Weekly economic briefing: State budget season – GST and other revenue drivers

The Weekly Economic Briefing is written by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart Deloitte’s Chief Economist in the UK. They provide a personal view on topical financial and economic issues. Subscribe to receive the Weekly Economic Briefing in your inbox!

In this week’s blog:

Australian economic briefing
UK economic briefing
International economic briefing

Australian economic briefing by David Rumbens

This section of the briefing provides a snapshot of key economic data and issues of relevance to Australia.

State budget season: GST and other revenue drivers

Along with the upcoming Federal budget on 9 May, the state budget season also kicks off shortly, with Victoria leading the pack on 1 May.

Part of the national economy’s rebalancing after the mining investment downturn has been facilitated by state government infrastructure spending on the east coast. Based on the current project pipeline, state capital spending won’t boost growth further from here, but will likely remain at a high level over the next year or so, before it then starts to moderate.

This week we briefly survey the outlook for the key driver of state and territory spending – state revenue.

For all states, the Goods and Services Tax (GST) is a key source of revenue. Earlier this month we saw the annual GST ‘reveal’, when the Federal Treasurer announces the carve-up among the states of next financial year’s GST collections.

The 2018-19 GST carve-up is based on how states have fared (relative to each other) over 2014-15 to 2016-17, in terms of growth in both revenues and spending.

Western Australia’s share of the GST pool continues to rise from historically low levels, as the collapse in the iron ore price since 2014 is more fully reflected in the GST calculation. That, along with the state’s poorly performing housing market, sees WA’s share of the GST pool increase from 3.6% to 4.9% (see Chart 1).

But the winner is Victoria. Its surging population and lower share of federal infrastructure funding, means its share of the GST pool rises – from 24.0% to 25.6% – despite Victoria being one of the best-performing state economies in recent years.

The GST sharing system – unlike global trade – really is a zero-sum game. Where there are winners, there must also be losers, and the biggest loser this year is Queensland. While WA copped falling values of iron ore production over this period, Queensland enjoyed rising coal production values. The state’s need for natural disaster relief spending also fell sharply, while it received an above average share of federal infrastructure grants.

The other big GST loser was New South Wales. The 2016 Census showed that the socio-economic status of the NSW population was relatively better off than previously thought – implying less need for government spending. The state’s booming property market also boosted land values and property sales, injecting windfall tax gains into the state’s coffers, and reducing its claim on the GST pool.

The Northern Territory also lost out, mainly because it benefitted from direct Commonwealth infrastructure grants, Tasmania’s share drops slightly for similar reasons, and the ACT’s share is unchanged from 2017-18.

Chart 1: Change in shares of total GST revenue, 2017-18 to 2018-19

Source: Commonwealth Grants Commission; Deloitte Access Economics

Looking ahead, some of these trends will likely continue.

Western Australia’s GST share could continue to rise as the three-year GST calculations more fully capture the falls in iron ore prices. Victoria’s population growth has continued to surge, which will attract more GST (although this could be largely offset by its relatively strong labour and property markets). Tasmania’s relatively robust economy will probably see its GST share continue to edge down.

But there’s likely to be good news for this year’s biggest GST ‘losers’ – population growth has picked up strongly in NSW and Queensland, and this may slow expected further declines in those states’ GST shares.

As state treasuries finalise their budget forecasts in the weeks ahead, other key tax lines will be payrolls and property. With jobs growth strongest in NSW and Queensland over the past year (overtaking the one-time leader in the now easing Victorian labour market), these states should benefit from a nice boost in payroll tax revenues (see Chart 2).

Chart 2: Annual employment growth by State (’000s, trend) 

Source: Australian Bureau of Statistics; Deloitte Access Economics

For NSW and Victoria, their upcoming budgets will be pre-election ones –  Victorians go to the polls in November, and the NSW general election will be in March next year. But with property markets starting to cool in Sydney and Melbourne, the FY19 budgets for these states may be the first for a number of years not to show windfall gains in property-related tax revenues, and therefore less in the war-chests for the major parties once the campaigning really begins.

For more information on the Australian brief, please contact co-authors David Rumbens and Craig Michaels.

 

UK economic briefing by Ian Stewart

A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to & view previous editions at: http://blogs.deloitte.co.uk/mondaybriefing/

