Australian Government, 2013-14 Budget

Statement 5: Revenue (Continued)

The tax‑to‑GDP ratio

In addition to lower nominal GDP, lower than forecast tax collections in 2012‑13 have resulted in the expectation of less tax per dollar of GDP. This is expected to impact the tax‑to‑GDP ratio in 2013‑14 and across the forward estimates. Indeed, tax receipts as a share of GDP are expected to remain well below pre‑GFC levels over the entire forward estimates period. Over the five years to 2012‑13, the average tax‑to‑GDP ratio is expected to be 20.9 per cent, lower than any period since the five years ending in 1995‑96.

If the tax‑to‑GDP ratio was the same as it was in 2007‑08 (23.7 per cent), the year immediately prior to the GFC, tax receipts would be around $24 billion higher in 2013‑14 alone.

Chart 1: Tax‑to‑GDP ratio

Chart 1: Tax‑to‑GDP ratio

Source: Treasury.

Box 1: Tax composition

The aggregate movement in total taxes as a proportion of GDP is the consequence of a series of movements in all heads of revenue relative to GDP. To understand these movements, taxes can be disaggregated into three broad categories: corporate, individuals and non‑corporate, and indirect.

Chart A shows the change in the level of tax receipts as a proportion of GDP for these three categories. In the years 2000‑01 to 2007‑08, total taxes were relatively steady as a proportion of GDP, at around 24 per cent. Following the global financial crisis (GFC), total taxes as a proportion of GDP fell by 3.7 percentage points to be 20.0 per cent of GDP in 2010‑11. Since 2010‑11, total taxes have recovered approximately one third of the loss and are forecast to remain well below pre‑GFC levels as a proportion of GDP.

Corporate taxes (which include company tax, superannuation funds tax and resource rent taxes) rose steadily from 2001‑02 to a record high of 6.4 per cent of GDP in 2007‑08. During the GFC these taxes declined by around 2 per cent of GDP and are expected to recover around half of this loss by 2016‑17.

Reductions in personal income tax rates dominate movements in individuals and non‑corporate taxes (gross income tax withholding, other individuals, individuals' refunds and fringe benefits tax) until the GFC. By 2016‑17, they are expected to recover to around their share of GDP in the early 2000s.

Most of the reduction in indirect taxes (GST, excise, carbon pricing mechanism, customs, luxury car tax, wine equalisation tax and other indirect taxes) occurred prior to the GFC. By 2016‑17, collections of indirect taxes are expected to contribute more than one and a half per cent of GDP less than they did at the start of this period.

Chart A: Change in level of taxes as a proportion of GDP relative to 2000‑01

Chart A: Change in level of taxes as a proportion of GDP relative to 2000‑01

Source: Treasury.

Nominal GDP and tax receipts

The recent weakness in nominal GDP growth reflects the sharp fall in the terms of trade in the second half of 2012 and weaker than expected domestic price growth. The terms of trade fell 12.9 per cent through the year to the December quarter 2012, owing to a 20.9 per cent decline in prices for non‑rural commodity exports. Although commodity prices recovered somewhat in the March quarter, they are expected to gradually decline in trend terms over the forecast period, in line with increasing global supply.

Movements in Australia's exchange rate and terms of trade are typically closely related and it is unusual for the Australian dollar to remain broadly unchanged while the terms of trade fall. The Australian dollar has appreciated strongly in response to the terms of trade boom, rising from less than US$0.50 in 2001 to a peak of over US$1.10 in the middle of 2011, and appreciating around 50 per cent in the past four years alone. Yet, while the terms of trade have fallen sharply in the past two years, with non‑rural bulk commodity prices now around 35 per cent below their peak, the Australian dollar has remained relatively stable and high.

As discussed in Budget Statement 2, the unusual combination of a persistently high Australian dollar and lower terms of trade is having an acute and enduring effect on profits and prices growth across the economy. The high Australian dollar has implications for tax receipts. It reduces income and demand for goods and services of trade exposed businesses, thereby lowering profitability across the economy. As profits fall, so too will taxes on companies, resource rents and capital gains. The effects also flow through to taxes on wages and consumption.

The combination of weaker commodity prices and weak domestic price growth has hit company profits across most sectors of the economy, including the resources sector. Over the past 18 months, corporate gross operating surplus (GOS), the National Accounts measure of corporate profitability, has fallen by almost the same amount as during the early 1990s recession and the GFC, albeit over a longer period of time.

During the early 1990s recession, corporate GOS fell by 11.2 per cent over two quarters. During the GFC in 2008‑09, corporate GOS fell by 10.2 per cent again over two quarters. Currently, corporate GOS has fallen in each of the last five quarters (September 2011 to December 2012), by a cumulative total of around 9.2 per cent, a slower, but comparably sized fall (see Chart 2). This is the first time in the history of the quarterly National Accounts (beginning in 1959) that corporate GOS has fallen in more than three consecutive quarters.

The weaker growth in corporate profits is a significant factor in the slower recovery in nominal GDP growth over the forward estimates.

