Spending sinks all hope of budget surplus

Monday, 27 March 2017

Spending sinks all hope of budget surplus
Picture: Renee Nowytarger | Source: The Australian

Original article by David Uren in The Australian:

Australia’s federal budget is ­unsustainable, a report led by the head of the Abbott government’s audit commission warns, casting serious doubt on “somewhat ­heroic” Treasury forecasts of a ­return to surplus in four years.

The report, drafted at the ­direction of leading businessman Tony Shepherd, warns that the government’s welfare and pension spending is fuelling ongoing deficits and has the potential to cripple the nation’s finances, pointing to Japan’s struggles to pay for its ageing population.

As the Turnbull government battles to win Senate support for its bid to reduce company tax rates, the report warns that Australia’s tax base is too reliant on narrow, unreliable bases of company and personal income tax.

“We are borrowing to meet the demands of growing recurrent expenditure while the tax base shrinks because of the ageing population,” the report, prepared by the Menzies Research Centre, a think tank affiliated with the Liberal Party, says.

“Few other nations bear such a heavy reliance on personal ­income and company taxes as Australia does in 2017.”

In a new danger to the government’s agenda, Pauline Hanson’s One Nation is threatening to ­abstain from crucial votes on the company tax cuts and other bills this week unless the government acts on a dispute between sugarcane growers and sugar producer Wilmar.

Days after Deputy Prime Minister Barnaby Joyce labelled Senator Hanson “bat-poo crazy” for calling Islam a disease, One ­Nation senator Brian Burston confirmed the plan to abstain from federal votes but denied it was holding small businesses to ransom by blocking their tax cut.

“We’re going to use our leverage for the very first time in the Senate to look after our agricultural sector,” he said.

One Nation’s move would ­deprive the government of four votes in the upper house for its ­enterprise tax plan.

Scott Morrison blasted Labor yesterday for opposing the tax cut for any business with annual turnover of more than $2 million.

“The Turnbull government is committed to legislating the 10-year enterprise tax plan. That’s why it is in the budget and why it is legislation before the parliament,” he told The Australian.

“Labor’s failure to support company tax cuts continues to expose not only their hypocrisy but Bill Shorten’s commitment to undermine our economy for his own shallow political interest.”

Mining magnate Gina Rinehart yesterday made a fresh plea for the government to hold the line. “Lower company taxes wouldn’t just benefit a few wealthy people, but all those families who own shares in companies, as well as those employed and seeking employment, and benefit all who have superannuation funds,” she said.

Labor finance spokesman Jim Chalmers stepped up the budget fight yesterday by calling on the government to keep the temporary deficit levy, which adds two percentage points to the tax rate on earnings above $180,000 but is due to end on June 30.

Senate powerbroker Nick Xenophon said his NXT party would only back a cut in the company tax rate to 27.5 per cent for small employers with up to $10m in annual turnover, blocking the government’s ambition to cut the rate to 25c in the dollar for all companies over a decade.

The government will also move this week to legislate a ­“diverted profits tax” to assure Australians it is cracking down on tax avoidance by global companies at the same time it tries to lower the tax rate for all employers in the name of creating jobs. With Australia’s gross debt predicted to blow out to about $648 billion within a decade, Mr Shepherd expressed concern that the public did not see the budget as a serious problem.

“The average Australian doesn’t care a toss about the deficit and the borrowing required to fund it,’’ he said. “That is a failure of explaining to the community.”

Australia is entering its eighth consecutive year of deficits, with net debt ballooning from $152bn in 2013 to an estimated $317.2bn in 2016-17. “The current level of government spending is simply unaffordable,’’ the report, to be ­released today, argues. It points out that 73 per cent of the government’s revenue comes from company and individual income taxes, one of the highest ratios in the world. Less than 0.1 per cent of companies deliver 59 per cent of company tax revenue while 9 per cent of individuals pay 47 per cent of income tax. The government ­depends on company taxes for 17.1 per cent of revenue, compared to the 8.8 per cent OECD average.

The major areas of spending continue to grow unchecked. Areas of public sector spending that may generate revenue or lift productivity are being cut, with transport and communications outlays budgeted to drop at an ­annual rate of almost 15 per cent across the next three years.

However, welfare, by far the largest area of government spending, is expected to rise in cost at an annual rate of 5.9 per cent while defence spending will rise at 5.5 per cent. The report argues that the budget outlook will only become more difficult as the average age of the population rises with the retirement of the baby boomers, while there is an “ever-growing rise in ­eligibility for entitlement”.

It points to the experience in Japan: between 1995 and 2013, it went from having 5.9 workers for every person eligible for the pension to 2.5 workers, forcing a 67 per cent blowout in pension costs. A similar fall is expected in Australia, moving from a ratio of 4.5 in 2015 to 2.7 by 2055.

The report also casts doubt on Treasury’s forecasts of a return to surplus by 2021-22.

“This outlook assumes Australia maintains a world-record 26-year stretch of economic growth, the Senate passes measures to support fiscal consolidation and a continuing generally positive economic ­outlook.’’

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