Friday, March 30, 2012

Company tax is weak because company profits are weak

IF AUSTRALIA never had a recession in 2008-09, and is the economic envy of the Western world, as we are told, then why is it so hard for the federal government to get its budget back in surplus?

Wayne Swan says it's because tax receipts are so weak. Tony Abbott says it's because Labor is addicted to spending. Who is right? It depends which figures you compare. If you take the figures for 2007-08 and 2011-12, then both are right.

The midyear forecasts project spending in 2011-12 to be 24.8 per cent of GDP, up from 23.1 per cent four years earlier.

The forecasts expected to slash that to 23.6 per cent in 2012-13, which now looks understated, and would still be above the level Labor inherited.

But is that surprising? After all, unemployment has grown, and the carbon tax and mining tax revenues are all earmarked for new spending. The bills for healthcare, pensions, aged care, all keep rising.

Swan wants us to focus on the fall in revenue. In the midyear update, cash revenue was projected to be 22.6 per cent of GDP in 2011-12, down from 25.1 per cent in the last Costello budget. That's a big fall, about $37.5 billion a year. Even in 2012-13, the government's take was projected to be 23.9 per cent of GDP, which Swan now says will be revised down.

Swan spent a lot of time yesterday explaining how the company tax take had fallen in the mining boom, because mining companies were investing so much depreciation knocked off half their tax bills. Capital gains tax plunged because the GFC left investors and firms with capital losses to write off.

All that is true. But the main reason company tax revenue is weak is that company profits are weak.The real problem is that since 2007 the economy has grown just 2 per cent a year. And it's hard to get back to surplus in a weak economy.