Budget Analysis May 2012

Transcription

1 Budget Analysis May 2012

2 The information in this presentation is of a general nature and does not represent advice. Forecasts are subject to unavoidable statistical variation. This presentation only takes into account information available to Independent Economics up to the date of this presentation.

3 What was said last year After fiscal stimulus of $61 bn to counter GFC, $1 bn in net savings over three years is not tough But need to prepare for future fiscal pressures from: an ageing population moderation in commodity prices Welcome focus on workforce participation and productivity Carbon price is cost-effective way of reducing emissions; needs global action to be effective Tax Forum an opportunity to pursue state tax reform

4 Forecasts of the 2011/12 Budget deficit Budget 2011 MYEFO Budget 2012

5 2012/13 Budget Issues The economic outlook: Europe under financial pressure; Australian economy in a soft patch The fiscal stance: Government s pre-commitment to a surplus The personal income tax burden: personal income tax cuts as compensation for $23/tonne Carbon tax Tax Reform Scorecard: response to Henry Review

6 The economic outlook

7 Growth soft now, but to improve 8% 6% GDP growth, % rolling years 4% 2% 0% -2% -4% history forecast 2006Q2 2007Q4 2009Q2 2010Q4 2012Q2 2013Q4 GDPW GDPA GDPW=world GDP GDPA=Australian GDP Source: Independent Short-term Forecasting Model

8 Softness in growth has contained inflation history forecast 2006Q2 2007Q4 2009Q2 2010Q4 2012Q2 2013Q unemployment (left) inflation (right) Source: Independent Short-term Forecasting Model

9 making room for lower interest rates day bill rate, % p.a history forecast Q2 2007Q4 2009Q2 2010Q4 2012Q2 2013Q4 Source: Independent Short-term Forecasting Model

10 Strong commodity prices keep AUD near parity $US/$A history forecast Q2 2007Q4 2009Q2 2010Q4 2012Q2 2013Q4 Source: Independent Short-term Forecasting Model

11 Comparison with Budget Forecasts Budget Independent RBA 12/13 13/14 12/13 13/14 12/13 13/14 GDP Unemployment rate Inflation Growth forecasts for 12/13 are similar (although our 3% is the lowest); trend growth in the economy with strength in mining offset by weakness elsewhere Unemployment creeping up to 5.5%, helping contain inflation; one more interest rate cut is expected Independent expects growth to pick up pace by 2013, leading to above-trend growth for 2013/14

12 The fiscal stance

13 Surplus target For: commodity prices are at historically high levels looming budget pressures from population ageing unemployment rate relatively low who wants to be like Greece? Against: growth currently slowish for non-mining economy Australia s debt levels are low by international standards On balance: target appropriate; tightening could have started earlier

14 Australia Greece UK US Japan Italy France Germany Ireland Portugal Adv Eco Pressure on public balance sheets 150 Net government debt in 2012 (% GDP) Source: International Monetary Fund Note: Greece figure is for 2010

15 Fiscal and Underlying Cash Balance ($bn) 2011/ / / /15 1. Cash Balance Starting point Policy Measures (pre-budget) Policy Measures (budget) Cash Balance end point Fiscal Balance Deficit to shrink dramatically in 12/13, before policy measures (cash balance starting point) Budget policy measures to bring net savings of $9 bn in three years from 12/13; on top of $11bn pre-budget (to MYEFO) Policy measures make the 11/12 bottom line worse

16 mild tightening in fiscal stance Fiscal measures in last 12 months (% of GDP) / / / /15

17 On expenditure side, Budget savings offset by increases Expenditure saving policies ($bn) 2011/ / / /15 Household benefit payments Foreign Aid Local Government FAG Defence Pacific Highway Other Total

18 the net savings come from revenue measures Revenue policies ($bn) 2012/ / /15 Company tax remains at 30% No discount on interest income 0.3 Loss carry back for CIT Removing PIT standard deduction Living Away From Home Superannuation changes Other Total

19 Budget Balance ($bn) / / / / /16 Source: Treasury

20 Key points Most of the gain in the Budget balance would have occurred without any Government policy measures So surplus required only mild policy tightening; could have started earlier Mild tightening relies mainly on revenue measures Debt levels are low now But fiscal challenges ahead from population ageing and moderating commodity prices

21 The personal income tax burden

22 Part of the story. Tripling of the tax-free threshold Source: Tax Reform Road Map, Australian Government, 2012/13 Budget

23 and the rest of the story Tripling of the tax-free threshold mostly offset by reductions in the Low Income Tax Offset; the net tax cut is relatively small This 2012/13 tax cut to compensate low and middle income earners for the introduction of the Carbon Tax But in 2012/13 cancelled out by bracket creep i.e. inflation pushing up average tax rates; for full-time workers on average earnings, tax rate unchanged from 2011/12 at 22.2% Beyond 2012/13, bracket creep continues to push up average tax rates, in the absence of further tax cuts Bracket creep a key role in the projected surpluses

24 so the tax share rises for the average worker Average tax rate 25% 24% 23% 22% 21% 20% 2000/ / / / / /16 FT average worker all taxpayers Sources: Independent Tax Calculator, ATO Taxation Statistics

25 Tax reform scorecard

26 A step back for company tax Q Company tax rate (per cent) pre-henry Henry pre-budget policy Budget policy

27 Loss carry back R Businesses can claim losses against tax paid in previous years, thus receiving a tax rebate Capped at $1m of losses, for losses from Helps correct for the asymmetric treatment of losses compared to profits in company income tax Helps cash flow during a downturn don t have to wait for profits to be earned before claiming tax refund Encourages investment by reducing the bias against risk taking

28 Shifting from royalties to resource rent tax Coal and iron ore rent tax (per cent) pre-henry Henry pre-budget policy Budget policy

29 High effective tax rate on interest income Q Discount on taxable interest income (per cent) pre-henry Henry pre-budget policy 0 Budget policy

30 Tax Reform Scorecard Government stepping back on reforms that were recommended by the Henry Tax Review company income tax cut discount on interest income replacing mining royalties with resource rent tax A 2010 modelling study for Treasury estimates an annual welfare gain of $2.1bn for households from a 40% mining rent tax and a 2% point cut to company tax Loss carry back a good policy, helping business in a downturn and encouraging investment

31 Chris Murphy Director Independent Economics Dinar Prihardini Senior Economist Independent Economics