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4.1 Overview of the Commonwealth’s finances

For the year ended 30 June 2013, the Commonwealth Government recorded an underlying cash deficit of $18.8 billion, equivalent to 1.2 per cent of GDP. In the current 2013-14 financial year the underlying cash balance is projected to record a deficit of $47.0 billion or 3.0 per cent of GDP. This reflects:

  • projected Commonwealth payments of $409 billion, amounting to 25.9 per cent of GDP; and
  • projected Commonwealth taxation receipts of $343 billion or 21.8 per cent of GDP After taking account of some $21 billion of expected non-tax receipts, total Commonwealth revenue is projected to be 23.1 per cent of GDP.

As shown in Chart 4.1 below, Commonwealth Government spending as a share of GDP remains close to the recent peak of 26 per cent recorded in 2009-10. Spending as a share of GDP is well above the average of the past 20 years of 24.6 per cent of GDP.

Total government payments have grown significantly over the past 10 years at an average annual rate of 3.6 per cent in real terms. This reflects both growth in a number of demand driven legislated payments and a wide range of policy decisions.

These policies include the 2009 adjustment to benchmark the Age Pension against a higher proportion of Male Total Average Weekly Earnings and the uncapping of Commonwealth supported university places.

Chart 4.1: Commonwealth spending as a share of GDP

This chart shows Commonwealth spending as a per cent of GDP from 1973-74 to 2013-14.

Source: Mid-Year Economic and Fiscal Outlook 2013-14.

The size and scope of government has increased significantly over time. Over the last 40 years, adjusted for inflation, government spending has almost tripled, from around $6,000 per person per year to over $15,000 per person per year today.

The growth in real payments per person reflects the greater role that government plays in the lives of Australians and the economy. As well as government policy decisions and higher expectations from the community, higher public spending reflects the ageing of Australia’s population and the fact that there are, proportionally, far more older people now (who tend to receive more government services).

Chart 4.2: Commonwealth real spending per person (2012-13 dollars)

This charts shows real payments per a person have grown from around $6,500 in 1973-74 to nearly $17,000 in 2013-14.

Source: Mid-Year Economic and Fiscal Outlook 2013-14 and National Commission of Audit.

As shown in Chart 4.3, Commonwealth tax receipts as a share of GDP have been subdued in recent years. At a current level of 21.8 per cent of GDP, tax collections are below the 20 year average of 22.4 per cent of GDP and well below the 23.6 per cent of GDP recorded in 2007-08.

Chart 4.3: Commonwealth taxes as a share of GDP

This chart shows Commonwealth taxation as a per cent of GDP from 1973-74 to 2013-14.

Source: Mid-Year Economic and Fiscal Outlook 2013-14.

The tax-to-GDP ratio provides a measure of how much tax is collected per dollar of economic activity.

As the Commonwealth is highly reliant on personal and corporate income tax, tax revenue is closely linked to the nominal economy. Accordingly, the biggest risk to revenue is an economic downturn or a sharper than expected decline in the terms of trade.

Several factors have weighed down corporate tax receipts in recent years, including the protracted recovery from the global financial crisis and the changing composition of the company tax base with a greater contribution from the mining sector.

Ten years ago the mining sector contributed less than 20 per cent to the company tax income base, whereas it now contributes around 37 per cent. This is important for company tax collections because the mining sector utilises several deductions more heavily than other sectors, particularly capital deductions and deductions for State royalty payments.

Australia’s high reliance on corporate tax also means the risk of multinational base erosion and profit shifting is heightened relative to other countries. Corporate tax accounted for nearly a quarter of Commonwealth tax receipts in 2012-13.

This increase in reliance on corporate taxes (and capital gains tax), matched by a structural decline in the comparatively stable indirect taxes and the temporary decrease in individuals’ taxes, has led to increasingly volatile tax collections.

The current mix of tax collections, along with our exposure to movements in the terms of trade, impose significant risks to the medium-term revenue outlook and increases uncertainty around revenue forecasts.

The Government has committed to consult the community to produce a comprehensive tax White Paper with all aspects of the tax system ‘on the table’.

The tax reform White Paper, alongside the Government’s proposed Federation White Paper, provides a significant opportunity to improve government and strengthen the economy. Maximising these benefits will involve enlisting State and Territory governments in the tax reform process.