Difficult budgetary times ahead as tax collections languish below Treasury estimates
The federal government looks likely to end up with a budget deficit this year that could be as high as $15 billion. This is disappointing in a year when a small surplus was promised.
The deficit blowout has resulted from revenue from company and personal tax collections languishing well below Treasury estimates. This revenue shortfall is concerning the business sector, which now fears this years budget shortfall will result in lower future business tax concessions.
Difficult budgetary times lie ahead especially if the plans for a boost in education outlays and introduction of a disability insurance scheme are to proceed. This is already evident from the announcement that the
Gonski-inspired additional school education boost will be funded by large cuts in tertiary outlays.
Such action would not have been necessary if tax rates had continued growing at the rates previously projected. The corporate sector and tax collections are being affected by the high dollar and slowing down of the mining sector.
The first impact of lower company revenues is an immediate reduction in company profits, resulting in reduction of both the governments and investors incomes within a very short period of time. Australia’s high and relatively inflexible wage structure reduces the ability for companies to adapt to falling profits quickly, explaining why personal tax collections are holding up better than company profits. But ultimately, weaker corporate profits will also result in lower personal income tax collections as companies reduce employment or take other measures to restore profitability.
Personal tax collections are coming under pressure from the decision to raise the level at which income tax becomes payable to in excess of $20,000 a year. In times of falling incomes and growing unemployment, this decision means that many more taxpayers will be paying lower tax bills as their incomes are reduced by unemployment or shorter working hours.
The increase in the tax-free area was in large part initiated as compensation for the introduction of the carbon tax. But with the sharp fall in the European carbon price, Australia faces the prospect of having implemented very costly increases in the tax-free area at a time when carbon tax revenue is highly uncertain. Unless the government reverses its personal income tax changes in light of its changed circumstances, it will have no alternative but to make savage cuts to projected outlays intended to introduce its new programs.