Australian governments are lousy at estimating tax revenue, which is blowing out the budget

As difficult as picking the winner of a horse race. Melbourne Cup winning jockey Michelle Payne poses with racing fans and her brother, strapper Stephen. Vince Caligiuri/Getty Images

Governments in Australia just can’t get their revenue forecasting right.

And this is partly the reason why total public debt in Australia, that of both state and federal governments, has hit a 15 year high of 18.6% of GDP (Gross Domestic Product), or about $283 billion.

The latest analysis shows the mounting debt is caused by both falling revenue and a rise in spending. Essentially, governments collect less tax than they think they will and keep spending more than they earn.

The Bankwest Curtin Economics Centre found that government debt in Australia is unlikely to reduce in the next five years because of these unrealistic estimates of revenue growth.

According to Analysis by Moody’s, the states built large deficits between 2005 and 2014 as spending growth of 6.7% outpaced revenue growth of 6.2%.

And the deficits will widen if revenue growth falls short of a forecast of 3.3% average growth per year between 2016 and 2019.

Alan Duncan, the head of the Bankwest Curtin Economics Centre, says the current level of public debt isn’t unprecedented but the rapid pace at which debt has accumulated since the GFC and the unlikely reduction is concerning.

The report also tests treasurer Scott Morrison’s claim that Australia has a spending and not a revenue problem.

“We find that revenue and spending should both bear some responsibility for Australia’s growing levels of debt,” Professor Duncan says.

“Government spending has been regularly underestimated by at least 1% of GDP in pretty much every budget since the end of the GFC, with actual spending now hitting 26% of GDP.”

The report highlights a poor record by governments when it comes to forecasting revenue.

Tax revenues have failed to rise above 23.5% of GDP at any point since the GFC, yet the forward estimates in successive federal budgets consistently target 25% of GDP.

“Tax revenues at 25% GDP is simply unrealistic as a target unless significant increases in taxation are being planned,” Professor Duncan says.

“Revenues at 23.5% of GDP and spending at 26% of GDP is not a recipe for budget balance.

Professor Duncan says spending controls alone, given Australia’s current economic climate, is unlikely to deliver the path to surplus.

“Reform options will have to be considered to return the economy to surplus and drive down government debt,” he says.

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