Sunday, 25 May 2014

Tax model is failing

THE Tasmanian Government’s budgetary problems are simple – it is essentially a service deliverer spending more than it is receiving.

Borrowings would be imprudent as there’s not enough to pay interest.

The past four years’ excess spending has been funded with amounts intended for other purposes, mainly funds in advance from the Federal Government such as the $290 million received to redevelop the Royal Hobart Hospital.

The GST, lauded as a growth tax until 2008, raised funds at a faster rate than overall economic growth and seduced state governments to expand their programs.

All components of revenue were booming. GST receipts comprise about 35 per cent of the state’s revenue of $5 billion, but are now falling below expectations.

Expenditure patterns have changed. When the 2011-12 year first appeared in the forward estimates, $2 billion in GST was expected. Only $1.7 billion eventuated.

The second biggest component of revenue, about 25 per cent, is specific purpose federal grants, in many areas including health and education.. An increase in these following the GFC helped Tasmania survive. These grants are now under threat as a result of the recent Federal Budget.

The third largest contributor to revenue is state taxes, about 20 per cent.

These are raising less than trends suggested a few years ago. In 2011-12, $900 million was raised compared with the forward estimate four years earlier of $1 billion.

Payroll tax raises about a third of the total. Motor vehicle taxes have nudged ahead of stamp duties, which have fallen due to fewer house sales. Land tax and gambling taxes complete the top five.

The last component of state revenue, about 20 per cent, is from sundry sources including dividends and payments from government businesses, sales of goods and services, fines, fees, royalties and interest.

All are under pressure. Interest has disappeared as cash has been spent, and payments from businesses such as Hydro Tasmania, at one stage a source of hope for the state, will all but dry up in the next few years.

With declines in revenue, we expect the feds to come to the rescue. But, like the boy who cried wolf, that may not eventuate. We may have to do more ourselves.

Borrow? General government borrowings are small. Most are by subsidiaries, such as the government businesses. Borrowings are always via Tascorp, the Government’s finance arm. It owes $5 billion. Only $3 billion is lent to government businesses, leaving $2 billion in cash.

Tascorp borrowed to ensure there would be funds when existing loans mature, thereby reducing the refinance risk.

The cash is there, but the Government’s ability to repay loans to Tascorp isn’t.

Overall, we are anything but insolvent, but we do have an unsustainable structure.

What about the superannuation liability some say will strangle the state? Is it $5 billion or $7 billion? It seems to keep changing.

The yearly payments can be reliably estimated. Peaking in about 10 to 15 years’ time at about 7 per cent of budget outlays, it will take 40 more years to pay the debt.

The future pattern of payments is reasonably certain but it is the regular variation of the current value of the stream of payments that causes alarm.

Payments don’t change much, it’s just the stream of future payments that, when converted to a single present value for accounting purposes, is very sensitive to changes in interest rates.

Faced with falling revenue, plan B has been to reduce full-time equivalent employees, rather than programs. Plan C has been to spend amounts intended for other purposes.

Tasmania receives in excess of $1.60 compared with $1 if GST was distributed on a per capita basis. It is far from clear whether the levels of services assessed by the Commonwealth Grants Commission as warranting extra funds are being delivered. Either the commission is wrong with its calculations or we are inefficient delivering those services.

Talk has now swung to an increase in GST. Maybe, but as the Henry Report argued, Australia’s tax system is best with four pillars: business taxes, individual taxes, land and resource taxes, and consumption taxes. The glaring problem with our tax system, as revealed by the GFC when all taxes fell, is the lack of stability. Not an ideal situation for a service deliverer like Tasmania.

The Federal Government has thrown down the gauntlet to the states with a suggestion of ceasing certain concessions for seniors.

The concession system has grown like Topsy. There are sound reasons, from simplicity and equity, for concessions for low-income earners to be addressed with welfare payments and that concessions based on age be assigned to the dustbin.

The biggest concessions are to landowners for land tax and all but the biggest employers for payroll tax.

The State Government has been grossly remiss with its use of land as a tax base compared with local government.

The latter raises four times as much with fewer complaints. One tax base raising one tax is the answer.

Payroll tax is poorly used. Properly used at a low rate, say 3 per cent for all employees, would be fairer than an increase in GST because retirees and welfare recipients wouldn’t pay. It would be an efficient tax, a prepaid GST by all employees, thus allowing states to be more autonomous.

We have just experienced an election campaign where all parties’ proposals were unsustainable. The Federal Budget hopefully will be the jolt needed to formulate a more realistic budgetary way forward for Tasmania.

A review of the roles of the three tiers of government – concessions offered, taxes raised and tax bases used – is long overdue.

The bleak picture of the nation’s problems as outlined in the Budget and the hotchpotch solutions offered was a triumph of ideology over economics. But, in blaming ideology, we shouldn’t lose sight of the fact that our state government, as presently structured, is unsustainable.

Neither should we forget we pay less tax as a percentage of GDP than before the GFC, nor that during the halcyon Baby Boomer days Menzies only ever ran one surplus budget in 17 years. We can easily achieve, within reason, to fund any level of government services we choose.

(Published in The Mercury on 25th May 2014)

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