This lingering moderation in corporate profits (and hence likely tax collections) combined with the impact of large shortfalls in year‑to‑date actual collections for company taxes have resulted in large downward revisions to expected tax receipts in 2012‑13 and over the forward estimates. Company taxes have been revised down by around $5.2 billion in 2012‑13 and $7.2 billion in 2013‑14. In comparison, the outcome for 2008‑09 company tax receipts was $11.3 billion lower than forecast at the 2008‑09 Budget, the last budget before the GFC. The fall in company taxes has been compounded by resource rent taxes which have been revised down by around $3.6 billion in 2012‑13 and $3.2 billion in 2013‑14.

Chart 2: Growth in corporate GOS

Chart 2: Growth in corporate GOS

Source: ABS cat. no. 5206.0.

Capital gains tax and the stock of losses from the GFC

Total capital gains tax (CGT) receipts have been revised down by $1.8 billion in 2012‑13 and $9.9 billion in the four years to 2015‑16. While CGT is expected to recover over the forward estimates, the recovery is slower than projected at the 2012‑13 MYEFO and CGT remains lower over the whole forward estimates period than its pre‑GFC peak.

CGT is affected by factors such as asset price movements, the rate at which capital gains are realised and the extent to which any prior capital losses are used to offset gains. In addition, capital gains realised by individuals and superannuation funds are generally subject to a discount of one half and one third respectively. Stock market indices and land values are assumed to grow in line with nominal GDP in the future.

Forecasting CGT is very difficult for several reasons. Price movements above or below the assumption may cause CGT to be significantly different from the forecast. Also, following the GFC, a large stock of capital losses were carried forward (see Box 2 of Statement 5 of the 2010‑11 Budget), and the utilisation of these losses generates large uncertainty in the forecasts, particularly as many of these losses are held within trust structures. Finally, historical information regarding CGT is only available from income tax returns, which arrive with a lag of one to two years, making estimation more difficult than for many heads of revenue. This has been an important factor in the current forecasts, where the 2011‑12 estimate for CGT (which forms the starting base for the 2012‑13 estimate) has been revised down by around $400 million since the 2012‑13 MYEFO. The downward revision to CGT in 2012‑13 is partly based on recent tax return data from the 2011‑12 income year, which shows that net capital gains income from individuals fell by around 20 per cent, the second‑lowest growth rate since 1994‑95.

While asset prices have recovered since the 2012‑13 MYEFO, they remain well below pre‑GFC levels. The ASX 200 at the beginning of May 2013 stood at around 5200 compared to the peak in November 2007 at around 6800. In addition, a large stock of capital losses is expected to continue to weigh on CGT over the forward estimates, affecting other individuals, superannuation funds and company tax.

Chart 3: Slow recovery in capital gains tax(a)

Chart 3: Slow recovery in capital gains tax(a)

(a) Yearly CGT amounts have been ascribed to the mid‑point of each fiscal year (January 1).

Source: RBA and Treasury.

Box 2: Comparison of the tax‑to‑GDP ratio over two downturns

Although the tax‑to‑GDP ratio fell dramatically in both the recession of the early 1990s and the global financial crisis (GFC), there are key differences between the revenue responses to the two downturns.

The recession of the early 1990s was characterised by general weakness in the real economy, as evidenced by high unemployment. Taxes fell by 2.3 percentage points of GDP over two years, from 22.3 per cent in 1990‑91 to 20.0 per cent in 1992‑93.

By contrast, during the GFC, Australia's real economy slowed, but still grew much more strongly than in the early 1990s recession. International and domestic share markets, in contrast, collapsed. The recent crisis can also be characterised by less buoyant global growth, the high Australian dollar and deleveraging by companies and households. Taxes fell by 3.5 per cent of GDP in two years, from 23.7 per cent in 2007‑08 to 20.2 per cent in 2009‑10.

Comparing the tax responses illustrates the differences between the two events. Individuals' income tax, excluding capital gains tax (CGT), contributed nearly 65 per cent of the fall in the 1990s recession, but only 25 per cent of the fall following the GFC. Indirect taxes contributed over 30 per cent of the previous decline, but only 11 per cent of the recent fall. By contrast, petroleum resource rent tax and taxes on companies and superannuation funds contributed only 6 per cent of the previous decline, but over half of the recent decline.

Chart A: Changes in the tax‑to‑GDP ratio through the 1990s recession and the GFC

Chart A: Changes in the tax‑to‑GDP ratio through the 1990s recession and the GFC

Source: Treasury.

A major component of the differences is CGT. In the 1980s and early 1990s, CGT was a new, immature tax which had a negligible effect on the tax‑to‑GDP ratio. By 2008, CGT was large and volatile and was responsible for over a quarter of the decline, as a component of taxes on individuals, companies and superannuation funds.

The different drivers of these two large falls in the tax‑to‑GDP ratio mean that the recoveries will also be different. While the first year of the recovery, in 2011‑12, was broadly comparable to the 1990s recovery, the second year, 2012‑13, has not matched the recovery in the tax‑to‑GDP ratio seen in 1995‑96. A key variable is the timing of the recovery in CGT, which has so far remained weak due to tepid growth in asset prices and a large stock of capital losses still to be utilised, reflecting the maturity of the system compared to the 1990s.

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