#MYEFO: not responding to changed circumstances and borrowing from the future unfair to future generations

Brendan Rynne, Partner, Chief Economist
Grant Wardell-Johnson, Leader, Australian Tax Centre

Put simply, we are simply not responding to our changed circumstances.

Our first reading of MYEFO suggests for the period FY17 to FY20 government receipts are expected to be about $30Bn lower than predicted in the May 2016 Budget, of which about $21Bn is due to reduced personal income tax revenue. The government has reduced spending by about $18.4bn over the same time period, so the net impact of the Budget deficit is a worsening of about $10.4Bn.

Perversely, the $1.2Bn lower in Future Fund Earnings (FFE) actually helps the underlying cash balance as the FFE is deducted from cash revenues and cash outlays – so a smaller deduction means a better underlying cash balance (UCB).

KPMG’s MYEFO forecasts still remain softer than Treasury’s. The primary reason for this is the combination of low wages growth, and relatively sticky unemployment, which collectively causes historically low levels of bracket creep and few new personal income tax payers entering the government revenue arena.

When KPMG reported in July this year on the risk of Australia losing its AAA credit rating, we found falling one notch would have a direct cost of $1Bn in additional interest payments, or the equivalent of one Comprehensive Cancer Centre each year.

Our economic analysis found Budget repair was least distortionary when government sought to reduce expenditure, rather than increase taxes – with the optimal allocation being 15 percent revenue increase and an 85 percent expenditure reduction. The $18.4Bn in savings and $13.2Bn in zombie measures are critical to resolving our fiscal imbalance.

Most importantly, these savings measures will be less detrimental to the economy than if the government sought to raise taxes. However, the Government’s ability to achieve the $18.4bn in savings – either absolutely or within the proposed time frames – will be extremely challenged and challenging, given the current make-up of parliament. Obviously, should any of these savings not be achieved, then the UCB will deteriorate accordingly.

Our initial FY21 forecasts show expected government receipts of about $517Bn, and if the average growth rate is applied to MYEFO cash outlays for the period FY17 – FY20, and FFE continues to grow on the same trajectory, then the UCB will still be in deficit (-$3.6Bn) – but closer to Budget balance than any year since FY08.

Tax Implications

On the tax side, there have been two minor changes.The first is a change of law to deal with circumstances where a capital raising is undertaken at the same time as an offsetting distribution such as a special dividend.  This planning is designed to release franking credits.The ATO had previously announced that it would apply an anti-avoidance provision to stop this, however, the Government’s intention is to change the law. This is expected to increase tax by $10m a year from 1 July 2017.

The second measure concerns disclosure of business debts owing to the Commissioner where the debts exceed $10,000 and are more than 90 days overdue. This is designed to improve compliance behaviour.

In summary

We continue to borrow from the future. In terms of equity between generations – this is simply unfair.

Further reading:

Debt & deficit: KPMG research report

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