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Swan and plunging revenue

April 1st, 2012

Treasurer Wayne Swan has switched from a “hard Keynesian” to a structural justification of expenditure cuts. Rather than advocating a rapid return to surplus as consistent with macroeconomic balance and full employment, Swan now says cuts are needed because of structural factors like declining capital gains tax revenue, notably omitted the Howard income tax cuts adopted and implemented almost completely by Labor. claiming, as quoted by the Age and other sources.

Tax revenue, which plunged from the 24.2 per cent of GDP once enjoyed by the Howard government to 20 per cent, is set to recover only slowly to around 22.8 per cent by 2016.

Looking that the 2011-12 Budget papers show nothing of the kind. They are for receipts, not revenue, but they show a decline from 24.9 per cent in 2007-08, the last Howard Budget to a low of 21.9 in 2010-11 (I checked and the final figure was 21.7). The 2012-13 MYEFO has (General Government) receipts recovering to 23.9 per cent of GDP by 2012-13 on current policy. Revenue is higher at 24.5 per cent.

Before I talk about the merits and otherwise of Swan’s strategy, I’d like to get the numbers right. Does anyone have any info?

Update An inquiry to the Treasury produced an amazingly rapid response, pointing me to page 363 of the MYEFO, which is the source of the data. I think it’s fair to say that Swan is engaged in cherry-picking the past and relying on rubbery numbers for the future. The numbers represent tax revenue rather than total receipts. The number for the Howard government is not that of its last budget, but is for 2005-06. That was before some big tax cuts, and also before the establishment of the Future Fund, the earnings from which are not counted as revenue, although the debt interest that could have been saved is an expense. The rubbery projections involve claims that the revenue/GDP ratio will remain almost static from 2012-13 onwards, when bracket creep would typically be expected to produce growth, in the absence of policy change.

I’d suggest a more accurate summary of the data is that, on current policy, receipts are projected to be 23.9 per cent of GDP in 2012-13, down from 25.1 per cent in the last year of the Howard government (Labor has, unwisely, pledged to hold itself below this level). The gap is entirely explicable in terms the unaffordable income tax cuts promised by Howard in 2007 and implemented (with modest changes) by Labor.

It would be easy enough to fill this gap by taking a harder line on tax expenditures and tax avoidance, without cutting the services which, according to Gillard and Swan, we are supposed to trust Labor to deliver.

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  1. TerjeP
    April 1st, 2012 at 19:53 | #1

    If you look at real (ie inflation adjusted) revenue per capita then I think you will find that the idea of a decline is mostly mythology. It seems that statists can’t stand the idea of the state growing slower than the general economy and so seek to complain that the state has shrunk (oh the agony) when this actually happens even if in fact the state has still grown. Swan should slash government spending. Rudd referred to using a meat axe when he was vying in 2007 for the job of PM and was trying to out conservative the conservatives. It sounded good at the time.

  2. rog
    April 2nd, 2012 at 00:06 | #2

    I would have thought some allowance for the earnings of the Future Fund be made; it was ostensibly created to offset so called future unfounded liabilities and has been the recipient of further govt investment.

  3. Freelander
    April 2nd, 2012 at 01:04 | #3

    I thought the liabilities are well founded.

  4. Freelander
    April 2nd, 2012 at 07:40 | #4

    Swan has been an idiot for unnecessarily painting himself into this corner.

  5. Fran Barlow
    April 2nd, 2012 at 09:28 | #5

    @rog

    unfounded liabilities

    LOL … the governmment would love them to be unfounded. They want to avoid them becoming unfunded.

  6. Ikonoclast
    April 2nd, 2012 at 11:12 | #6

    Swan now runs a “pro-cyclical” budget program. When the economy is in trouble (as it is now) with high unemployment, high under-employment, high hidden employment and un-utilised capacity, he wants to cut government spending. That is, cut the dollars going into a weak economy. Austerity in other words, which will plunge a weak economy into severe recession.

    What really bugs me (and I wanted to use a stronger experession) is that our governments and treasurers are totally inconsistent. They cannot hold to a single firm line on how the economy works. In the 2008 GFC, they were Keynesian. Now that a double-dip recession looms they want to be pro-cyclical, i.e. cut when the economy is weakening. Since they clearly don’t have a single guiding philosophy, you have to ask what does guide them? It can only be fashion and conformity. Now that austerity is the fashion (in Europe and possibly in the US), Swan and Co. simply have to ape them. What is it? A lack of firm understanding? A lack of courage? Or is conformity with the dominant neoliberal ideology so ingrained they are conditioned like Pavlov’s dogs and cant help themselves?

