Tax revenue outlook 'desperately bad', Henry warns
Governments will be unable to fund the nation's ballooning infrastructure needs unless they can extract more tax revenue from the economy, former Treasury secretary Ken Henry says.
Following a similar warning from the Treasury last week, Dr Henry today said the tax system would not collect enough revenue as the population expanded in decades to come.
State governments without the buffer of mining royalties were especially vulnerable to the trend, and they faced a ‘‘desperately bad’’ situation, he said.
The warning comes after the Treasury Secretary, Martin Parkinson, last week said the days of big budget surpluses were gone, and the run of Howard government tax cuts in the mid 2000s were funded by a ‘‘temporary bubble’’ in revenue.
‘‘It is true as Martin said the other day that the Australian tax base simply will not deliver what people expect of it,’’ Dr Henry said at a business forum in Canberra today. ‘‘In the states, they are in a much worse position. The states’ revenue systems are especially fragile.
‘‘At the moment it looks OK for the resource-rich states, and for the others it looks desperately bad. But even for the resource rich states ... at some stage the royalties will deliver less revenue than they are presently delivering.’’
Tax revenue has slowed sharply in recent years due to weak capital gains in the property and share markets, and a peak in commodity prices. Dr Henry said the ratio of tax to gross domestic product was unlikely to recover to previous levels.
Australia’s tax revenue as a share of GDP is among the lowest in the developed world. It is estimated to have fallen to 23.8 per cent this financial year, compared with more than 25 per cent for much of the previous decade.
‘‘We don’t have the infrastructure, that’s obvious, for another 14 million Australians. But we don’t at the moment have the mechanisms for thinking about what sort of infrastructure we are going to need,’’ he said.
‘‘The fundamental question of course confronting all of us about that infrastructure build requirement is how’s it going to be funded?’’
Dr Henry, who works as an economic adviser to the Prime Minister and a NAB board member, is finalising a white paper on how Australia’s economy can make the most of the ‘‘Asian Century’’.