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Hewson's $3.9 billion credibility gap

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16 December 1991


The Treasury and the Australian Taxation Office have now completed their analysis of the revenue side of the Opposition's tax and expenditure package.

This shows that the Opposition has overstated its revenue gain by more than $1.1 billion.

Taken together with the Department of Finance analysis of the outlays side this means the Opposition's package is underfunded by $3.9 billion (after the necessary adjustments to put all figures on a consistent basis have

been made).

Dr Hewson's revenue estimates are defective in a number of significant areas.

He would have us believe he can collect revenue from 105 per cent of the GST tax base. This absurd proposition is based on two false assumptions.

The first of these false assumptions is that there would be no avoidance of the GST. This has resulted in the Opposition overstating revenue by about $1.3 billion.

Treasury estimates that avoidance would be about 5 per cent. This accords with work recently done by Access Economics.

The second false assumption is that the GST would collect significant new revenues from the black economy.

The Opposition has assumed $1.2 billion revenue from the black economy and foreign tourists. Treasury attributes $0.6 billion to foreign tourists but regards any estimate of additional revenue from the black economy as purely

speculative. ·

All Treasury's GST calculations have been based on total consumption expenditure which would already include the vast bulk of expenditures by those avoiding income tax.

The Opposition has also overstated the size of the GST base by about $4 billion. This results in revenue being overestimated by about $0.6 billion.

Other overestimates of revenue include superannuation ($215 million) and the Medicare Levy Surcharge ($5 million) giving total overestimates of $2,687 million.

Treasury and ATO also found errors in the other direction.

Underestimates were found in income tax cuts ($591 million), capital gains tax ($135 million), tax free savings ($360 million), GST tax credits ($104 million), bracket creep ($157 million), dependent spouse rebate ($1 million), payroll tax clawback ($187 million) and tobacco

excise ($5 million).

Treasury/ATO estimates are attached.

The implications of the $3.9 billion gap are devastating to the integrity of Dr Hewson*s package.

It is underfunded by the amount necessary to pay for three of his major promises.

1. The 8 per cent increase in social security and veteran's pensions and 6 per cent increase in all other social security, education and training allowances which are intended to compensate for the

inflationary effect of the consumption tax. These were costed by the Department of Finance at $2,374 million (91-2 prices) in Year 3 of Dr Hewson1s program.

2. The increase in family allowances (100 per cent, 50 per cent and 6 per cent depending on income) which the Department of Finance has costed at $1,036 million (91-2 prices) in Year 3.

3. The $565 million (91-2 prices) re-insurance pool subsidy to prevent insurance premiums blowing out as a result of elderly and chronically ill people taking private insurance.

This shortfall means that Dr Hewson either cannot deliver the compensation arrangements he has promised or he cannot deliver his Budget bottom line, which would leave his economic policy in tatters.

Table 1 (attached) shows the change in the Budget balance (excluding privatisation) between 1993-94 and 1994-95. If all compensation is paid, the stance of fiscal policy moves from a tightening to a massive easing (plus $1,685 million to minus $3,069 million).

this would occur in the year when the Opposition plans to introduce the GST.

Given the lack of an Accord arrangement to prevent the price effects of the GST being built into the wage system and ongoing inflation, this implies that monetary policy would have to be made cripplingly tight by the Reserve

Bank with interest rates going through the roof under a Hewson Government.

It is clear that the last thing Australia needs is Dr Hewson's GST package.


The Treasurer


ACTION REQUIRED BY: For information only


In accordance with established procedures, to provide factual briefing on the Opposition tax and expenditure documents released on Thursday 21 November, as requested by your Office.


2. Table 1 provides a summary of the impact of the Opposition's proposals on the Commonwealth Budget position. Table 2 provides Treasury/ATO costings of the revenue measures. Details of the assumptions used in Treasury/ATO costings are also

provided. Table 3 provides a reconciliation of the outlays savings for the Opposition's proposals which was released on 9 December and the Treasury costings of outlays savings. The adjustments reflect:

• conversion of costings from 1991-92 dollars to 1990-91 dollars:

• inclusion of certain Opposition policy proposals which were not included in Chapter 16, Table 16.2; and

• adjustments to ensure classification of revenue and outlays is consistent with the classification used in the Commonwealth Budget.

