Budget denialism

 

WHEN Premier Gutwein undertakes not to sugar-coat the message, you can guarantee that’s what he will do. Introducing the 2020-2021 Tasmanian state budget he said: “This year the deficit will be $1.1bn, before improving to a deficit of $281m in 2021-22. Importantly as our economy returns to growth, there is a pathway back to the black with a return to a modest surplus in 2022-23.”

Announcing “the largest and most significant infrastructure program in the state’s history” then failing to include that spending in the deficit calculation is deceptive. The actual cash deficit for this year will be $2.1bn. In 2021-22 the cash deficit will be $1.07bn followed by $656m the year after. That’s a whole lot different to what the Premier might like us to believe. The Premier uses the generic term “deficit” for the Net Operating Balance figure. As its name suggests the latter only includes operating expenses, wages for instance, not capital outlays, roads and schools for example. This is not a semantic quibble. The point that needs to be understood is that a positive Net Operating Balance does not mean there will be cash surpluses to reverse the growth in net debt. There is little prospect of that occurring any time soon.

“In this budget we will continue to leverage our strong balance sheet to stimulate our economy,” the Premier said. More sugar coating. The balance sheet at June 2020 was the smallest for more than 15 years and it’s about to get a whole lot smaller. By June 2021 the government’s net worth will be $6bn. Of that figure, $4.7bn is the net worth of government businesses. Aside from them the government’s net worth will only be $1.3bn, smaller than the Hobart City Council. So let’s not pretend we have a strong balance sheet when a cursory glance reveals the exact opposite.

Mending payroll tax

 

Tasmania’s state budget next week is a wake-up call that our tax system won’t deliver the revenue we need.

Even before COVID-19 the budget was in trouble. For the past three years, spending has exceeded receipts despite a relentless pattern of infrastructure deferrals and underfunding of crucial services.

The recent federal budget sent a clear message that the Feds were content to leave states to fend for themselves whilst they pursued their own plans to direct most budget assistance to private businesses to resurrect the flailing economy.

Encouraging businesses to buy new plant and equipment is ill directed when existing plant is idle due to insufficient demand. A lot of new plant will be labour-saving and sourced from overseas. The stimulus effects will be muted. The jobs recovery is premised on shaky assumptions.

Lower personal taxes are also seen as the way for people to spend more with local businesses. Unfortunately, this misses the crucial point that what a lot of people would prefer is more public goods, like better health, aged care and social housing. Not only that but more jobs will eventuate as the multiplier effects are superior.

All states are facing similar revenue shortfalls. Payroll tax is the largest contributor to states’ taxation revenue, comprising about one-third. The origins, history and the underlying rationale of payroll tax have largely been forgotten as it has evolved to only apply to larger employers at a higher rate.

To make matters worse, the taxable base now includes superannuation contributions as well as ordinary labour remuneration.

If payroll tax is a disincentive to employ, as most people believe, it’s only because a fair and efficient tax has been spoiled by policymakers. It is not a coincidence that the voluminous 2010 Henry Tax Report included payroll tax in the chapter on Consumption Taxes. Despite using labour income as its tax base, a uniform tax on all labour income is a pre-consumption tax. As a tax it is more closely related to GST than most people think. With a low rate it would be fair and efficient.