Wednesday, 10 February 2010

Our vanishing tax base

In an earlier article covering issues facing the Tasmanian economy in these pre election times (HERE: Our economic black hole), the matter of the Government’s little known but very large overdraft was examined. The latest Mid Year Financial Report shows the State’s net cash reserves plummeting to $313m by 2012/13 despite the fact that the Superannuation Provision SPA a/c should show a balance of $1,589m by 2012/13.

Whilst Treasury no doubt has a conservative and achievable plan to reduce the overdraft, the so called temporary Debt Repayment a/c, and at the same time provide for the extinguishment of the unfunded super liability by 2035, it is not at all clear that Mr Bartlett’s current spending spree is based on the Treasury plan or indeed if Mr Hodgman’s plan to abolish taxes can be accommodated within that same plan. Without further info, we are all in the dark. As shareholders in Tas Inc it is a little unnerving.

In this second part a search for the ‘black hole’ that we were warned about as little as 12 months ago will be attempted. What happened to the State’s income as a result of the GFC, and how will the policy decisions and promises that have occurred recently affect this level of income?

Too little attention is given by the politicians to the income side. It’s as if money grows on trees.

Amounts received from the Feds consist of General Purpose GP Grants being a share of GST receipts, and Specific Purpose SP and National Partnership Payments NPP being for specified purposes as agreed usually at COAG meetings.

There is no doubt that the GP grants have reduced following the GFC.The Government has been at a loss to explain why GST receipts have fallen so much when the effects of the GFC here have been minimal.

But overall when SPs and NPPs are included, grants from the Fed will increase over the 4 year period of the forward estimates (FEs).This is the conclusion when the 2008/09 Budget handed down in May 2008 (before the effects of the GFC) is compared with the latest Mid Year Financial Report in Dec 2009.

But SP grants and NPP grants are tied grants which have to spent in agreed ways, so in fairness it might be appropriate to look at Fed grants less direct grant expenses. The net grants for this year 2009/10 are expected to increase by $67m , but fall by $27m and $60m in the succeeding years if the May 2008 Budget is compared with the Dec 2009 Mid Years. Not a huge concern. Certainly not a reason to frighten us all with talk about a black hole of $1.5b.

But what about the State’s other income? This is where the picture becomes bleaker. We are planning to become more reliant on Fed grants. We will be raising less.

The following table extracted from last year’s Budget and this year’s Mid Year Report averaging cash income over the period of the Forward Estimates (4 years) shows an alarming change in the amount of income we, as a State, are raising.

2008/09 Budget
2009/10Mid Years
Sale goods and services
Fines, regulatory income
Interest income
Dividends and tax equivalents from GBEs
Other receipts
Operating expenses
Net cash from operating
Net cash on new plant & infrastructure


The % of our income raised by State taxes has fallen from 21.6% to 19.4%, a fall of 2.2%.Because we’re spending all our cash, interest will fall from an average of 2.4% of our income to 0.8%, a fall of 1.6%. Together these amount to 3.8% of our income or around $170m. The Feds share of our income has risen by 3.1% to almost 62%.

What’s the response? Bartlett is spending like his life depends on it. Will promises ‘real change’ then takes another $80m out of our income with the land tax abolition at the same time slamming the Greens for living in Never Never land and likely to bankrupt the State with their proposal to reduce State revenue by a lesser amount with the abolition of poker machines.

Peter Gutwein’s line is that ‘fiscal responsibility’ is all that is needed to cover for the absence of land tax. Presumably he means spending cuts. I can’t quite believe it. We could be looking at a possible reduction of 6% in our income or $270m pa which will be addressed with spending cuts.

The above Table also indicates that spending on new plant and infrastructure will exceed the net cash after normal operations. And this is before the spending spree of the last 2 months. Sure that’s what we may expect Government to do in hard times but they’re spending the funds set aside to extinguish the unfunded superannuation liability. Which they haven’t attempted to explain to voters.

Another salient point from the Table is the steady contribution made from GBEs into Government coffers. Only 3.3% of our revenue but hugely invaluable at this time. Imagine if the GBEs were sold as some politicians are philosophically inclined to do, the proceeds could easily vanish during an election campaign, and we would be left with a future revenue shortfall without dividends and the payment of income tax equivalents from GBEs.

The Age reported one of Ken Henry’s speeches the other day in which he cited the controversy over the Hawke government’s introduction of a fringe benefits tax in the 1980s, a move he said was based on the ‘‘rather innocuous proposition that a worker should pay tax on his or her remuneration even if it is not labelled wages or salary’‘.

‘‘Who on earth would consider it sensible that an executive who receives some part of his remuneration in the form of a Porsche and a holiday apartment should not be required to pay tax on that income?’‘

Dr Henry said he still found the intensity of opposition to ‘‘this rather obvious requirement of tax system fairness and integrity’’ hard to believe.

Ken Henry could have been talking about Tasmania.

Or about Will Hodgman’s plan to abolish land tax ostensibly designed to drive investment, but at the same time retaining the socially wicked and economically inequitable poker machine tax.

Another small matter Will hasn’t confided to voters is how the abolition of land tax will be regarded by the Grants Commission when they assess the State’s revenue raising efforts as part of the complicated formula used to divide GST revenue between States. Could it be that our % of the GST pool will fall if it shown that we are not pulling our weight when it comes to raising our own revenue?

Nouriel Roubini who was one who foresaw the impending GFC train wreck wrote recently in the AFR while discussing the debt time bomb which might impact on some advanced nations ( Australia was not on the list) said

“Americans are deluding themselves that they can enjoy European-style social spending while maintaining low tax rates as under President Reagan. At least European voters are willing to pay higher taxes for their public services.”

Tasmanians are similarly deluded if they blithely accept what Messrs Bartlett, Hodgman and McKim are saying.

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