  7. rog
    April 2nd, 2012 at 11:40 | #7

    @Fran Barlow Looks like I foundered.

  8. Dan
    April 2nd, 2012 at 11:59 | #8

    Ikonoclast :high hidden employment

    Sounds like a good problem to have…

  9. Troy Prideaux
    April 2nd, 2012 at 12:11 | #9

    @Ikonoclast
    Probably more the latter than anything else. Swann declared on numerous occasions that the government *will* be running a surplus this term. They committed themselves pretty heavily to it, many would say irresponsibly. They’re so determined to create some fiscal-economic credibility in a political sense, that they’re willing to sacrifice all Labor values (whatever they are) and credible fiscal & economic policy to maintain the political commitment.
    In terms of unemployment – the $80B or so being invested in resources within the next 12 months will mask the issue in terms of holistic numbers to some extent. Obviously (in terms of polling numbers) people are getting pissed off playing job-merry-go-round, with a broken music player [cough], I mean “the adjustment of the economy we need to have”.

  10. John Quiggin
    April 2nd, 2012 at 13:01 | #10

    The unfunded superannuation liabilities were mostly generated in the past. The (generous) Commonwealth Super Scheme was closed to new entrants in 1990, and the defined benefit option for the replacement PSS was closed to new entrants in 2005. Only the military scheme is still open and unfunded. Eyeballing the estimates, I’d say the real value of the liability is already declining

    http://www.treasury.gov.au/documents/1156/HTML/docshell.asp?URL=02_Future_Fund.asp

  11. Uncle Milton
    April 2nd, 2012 at 13:36 | #11

    “a harder line on tax expenditures”

    These were $112 billion in 2010-11. It’s all set out here

    http://www.treasury.gov.au/contentitem.asp?NavId=035&ContentID=2301 .

    Swan only has to attack a small fraction to fix his budget problem.

  12. socrates
    April 2nd, 2012 at 14:23 | #12

    This is a good question. I found Swan’s recent comment that getting the budget back into surplus quickly was “an economic necessity” complete nonsense. Why is it a necessity? Are we about to default on our debt? We still have one of the lowest public debts in the OECD. Will nobody loan us money? The valuation of the Australian dollar suggests otherwise. It is only a political necessity, because the Treasurer would rather create a recession than admit he mis-spoke.

    So we have the economic settings now firmly on “recession” and sure enough, three states are already in recession. Sounds like Labor is aiming to make it 5 states out of 6 by 2013.

    I think Iconoclast sums up the lack of a coherent economic philosophy well. There is no philosophy, only “positioning” and “narratives”. In this regard the desperate desire to be seen as “economically credible” is self-defeating. The harder Swan tries to do things just to look credible, the less credible he looks. Confidence in his “economic credibility” seems unfounded.

    Perhaps Swan desperately wants to deliver one surplus budget this term because he knows it is his last chance; there will be no third term. Presumably he wants a budget surplus to crow about in future when this train wreck is dissected by political historians. Too bad Swan isn’t interested in crowing about employment growth, or reducing deficits in services and infrastructure, than in balancing his cheque book.

  13. David Irving (no relation)
    April 2nd, 2012 at 15:16 | #13

    The military scheme is closed as well, Prof Q (from the early 1990s IIRC – after I got out of the full-time Army anyway) but there are still recipients, obviously. The current Defence scheme is like any other.

  14. Freelander
    April 2nd, 2012 at 15:56 | #14

    Shockingly generous. But nice if you were lucky enough to getting your snout in that trough!

  15. John Quiggin
    April 2nd, 2012 at 15:58 | #15

    According to http://www.treasury.gov.au/documents/1156/HTML/docshell.asp?URL=02_Future_Fund.asp

    In 2040, the largest superannuation liabilities will be generated by the Military Superannuation and Benefits Scheme, which is the only significant defined benefit scheme in the government sector remaining open to new members (Chart 3).

    Maybe similar to the public service, with a generous scheme closed off around 1990, and a less generous scheme, but still with a defined benefit option, introduced then.

