Part III: Projections for spending and revenue (continued)
Revenue
Commonwealth total revenue is derived from taxation and non-taxation sources. Like international long-term budget reports,5 this report projects revenue to be a constant proportion of GDP. This is because both taxation revenue growth and GDP growth have the same major drivers (for example, wages and profits). Commonwealth total revenues are projected to be 22.4 per cent of GDP from 2005-06, the final year of the forward estimates period, to 2041-42.
Taxation revenue
Taxation revenue includes income taxes and indirect taxes. Income taxes on individuals and companies are the largest source of Commonwealth revenue. In 2001-02, taxation revenue is expected to account for 91 per cent of total Commonwealth revenue. Of this, income taxes are expected to account for 73 per cent of total Commonwealth revenue, indirect taxes are expected to account for 15 per cent and other taxes are expected to account for 3 per cent.
Key trends and drivers
The key drivers of trends in total Commonwealth revenue are economic variables, such as wages, employment, profits and imports, which influence income tax revenue and indirect tax revenue (Appendix D).
Various taxes are levied on the components of GDP and each component has generally grown at around the same rate as nominal GDP. As a result, total taxation revenue also tends to grow in line with nominal GDP (Chart 27).
Chart 27: Total Commonwealth taxation revenue and GDP
Source: ABS Cat. No. 5206.0 and Commonwealth of Australia Budget Paper No.1 (various).
Taxation revenue risks
In 1996, the Report of the National Commission of Audit noted that the ageing of the population would affect personal income tax revenue, as the average tax paid per person declines for older age groups (Chart 28).
Chart 28: Average annual income tax per person
by age, various years
Source: Treasury.
However, personal income tax revenue does not fall as a percentage of GDP as the population ages, because labour force and wages growth trends affect income tax and GDP growth more or less equally. These trends include rising female labour force participation in each age group and the slowing in aggregate wages growth resulting in slower GDP growth.
The National Commission of Audit also noted that an ageing population could affect the wholesale sales tax base. However, The New Tax System replaced the wholesale sales tax with the GST, which is less at risk from population ageing because its broader base includes services. Furthermore, the Intergovernmental Agreement allocates the GST revenue to the States and Territories.
Methodology and projections
Over the last three decades, Commonwealth taxation revenue has remained relatively steady as a proportion of GDP (Chart 29). Major components of taxation revenue have grown in line with GDP. Therefore, Commonwealth taxation revenue is assumed to remain constant at 20.8 per cent of GDP from 2005-06, the final year of the forward estimates period, to 2041-42.
Chart 29: Total Commonwealth taxation revenue
Source: ABS Cat. No. 5206.0 and Commonwealth of Australia Budget Paper No.1 (various).
Non-taxation revenue
Non-taxation revenue includes sales of goods and services, interest, dividends and petroleum royalties. In 2001-02, non-taxation revenue is expected to account for 9 per cent of total Commonwealth revenue. These revenues are difficult to relate to economic parameters, so Commonwealth non-taxation revenues are assumed to remain at 1.6 per cent of GDP from 2005-06, the final year of the forward estimates period, to 2041-42.
5 For example, see Dang, Antolin and Oxley 2001, Congressional Budget Office (US Congress) 2001, Her Majesty's Treasury 2001 and The Treasury (New Zealand) 2001.
