It will also need to present a path for long term fiscal sustainability, but in the context of the Government’s desire to increase funding on education and disability care, the continued growth in health expenditure and an ageing population. Furthermore, many, including the Australian Treasury, believe significant long-term revenue challenges are emerging.
The Prime Minister’s speech of 29 April suggests a $12 billion decline in revenue for this financial year, an extrapolation of a $7 billion decline in revenues for the year to February 2013 against the October Mid Year Economic and Fiscal Outlook (MYEFO). This is a decline of about $17 billion since the last budget.
The explanation for this sudden decline seems to lie in our presently high Australian dollar combined with weaker export prices. The strength of the Australian dollar has been largely attributed to the volatility and fragility of other currencies, assisted by Japan’s recent decision to drive down the yen. The high Australian dollar combined with lower commodity prices has put pressure on exporters, but also on local firms who face fierce competition from cheaper imports. This is leading to lower company profits and lower company tax collections.
This revenue decline in the short term will need to be filled. In the longer term, there is an unsustainable gap between rising costs and future revenues. Both the expenditure and revenue sides of this equation will need to be dealt with.
Cutting expenditure is not easy, particularly when we are expecting governments to do more than we have in the past. Part of the solution will be to grow the economy. Measures to lift the senior participation rates and maternal participation rates would assist. So would tax reform. The earlier we confront these challenges, the easier the solution.
In lead up to this year’s Federal Budget, we examine these issues in our Background to the 2013 Federal Budget - Perspectives in Advance publication. We will also publish early on Wednesday morning, 15 May 2013, our detailed review of the implications of the 2013 Federal Budget on business.