In the short term, the budget will need to confront a significant decline in revenue projections that have come to the fore in the last six months and caused the government to abandon its promise of a surplus.
The budget 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 suggested 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 the current high value of the 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 addressed.
Cutting expenditure is not easy, particularly when taxpayers are expecting governments to do more than 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 these challenges are confronted, the easier the solution.
In leading up to this year’s federal budget, the KPMG member firm in Australia has examined these issues in Budget in Advance publication.
For more information, contact a KPMG professional in Australia:
+61 2 9335 7128