3. For information.

A.S. Cole Secretary to the Treasury 16 December 1991


In accordance with traditional practice, the Treasury and the ATO have costed the revenue proposals contained in the above package.

The costings are based on descriptions and listing contained in the above document. All costings are in 1990-91 dollar terms.

In areas where we were unable to cost the option using the available information, the Opposition's costings have been assumed. These items are marked by (*) in the attached table.

Treasury/ATO costings were similar to or the same as the Opposition's costings in most areas. There were five areas of difference.

GST Revenue

The Treasury estimate of GST revenue is $2.5 billion (1990-91 dollar terms) less than that of the Opposition when fully implemented. This difference is attributable to three factors:

• The Opposition estimate includes $1.2 billion revenue from foreign tourists and the black economy. The Treasury estimate includes $0.6 billion revenue from foreign tourists, but does not include anything for any additional revenue from the black economy. To the extent that the black economy consists of people simply avoiding.income tax there is no a priori reason to expect that their expenditure is not included in the National Accounts and so already in the GST Base. In regard to activities not currently included in the National Accounts there is significant doubt about the ability of the GST to apply tax to these activities. Finally any attempt to quantify the size of the black economy is subject to significant uncertainty and it is not possible to produce a reliable revenue estimate. Consequently, any estimate of additional GST revenue from the black economy must be purely speculative.

• The Opposition estimate appears to make no allowance for any avoidance or evasion of the GST. The Treasury estimate includes an allowance for 5% avoidance or evasion of the GST, reducing revenue by $ 1.3 billion.

• The remaining $0.6 billion difference in revenue estimates is due to the Opposition figuring appearing to overstate the potential GST base by approximately $4 billion (1990-91 values).


Tax Cuts

The Opposition estimates that the cost of the tax cuts would be about $0.7 billion more than the ATO by 1995-96. The ATO estimates were prepared based on real 1990-91 incomes and measured the differences in tax yield when compared to the current 1991­ 92 tax rates. The Opposition has not provided the assumptions underlying their estimate.

Tax Free Savings (TFS)

The Opposition estimates that the cost of the tax free savings proposal would be $500 million in 1994-95 and $520 million in 1995-96. The Opposition has not provided the assumptions underlying their estimate.

The ATO estimates the cost to be $160 million in both years. One reason for the difference could be that the Opposition has not allowed for the fact that not all new savings would be eligible for the TFS rebate, either because it is above the cap or is derived by taxpayers facing a marginal tax rate below 30 per cent The ATO estimate makes allowance for these factors, based on previous years' interest and dividend


Capital Gains Tax

The Opposition estimates that the cost of the capital gains tax proposals would be $200 million by 1995-96, compared with an ATO estimate of $65 million.

The Fightback document provides no detail for the costings for the changes to the CGT that are proposed. Also, in a number of instances it is not precisely clear what the proposals involve nor how they will be implemented.

In costing any CGT initiative, behavioural assumptions can be very important For example, how many businesses take advantage of the like asset rollover in a given period will depend on the response of business to the new rollover concession. Determining the magnitude of behavioural responses is very subjective. That CGT

revenues are influenced by assumptions about asset prices and realisation rates also makes forecasting revenue effects difficult.

In view of the considerable difficulty in costing CGT initiatives and that we do not know how the Fightback figures were calculated, the difference in the estimate should be treated cautiously.


Superannuation Funds

The ATO estimates that the Fightback superannuation proposals would cost a net $215 million. This comprises seven separate proposals.

