Budget monsters, scary creeps

In a bunker within the Federal Treasury, Joe Hockey and Mathias Cormann are putting the final touches to next week’s Budget.

Time is short — and so are tempers — as the pair attempt to repair the nation’s fiscal bottom line and the electoral standing of the Abbott Government.

It’s unlikely they got a chance to read two pieces of research that emerged last week and go to the heart of Australia’s (and WA’s) fiscal woes.

The Australian Taxation Office released its annual Taxation Statistics report which pulls apart everything you ever wanted to know about our tax paying proclivities.

And the Parliamentary Budget Office went through the finances of the Commonwealth and every State and Territory.

Taken together, they highlight the problems facing Hockey, Cormann, Colin Barnett, Mike Nahan and every voter in the country.

First, the tax office.

The headlines focused, understandably, on the 55 people who made at least $1 million in 2012-13 but managed not to pay tax. Indeed, some of those people collected a tax refund (while some of them also received a government welfare handout).

Another 740 people with incomes of more than $180,000 but less than $1 million also avoided paying tax. At a time when it’s clear that there are problems in the tax system, that some people really believe it is optional to make a contribution to the country was unwelcome news.

But the figures also highlighted two emerging trends that are not good from a fiscal or economic perspective.

The number of people being pushed into higher tax brackets because of incremental wage rises is increasing.

Bracket creep, as it’s known, resulted in 186,000 people moving into the second top tax bracket while another 46,000 were pushed into the top 45¢-in-the-dollar bracket.

Now, if this was because of all these people getting big pay rises or taking on much better paying jobs then it wouldn’t be an issue.

But in many cases the issue was just a run-of-the-mill pay rise that was enough to tip them into a higher bracket. While bracket creep at the top end is a worry, it ultimately only applies to about 2.4 million people.

The total taxpaying community is closer to 13 million. At the bottom end there was a rise in the number of people moving up into the middle bracket of 30¢ in the dollar for people earning more than $37,000 but less than $80,000.

This march into higher tax brackets is important to the Budget (I’ll touch on that in a moment) but higher personal income tax also has a knock-on effect at the economic level.

And, as those 55 millionaires who didn’t pay tax show, it is also an incentive to engage in some creative accounting. The other problem identified in the tax stats was a demographic one. The number of people aged between 65 and 69 lodging a tax return rose almost a third between 2008-09 and 2012-13.

At one level that’s a good thing. We want older people to work for longer. But at a fiscal level, these people are not getting high wages that supply strong tax revenues.

And the more there are of these people, while the proportion of workers in high paying jobs falls, the bigger the tax issues. The Parliamentary Budget Office, an independent agency created by the hung Parliament under Julia Gillard, continues to prove its worth.

Its latest research examined Federal and State revenue and spending patterns over the period 2002-03 to 2012-13 while also looking at future trends.

On the revenue side, it pointed out that as a proportion of GDP the Federal tax take had fallen from 35 per cent to 33.2 per cent over the past decade.

It may not sound much but here’s some perspective. In 2002-03, Peter Costello delivered a Budget surplus of $7.1 billion.

If the tax take was the same as that facing Wayne Swan in 2012-13, Mr Costello would have run a deficit of $7 billion.

If Mr Swan had enjoyed the same tax ratio as Mr Costello in 2012-13, the deficit of $21 billion would have been a $6 billion surplus.

The PBO notes that in large part the march back to surplus is based on the tax take returning to that 2002-03 level.

And that brings you back to bracket creep. Without bracket creep (and stronger wages and a stronger economy), the Budget will remain in the red.

All the rhetoric that spending cuts will bring the Budget to heel is bunkum. Revenue also has to rise.

The Budget office also warns that there are severe risks ahead, including falling commodity prices and a soft national economy.

Then there’s the issue of the single largest spending cut in last year’s Budget — the $80 billion from future education and health funding to the States.

According to the PBO, this cut — which will start to show up in the forward estimates of State budgets this year — is going to cause trouble.

“Adjusting to these new arrangements is likely to pose challenges to the management of State government budgets over the medium term,” it noted.

In other words, the States — which are also trying to cut spending and lift revenue — are going to have their budgets squeezed because the Feds are going to reduce expected revenue in the education and health areas.

The PBO’s report also contained further confirmation of the self-created problems within the WA Budget.

While the Barnett Government complains about its falling share of GST (a legitimate gripe), it tends to ignore the State’s other sources of income.

According to the Budget office, WA enjoyed the single biggest increase in revenue of any State or Territory over the past decade.

Revenues lifted 8 per cent a year. The next best was Queensland, where revenues were up 7.5 per cent.

By contrast, in those economic basket cases of South Australia and Tasmania, revenues were up 4.9 per cent and 4.7 per cent per annum.

So the complaint that WA has not had enough money, again, fails to stand up to scrutiny.

The State Budget is in trouble because of the other side of the coin. Spending over the past decade grew 8.9 per cent per annum.

It doesn’t take a fiscal genius to see the problem. If your revenues are growing slower than your outgoings, then you are going to run into financial trouble.

Put the PBO and the tax office reports together and you get a clear picture of what’s gone on and what’s coming in the fiscal space.

Budgets, by their political nature, are often caught up in the day-to-day tussle that passes for debate in Canberra.

Longer-term reflections, however, give you an idea of the larger trends at play.

And the two reports suggest that the trends are running in the wrong direction — at( the Federal and the State( level.

Something has to give, soon.