“The principal indicator of future fiscal pressure is the degree to which government spending outpaces revenue when the ratio of government tax revenue to GDP is held constant. This provides a measure of the increase in revenue or reduction in aggregate spending required to provide a balanced budget (table 1). Overall, the Australian Government must find funding sufficient to cover additional expenditure of 4.5 per cent of GDP, and combined state and territory governments must find an additional 1.4 per cent of GDP. It is possible that given the limited tax options available to the states and territories, much of their fiscal pressure could be ‘passed on’ to the Australian Government in the form of greater demands on federally collected taxes.”
The paper comments on the participation rate in our economy, noting that the biggest gap between the working population (those aged between 20 and 59 years) and the population as a whole will occur in the early 2020s. The paper also comments that, should the government attempt to fund the emerging fiscal gap through higher labour income tax rates, this would discourage labour supply. The paper states (on page 85):
“The effects would not be trivial — especially for the supply of labour by married women, who empirically are the most responsive to wages. An international meta study (Bargain and Peichl 2013) found that for every 10 per cent decrease in after-tax wage rates:
- married women and single mothers withdraw an average of around 5 per cent of their hours supplied
- married and single men withdraw an average 1 per cent of their hours supplied
- single childless women withdrawn an average 1.5 per cent of their hours supplied.”
When current revenue collected from salary and wages is estimated at 10.7% of GDP and total tax receipts are estimated at 22.2% of GDP, you can see the need for change.
The examples above highlight one of the issues that the ageing population presents. Decreased participation means reduced revenue unless tax rates rise. Increased tax rates may mean a loss of female participation in the workforce. The research paper, like other similar reports, raises the issue that the gap in funding can only be filled by increased productivity or increases in the rate or breadth of the tax base.
So what can we do? Collectively, we can continue to push for tax reform, push for change that creates efficiency in government and, for those of us in business, look at ways to drive productivity gains through innovation, efficiency and product development. The gains we make today will help us and our future generations.
My term as president is disappearing in what seems to be a blink of an eye. I have met many members of The Tax Institute and thank you all for your kind words.
Being president cannot be done alone.
Thank you to the national and state councils. Thank you to Noel and his team of dedicated, loyal people. You all make The Tax Institute the leading professional body in tax.
I have to say a special thanks to Robert Jeremenko, Stephanie Caredes and Deepti Paton for their help in the numerous submissions and representations that happened in 2013.
To all of you, my best wishes.
The Tax Institute is Australia's leading professional association in tax. Its 13,000 members include tax agents, accountants and lawyers as well as tax practitioners in corporations, government and academia.