Where did all the money go?

May 30, 2001
Issue 

BY ALISON DELLIT

The Australian Financial Review's May 23 headlines said it all, "There's a hole where the surplus used to be", "Even the 1.5 billion isn't as good as it looks" and, on May 24, "The incredible shrinking surplus".

Behind the corporate media's assertion that Labor leader Kim Beazley hasn't been left enough money to fund his GST roll back is an understanding that there are a lot of extremely dodgy figures in this year's Coalition budget.

Firstly, there's that growth forecast of 3.25%, reaching 4% by the end of next year. At best this is an optimistic estimate. In last year's budget, Treasurer Peter Costello predicted GDP growth of 3.75% for 2000-2001. He has now revised this to 2%.

The anticipated economic recovery is predicated on private investment in residential construction increasing by 5%, optimistic considering that the government originally claimed that the GST would result in a 2-3% downturn in 2000-2001. It actually resulted in a 25% downturn. Even under he best conditions, the dramatic turnaround predicted by Costello is unlikely. Following the HIH debacle it would be miraculous.

Costello is also punting that the US downturn is caused by "low confidence" which will turn around in the next 12 months. This is extremely optimistic.

But even if Costello's growth projections turn out to be right, the projected budget surplus still looks dodgy.

GST revenue was well down on expectations, forcing the federal government to compensate the states for lost revenue. The budget was rescued by an increase in income tax paid, probably as a result of the increasing scrutiny of the Australian Tax Office under the GST.

The projected surplus is based on discounting these potential negatives in the year ahead and adding in windfalls such as Reserve Bank dividends, which jumped 112% or $2.5 billion. This money is a direct result of the falling Australian dollar, as the Reserve Bank sold off its foreign currency holdings in an attempt to buy up Australian dollars on the international money markets. This reaped a huge profit in dollar terms, but betting against the market means that the Reserve will eventually run out of foreign currency.

Also included in the revenue side of the budget are the defence asset sales that Costello held over from last year and the projected earnings from next year's asset sales.

Costello has also jacked up expected income from revenue-generating government programs. He has provided no explanation as to how this will be achieved.

While Costello has managed to produce a projected cash surplus, on an accrual basis the budget is in deficit by $1.5 billion. We can therefore expect another "sudden" discovery of a budget "black hole" after the election.

Where did the money go? The financial press has been desperately accusing the government of being a "big spender", but the reality is that education and health spending has fallen in real terms. The government has significantly increased defence spending, as well as direct industry handouts like the research and development. But the issue isn't really spending, it's falling tax income.

Business taxes, and taxes on wealthy individuals, have been consistently lowered for the last 10 years. Under the current tax system, executives on salaries of more than $200,000 are still taxed at the same rate as workers on $60,001, a mere 47 cents in the dollar.

The latest cuts bring company tax to its lowest ever, both in real terms and as a portion of the budget. While income tax is expected to rise by $6 billion in 2001-2002, company tax is expected to fall by $7.5 billion.

Restoring company tax back to 49 cents in the dollar could raise an extra $17 billion; taking it to 60 cents in the dollar would yield an extra $27 billion. This would be enough to restore funding to the universities, ATSIC and give welfare recipients a substantial income rise. But this is a solution to Australia's social problems that the big end of town considers abhorrent, and their servile politicians conveniently ignore.

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