It’s always a case of another year, another excuse for not slashing Australia’s tax burden

There is a famous gag in Charles Schulz’s Peanuts comic strip in which the very bossy Lucy Van Pelt persuades the perennial loser Charlie Brown to try to kick a football while she holds it in place but she always pulls it away at the last moment. The football deception was funny not only because poor old Charlie fell for the ruse every time, but because of the creative excuses Lucy invented to account for Charlie’s failure. After Charlie flew spectacularly through the air and landed painfully on his back in true blockhead fashion, Lucy always had a clever justification for pulling the ball away as he followed through. Excuses like your shoes were dirty or you have to learn to be trusting or I’ll give you a million dollars to try again. Treasurer Peter Costello is the Lucy Van Pelt of Australian politics. Every year since 1996 he has announced estimates of the Commonwealth’s budgetary position for the coming financial year.

And just like Lucy with the football, at the end of each financial year the actual deficit has turned out to be smaller (and actual surpluses have turned out to be larger) than the initial estimates made more than a year earlier. It happened again last month. In the second statement of the first paper in the 2006-07 budget, Costello and the Treasury held the fiscal football in place, telling us that we could expect an underlying cash surplus of $10.8billion. But we now know that this estimate will be wrong very wrong. The latest guess is that last year’s surplus was actually $17.3billion. That’s a huge estimation error, but it is not unusual. A big part of the problem is that Treasury has underestimated future revenues in each and every Costello budget.

The Costello era stands out like a sore thumb in Treasury’s revenue estimation error the difference between actual revenue outcomes and published budget revenue estimates for every year since 1979-80. In the pre-Costello years the average estimation error was quite low ($260million), which suggests that although Treasury’s revenue estimates were often incorrect, they were not biased and did not consistently underestimate revenue. But since Costello has taken over the reins, the estimation error has averaged a whopping $7billion. Surely this stretches the meaning of the phrase close enough for government work just a bit too far. Treasury bureaucrats, like everyone else, are not perfect. They make a lot of mistakes.

But a forecasting record which is consistently wide of the mark in the same direction for 11 years in a row suggests that something is very, very wrong. Why does any of this matter? In case you haven’t worked it out yet, the suckers in this story the Charlie Browns of Australia are the poor old taxpayers. By the time the actual surplus is computed and turns out to be much larger than the budget estimates, it is simply too late to cut taxes further in that financial year. But it is never too late to do something with the unanticipated revenue windfall, so Costello snatches the football away and taxpayers end up in pain, fooled yet again. And, just like the Peanuts cartoon, they’re told to wait until next year when the entire process begins all over again.

The similarities with Peanuts don’t end there. It’s always a case of another year, another excuse for not slashing Australia’s tax burden. Just like Lucy, the justifications are always very creative although by now they are beginning to wear pretty thin. Tax rates have been cut, but they could have been cut by more. Time and again taxpayers are told at budget time that more generous tax cuts are unaffordable because the Government’s anticipated spending commitments are simply too high relative to anticipated revenues. Further tax cuts would be irresponsible because the expected surplus would then be too low and government debt would not be reduced quickly enough. But when Labor’s debt was completely paid off, the story changed yet again. Now we’re effectively being told that today’s surplus revenues are needed to finance the anticipated welfare addiction of future generations.

Enough is enough. Any good economic manager must present reasonably accurate revenue estimates. Why not improve their accuracy and let taxpayers keep more of their own money, instead of playing the same asinine game every year and hiding the ”unanticipated” revenues away in the Future Fund? In the 2006-07 budget Costello did indeed cut the top marginal tax rate. But it was by a minuscule amount from 48.5 per cent to 46.5 per cent. Why wasn’t it cut further? You guessed it: because it was too costly and would have made the expected surplus too low. The recent budget surplus estimate simply blows that argument out of the water. Costello must now be wondering: what excuse will the blockheads of Australia fall for next time?

Dr Alex Robson is a lecturer in economics at the Australian National University and a Research Fellow at The Centre for Independent Studies.