There are two drivers of the Budget: the economy and the decisions of politicians, according to Chris Richardson of Deloitte Access Economics.
Richardson’s chart below looks at the economy’s effect on the Budget and the impact of political decisions.
The circled area shows Deloitte Access Economics’ estimate of the latest policy costs on tax revenue writedowns. At the bottom right of the chart is the budget shortfall.
Deloitte Access Economics projects revenues to fall short of the budget forecast by $2.3 billion in 2014-15, and for that to turn into a rout in 2015-16, down $7 billion versus official estimates.
The extent of the budget blowout will be known in the next two weeks when Treasurer Joe Hockey is expected to release the Mid-Year Economic and Fiscal Outlook (MYEFO).
“It (the chart) shows that the economy spent a decade throwing kisses at the Budget, but that boom turned out to be temporary,” Richardson says. “What weren’t temporary were politicians’ promises – they turned out to be permanent.”
Richardson says all but a few hundred million of the shortfall is due to the economy and the rest is down to a July 2015 income tax cut to compensate for a carbon tax which no longer exists.
“Those costs of a further weakening in the economic backdrop are even bigger than the policy savings the government announced in May, and that the Senate has since largely rejected,” Richardson says.
Government revenue has been falling mostly on the back of plunging profit taxes.
Deloitte Access Economics estimates that company taxes, superannuation taxes and resource rent taxes will will be below the May Budget forecasts, dragging down the tax take by $1.9 billion in 2014-15.
And the latest round of commodity price falls will further weaken taxes, bringing the shortfall in profit taxes to $5.4 billion in 2015-16.
“However, the source of the budgetary pain is now spreading,” Richardson says.
“Whereas once the red ink was mostly confined to the profit taxes, the combination of wobbly job growth and (even more importantly) an extended period of weak wage gains now looks like being just as big a Budget buster – with total income taxes on individuals falling short of Budget estimates by $2.9 billion in 2014-15. That shortfall reaches an unhappy $4.2 billion in 2015-16.”
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