    Not a big issue, but if you suppose that the Military Scheme is closed like all the others sometime before, say 2020, then the Future Fund will exceed the total liability not long after that.

  16. Freelander
    April 2nd, 2012 at 16:57 | #16

    Maybe that is why successive governments have been so keen to send troops into conflict areas. A means of dispatching some of the liabilities.

  17. April 2nd, 2012 at 17:58 | #17

    Freelander :
    Maybe that is why successive governments have been so keen to send troops into conflict areas. A means of dispatching some of the liabilities.

    What an idiotic comment.

  18. Freelander
    April 2nd, 2012 at 20:48 | #18

    Surely the government has actuaries who could estimate the likely impact on the military super liabilities from any contemplated engagement? They would be remiss if these calculations were omitted from their forward estimates.

  19. Ernestine Gross
    April 3rd, 2012 at 09:55 | #19

    I hear (on ABC) the poor standards are making their demands known again.

  20. JB Cairns
    April 3rd, 2012 at 11:15 | #20

    Sorry John but it is you that is cherry-picking.

    Tax receipts is the largest part of total receipts.
    Take the last financial year the tax % of GDP was 20% which is as low as it was in 1978/79. Bringing non-tax receipts brings it up of 21.6% of GDP. so essentially it is tqax receipts that matter.

    Treasury went to a lot of trouble spelling out the problems of tax revenue in that section in the Budget.
    Statement 5 of Budget paper no.1 actually.

    As for fiscal policy I think I might agree with Kouka now.

    Much better to get it not the black now (a surplus is more than 1% of GDP) so and let lower interest rates do their work.

  21. Fran Barlow
    April 3rd, 2012 at 11:36 | #21

    @Freelander

    Surely the government has actuaries who could estimate the likely impact on the military super liabilities from any contemplated engagement? They would be remiss if these calculations were omitted from their forward estimates.

    Doubtless, but your hypothesis:

    Maybe that is why successive governments have been so keen to send troops into conflict areas. A means of dispatching some of the liabilities.

    Does not follow. Firstly, and most obviously, the marginal cost of the operation would be orders of magnitude larger than any extinguished liability associated therewith. The cost of supporting troops in the field and the incidental cost from life-altering but non-lethal injuries would be much larger than any savings. Moreover, the prospective savings would be at thye credit of governments decades from now. Finally, the considerations for the operation in Afghanistan (and likewise any possible withdrawal) are in any event entirely culturo-political. Only radical change in the immediate marginal cost of the operation could force a reconsideration of the speed with which troops are likely to withdraw, and only truly prohibitive costs could have discouraged them from engaging when Howard elected to do so in 2001. Apparently it costs the US somewhere between $500,000 and $1.25million per troop per year to keep their troops in the field. The cost of the Australian operation is probably much lower — but it would still be far cheaper to keep them at home — not to mention less risky politically. Dead and injured troops don’t make good copy and troops doing bad stuff, even less so. Any half-way rational regime would have high-tailed it out of there at the first opportunity. Sadly, this regime is not half-way rational but currently a plaything of their loopy right, their loopy right’s friends and The Murdochracy more generally, which is why at current marginal cost, cost is not yet a significant factor in policy.

  22. Chris Warren
    April 3rd, 2012 at 13:01 | #22

    As long as there are not clear definitions of various economic ‘entities’ politicians and journalists will always play these games. Peter Martin has a good piece in today’s SMH listing 5 standard tricks:

    Shift spending
    Outsource spending
    Sell assets
    Hide borrowing
    Send spending off into the future.

    But another problem is that according to the IMF “there are no unique definitions of credit and debt,”. It appears that no-one has totalled the level of debt capitalism now needs to prop itself up – it must be near 100 trillion.

    So little wonder they cannot regulate the system as a whole – and we end up with a GFC.

  23. David Irving (no relation)
    April 4th, 2012 at 17:41 | #23

    My apologies, Prof Q – I wasn’t aware the Defence scheme still had a defined benefit. As I said, I was out by then (too early to collect a pension), and didn’t pay much attention to the fine details.

  24. Ken Fabian
    April 6th, 2012 at 16:26 | #24

    I think there’s no doubt that failing to bring the budget into surplus would send a hostile media into an ecstatic finger pointing frenzy. Irrespective of what may be best for the economic circumstances. I don’t know that keeping this commitment will save Labor but failing to keep it will almost surely help to sink it.

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