then see a substantial tightening of the fiscal stance.

Total tax receipts are expected to rise from almost AUD292bn in 2009-10 to almost AUD365bn in 2012-13, or from 24% of GDP in 2009-10 to 25.2% in 2012-13, as the tax stimulus measures are retracted.

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