• Rebate at 25 % on contributions to $6000 including catch up provisions for over 45s -$1460m

This estimate was derived by taking the estimate of member financed superannuation contributions derived from ABS data ($5.8 billion) and multiplying this by the proposed rebate rate (25%);

- this assumes virtually all member financed superannuation contributions will fall within the proposed limit on rebates;

• Contributions for non-working spouse -$235m

This estimate was based on ABS data for the number of employees with non­ working spouses. Assumptions were then made about the level of contribution that would be made and the likely take up rate for the measure.

• Repeal of the current deduction and rebate system for contributions +$690m

This estimate is based upon actual taxation data.

• Taxpayers under 60 - lump sums taxed at 20% +$150m

This estimate was calculated using taxation statistics and the ATO taxation model. Data on the numbers of people currently receiving lump sums before age 60 were fed into the model to derive an estimate of revenue gained by taxing such people as proposed, compared with the current revenue raised from such taxpayers.

• Taxpayers over 60 - lump sums tax free and pension changes +$30m

This estimate was calculated on actual data on lump sums and the ATO tax model, as for the proposal directly above.

• Increase tax on Superannuation fund earnings from 15% to 25% +$560m

This estimate was calculated using tax receipts from superannuation funds and the revenue gain from an increase in tax calculated by applying the higher tax rate proposed to taxable income and deducting imputation credits.


DOF total (1)

GST tax credit (2)

1991-92 Prices Total Diesel fuel rebate (3) Total

1990-91 Prices -r-al sel fuel rebate (3) Total

Pension Hardship (4) PBC card (5)

Redundancy (6) Rounding (7) GST tax credits (8)




1993-94 1994-95 1995-96 1993-94 1994-95 1995-96 1993-94 1994-95 1995-96 $m $m $m $m $m $m $m $m $m

-3321 -4551 -4499 -1928 -2040 -1867 1393 2511 2632

0 343 458 0 343 458 0 0 1 0

-3321 -4208 -4041 -1928 -1697 -1409 1393 2511 2632

4 o 677 902 0 677 902 0 0 0

-3321 -3531 -3139 -1928 -1020 -507 1393 2511 2632

-3221 -3425 -3046 -1870 -989 -492 1351 2436 2554

0 -617 -822 0 -617 -822 0 0 • 0

-3221 ■4042 I -3868 ] -1870 -1606 -1314 1351 2436 2554

40 40 40 I 40 40 40 0 0 0

110 0 0

1 0

0 0 -110 0 0

-146 -194 -194 1 0 0 0 146 194 194

6 4 5 1 0 0 0 -6 ■A -5

0 -333 -444

l 0

-333 -444 0 0 0

-3211 -4525 -4461 1 -1830 -1899 -1718 1381 2626 2743

(1) Costings as outlined in the Treasurer’s press release of Monday 9 December 1991. (2) GST tax credit/added back in order to ensure consistency with Table 16.2, Chapter 16. (3) Diesel fuel rebate adjustments nesessary to ensure consistency ydth fuel excise estimates modifications as per Chapter 16 page 233. (4) This item appears on page 316, Chapter 18 of Opposition docunient but is not included in Chapter 16. (5) This item appears on page 316, Chapter 18 of Opposition document but is not included in Chapter 16. (6) Cost of redundancies in Table 16.2, Chapter 16 has not been reflected in total costings in Table 18.3,

Chapter 18. In order to achieve the same totals as Table 18.3, this adjustment deletes the cost of .edundaneies from the Opposition figuring. The costs remain in the Treasury/Finance figuring. As a result, total Opposition savings arc $146 million higher in 1993-94^and $194 million higher in 1994-95 and 1995-9i (7) Reflect rounding on individual items plus various minor errors on

Chapter 16 arc not converted back to 1990-91 prices when fed into (8) Figure of $333 million in 1994-95 for year 2 assumes 3/4 of a full on l/OciobcT 1994. Figure of $444 million in 1995-96 comes from

ipposition document where figures from haptcr 18. ar effect for tax credits as GST comes in age 167 of the Opposition document.

Totals from page 232 Total from page Totals from

of Opposition 233 of Treasurer's Press

document . Opposition's Release of

document 9 December 1991