Who needs tax reform when you have the Gregorian Calendar? Says KPMG Chief Economist Brendan Rynne.
I’d like to congratulate all those people whose birthday falls today – after all, when you only have a ‘proper’ birthday once every four years it must be an extra-special occasion.
There is another group who should be feeling lucky today – the Federal Government whom have just been ‘gifted’ a bonus $1bn in tax, via that extra day in this year’s figures.
How so? GDP for Financial Year 2016 is estimated as $1.72 trillion – this is based on FY15 revenue figures, together with our estimate of 2.7 percent real growth and 1.9 percent inflation. We will come back to those figures below.
Divided by 366 days, that GDP figure becomes $4.7 billion per day. With the same effective ‘whole of economy’ 21.7 percent tax rate as FY15, Commonwealth tax receipts will work out at $1.01bn a day in FY16.
To put that in context, the government’s well-received Innovation Statement in December will cost around $1bn. So to get that paid for courtesy of a quirk in the Gregorian Calendar is quite handy. Who needs tax reform when you get extra money like that?
And the government could do with a bit of luck. KPMG’s new Quarterly Economic Outlook predicts inconsistent growth, below 3 percent GDP over the next three 3 years – until the next Leap Year! – together with slowly falling unemployment; inflation creeping up and a worsening terms of trade.
We also believe there will be a sharp decline in both business and government investment, and weak growth in real disposable income over FY16. So altogether a pretty mixed picture to say the least .
As mentioned above, KPMG expects the Australian economy to grow at 2.7 percent this financial year. While this will edge up to 2.8 percent during FY17, it is still below Australia’s long-term trend rate of 3.2 percent. The economy is operating below its potential, resulting in unemployment being ‘sticky’ at around 6 percent and the consequent financial outlook for government being less than rosy.
Essentially, the Australian economy is neither here nor there – it’s not bad enough to fall into recession, nor is it shooting the lights out in terms of output and profitability.
The report observes that employment growth of about 320,000 jobs in the past 12 months has been predominantly focused in the services sectors, while in contrast the manufacturing sector lost 50,000 jobs.
While job creation has been strong, the types of jobs being generated create below-average contributions to GDP. As a country, we need to be focusing on creating jobs that generate higher returns for the economy, otherwise we’ll see our standard of living decline even though employment is rising. Lower-paying jobs means less tax income for the government and higher welfare payments – a double whammy. And with less consumer spending, GST and excise receipts are also lower.
The weakness in this part of the government’s tax equation outweighs the fall in iron ore prices, which the Treasurer has tended to focus on. For FY16, company tax receipts are expected to be about $1.8bn less than last May’s Budget forecast, but the combined effect of reduced economic growth and consumer spending is 30 percent higher than this, at about $2.4bn.
In terms of inflation we predict this will rise from 1.9 percent in FY16 to 2.8 percent in FY18 before tapering off. And we see the Aussie dollar stabilising at about USD.70c for the near term, which should help increase export activity further.
Economists are famous for disagreeing, and of course events can make any predictions look foolhardy with the benefit of hindsight. But standing here in February 2016 (just about!), the short-medium future for the Australian economy looks challenging. The government has got to get its policy settings right and decide on a wide-ranging productivity-raising agenda to get that growth rate over 3 percent, which will make a big difference.
After all, the government isn’t given an extra $1bn every day.