Examines the effect that the fall in tax revenue post Global Financial Crisis (GFC) had on the Commonwealth’s budget.

Summary
This paper looks at the effect that the fall in tax revenue post Global Financial Crisis (GFC) had on the Commonwealth’s budget . It does this by modelling what would have happened if revenue had instead remained at the government’s tax revenue target of 23.9 per cent of GDP. The difference between what actually happened and what the model shows would have happened helps reveal the impact of tax revenue falling below 23.9 per cent of GDP had on the budget.

The government announced in the 2014 - 15 MYEFO that it was targeting a tax to GDP ratio of 23.9 per cent . The budget papers reveal that it plans to let the tax to GDP ratio rise to 23.9 percent of GDP before allowing “ future tax relief once the tax ‑ to ‑ GDP ratio reaches 23.9 per cent ” . The most recent 2016 - 17 budget papers show that only afte r tax revenue returns to that level is the budget predicted to return to surplus.

The model shows that i f tax revenue had not fallen post GFC then there would have been only two years where the budget was in deficit during the term of the previous Labor g overnment. These deficits in the model are caused mainly by the stimulus spending. It also shows th at the accumulated deficit, which is roughly equal to government debt, would have been almost non - existent today.

This shows that the main factor leading to the post GFC deficits and the accumulation of government debt has been the fall in tax revenue. Th e budget papers project that economic growth will return to its long run average and as it does rates of tax revenue are expected to rise. As this happens the deficit is projected to decrease. A surplus is projected in 2020 - 21 at the same time the tax to GDP ratio returns to 23.9 per cent.