Technology and productivity – a complicated relationship

  • There are numerous explanations for why technology is no longer boosting productivity in the way it did in the twentieth century. The US economist, Robert Gordon, argues that today’s technologies are less productivity-enhancing than the great inventions of the past. The opposing view is that technology is still working its magic, but in ways, such as improving the quality of goods and services, which are poorly captured by the statistics.
  • Last month the Harvard economist Jeffrey Frankel took a different approach pointing out that for all its benefits technological change also inflicts damage and disruption.
  • Technology continues to open up new avenues for warfare and criminality. Cyber-attacks, phishing, malware, security breaches and viruses are facts of life in the age of the internet, ones that, as the WannaCry attack last year demonstrated, impose huge costs.
  • A related theme is the effect of distorted or false news on our understanding of the world, the public exchange of information and trust in institutions. The risk that lies take hold is age old. The internet was initially seen as a safeguard against such threats – but it is clear that it also has the capacity to magnify them.
  • At a company level, the benefits of new softwares and innovations are partially offset by the time needed to master them and the disruption, distraction and glitches along the way. Economists tend to downplay the disruptive aspects of technological change which are an almost inevitable price to be paid for realising gains.
  • Then there is the distractive power of social media and smart phones. The US Chamber of Commerce Foundation has found that people typically spend an hour of their workday on social media, rising to 1.8 hours for millennials. Another survey found that traffic to shopping sites in the US surge between 2pm and 6pm on weekdays.
  • The effects on productivity are even more pervasive than these numbers suggest. When you switch tasks what Sophie Leroy, a professor at the University of Minnesota, dubs as attention residue, prevents your attention from fully returning to the main task. Concentration and effectiveness suffer. By one estimate, it takes an average of 25 minutes to fully engage with the prior task. Moreover, workers who are interrupted are significantly more likely to go on to ‘self-disrupt’. They find it harder to settle down and work even when there are no distractions.
  • Recent technologies have had other unexpected and unwanted effects. In the US the main cause of driver distraction, in accidents that killed or injured almost 400,000 people in 2015, was text messaging. One theory for the rising tide of male High School and college graduates who choose not to work in the US is that they are happier playing video games.
  • Professor Frankel’s argument that technology brings with it costs, disruptions and new threats, as well as benefits, is a powerful one. But it is not new.
  • Aerial bombardment, pollution, road accidents, obesity, the degradation of oceans…and many other ills can be laid at the door of earlier innovations. Cyber warfare is the latest in a very long list of technologies pressed into the service of conflict. Alfred Nobel founded the eponymous prizes, it is said, partly out of guilt for having invented dynamite and for his role in the armaments industry. It is far easier to think of technologies that brought with them new problems than the ones that brought only benefits.
  • Innovation tends to be seen in terms of ground-breaking inventions. There is at least as much magic in what follows – applying them to real problems, learning how to get the most out of them and countering their failings. It is a changing relationship. Improving knowledge means we grasp the unforeseen consequences of past innovations – as with asbestos, leaded petrol and tobacco. And rising incomes make societies less willing to tolerate the known side effects of past development. China became rich and then it became concerned about pollution.
  • The relationship between people and technology is also less straight forward than it might seem. We may spend more time at work on social media and Amazon but technology also means we spend more time outside working hours doing our jobs – so much so that a number of businesses have taken steps to limit out-of-hours emails to counter this erosion of free time.
  • The obvious challenge is to extract the benefits and minimise the costs of technology. As Professor Frankel’s thoughtful post makes clear, that is no easier today than in the past. The rapid material and human progress of the last two centuries suggests humans are pretty good at getting this right.

 

OUR REVIEW OF LAST WEEK’S NEWS

The FTSE 100 ended the week up 1.1% at 7,265.

 

International economic briefing by Ian Stewart

Economics and business

  • The United Nation’s General Secretary Antonio Guterres warned that the Cold War is back as Donald Trump said US-Russian relations are worse than they have ever been
  • President Trump instructed his advisors to look into re-joining the Trans-Pacific Partnership trade bloc from which he withdrew the US last year
  • China’s President Xi Jinping struck a conciliatory tone on trade in a speech in which he promised to further liberalise the Chinese economy
  • The World Trade Organisation said that US-China trade tensions may already be impacting the global economy
  • Euro area investor sentiment fell in April for the third month in a row according to the Sentix index, with investors ‘deeply concerned’ over protectionism
  • New Chinese acquisitions of US companies fell by 90% from 2016 to 2017
  • US core inflation, which excludes volatile food and energy prices, rose to 2.1% in March, its fastest pace in more than a year
  • New claims for unemployment insurance in the US have been below 300,000 a week, for the longest period on record
  • The IMF warned advanced economies against further migration controls, saying their economies risked being overwhelmed by ageing populations
  • The National Institute of Economic and Social Research estimates UK Q1 GDP growth slowed to 0.2% from 0.4% in Q4 2017, mainly due to adverse weather
  • The availability of UK consumer credit dropped “significantly” in the first quarter of 2018, according to a Bank of England lenders survey
  • UK manufacturing output contracted in February for the first time in almost a year, following similar slowdowns in France, Germany and Italy
  • The London Stock Exchange appointed David Schwimmer, a former Goldman Sachs investment banker, as its new chief executive replacing Xavier Rolet
  • The aluminium price hit its highest level since 2012 after the US sanctioned Russian steel giant Rusal as part of wider measures against Russia
  • New Zealand is one of the first countries to ban future offshore oil and gas exploration in a move seen as a major victory for environmental groups
  • Oil prices hit $73/b, their highest level for three years, over geopolitical concerns in the Middle East and continued OPEC production quotas
  • Global retail defaults reached their highest ever level in Q1 2018 with Moody’s citing changing consumer habits and the rise of e-commerce

Brexit and European politics

  • The Hungarian Prime Minister Viktor Orbán, leader of the far right-wing Fidesz party, won the Hungarian elections after its anti-immigration campaign
  • The number of UK nationals acquiring citizenship in other EU member states increased by 165% in 2016 compared to the prior year
  • A report by the Migration Observatory found that thousands of EU nationals may risk losing UK legal status after Brexit for a variety of reasons related to oversight and challenges around the application process
  • UK companies in 18 out of 23 sectors surveyed by the Confederation of British Industry favour EU rule alignment following Brexit
  • The UK’s Financial Conduct Authority has set aside £30m to prepare for the UK’s departure from the EU and will deprioritise non-critical projects
  • The German foreign minister pledged his support to the Irish government’s refusal to accept the return of a hard border in Ireland after Brexit
  • Negotiations on completing the EU banking union are in a “critical phase” following numerous delays
  • Italy’s president, Sergio Mattarella, said there has been “no progress” in talks to form a government after a second round of consultations
  • The EU has tightened ‘posted workers’ rules following claims that they facilitate ‘social dumping’, where employees are temporarily sent to high-wage countries from low-wage ones at rates that undercut local wages

And finally…

The Japan Times reports on the growth of Japanese rental services such as the Ossan Rental website, which dispatches middle-aged men to clients who want companionship for social events, to go shopping or see a movie with – profitable company


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