TAX NEWS - June 2010

Australia Tax: State budgets flush with $3bn from Kevin Rudd

KEVIN Rudd has come to the rescue of ailing Labor governments in NSW and Queensland, pumping in an extra $3 billion in federal grants to prop up their state finances.

As the national economic recovery gathers pace, state Treasury coffers are being replenished thanks to good fortune, a mild return to fiscal prudence and the continued extravagance of Canberra's stimulus and reward payments.

But spending continues to grow ahead of revenue in Victoria and NSW, where premiers John Brumby and Kristina Keneally are trying to woo business with tax cuts and voters with more generous social services.

The NSW and Queensland governments delivered their 2010-11 budgets yesterday, with both reporting strong turnarounds in their fiscal positions and a slight uptick in state output growth.

NSW is expecting a $101 million surplus this financial year, after booking a $900m deficit the previous year.

Queensland's budget bottom line is forecast to deteriorate by almost $1.5bn in the coming financial year to a deficit of $1.7bn.

Yet a year ago, the state was looking at a red-ink headline of $3.4bn.

Now Queensland is forecasting a return to surplus in 2015-16, a year earlier than previously expected. "With continued discipline we can see a return sooner," Queensland Treasurer Andrew Fraser said yesterday.

"It will require all our resolve, something we have in spades."

Speaking of implements, Queensland and NSW have been rewarded with shovelfuls of cash from the Rudd government. By contrast, Western Australia has been sustained by retail spending, exports and a can-do, cost-cutting leader in Premier Colin Barnett.

Western Australia is tipped to rack up a pair of $290m surpluses, this year and next, when its output growth is expected to be almost 5 per cent.

The NSW rebound can best be seen in the tale of how the outlook for 2010-11 has improved since Treasurer Eric Roozendaal's first budget 12 months ago. Then, the bottom-line forecast was for a $116m deficit. NSW officials are now forecasting a surplus of $773m.

This $889m turnaround came largely through a $1.546bn boost in grants (over what NSW Treasury expected a year ago) from the federal government: the state's GST and national agreement payments both rose by 10 per cent.

On a broad rule of thumb, NSW got an across-the-board revenue windfall worth $2.347bn, it spent $1.458bn and it saved the rest. Looked at another way, NSW Labor, which heads to the polls next March, banked almost 58 per cent of Canberra's extra largesse.

"The beacon of hope I talked about last year has lit the path to prosperity," Mr Roozendaal said in his budget speech.

He neglected to say the Prime Minister and Wayne Swan built the light tower, supplied the fuel and paid for the maintenance.

A slight cut in payroll tax was welcomed by NSW companies, although the state remains a high-tax jurisdiction, the legacy of fiscal indolence and the strength of energy-sector unions.

Yet this year, NSW has performed better than Victoria, which squeezed Canberra for dollars and was able to splash out cash on voters and businesses in its budget last month.

Successive years of reform and sound fundamentals meant Mr Brumby could retain Victoria's low-tax king status and prepare the heartland for an election in November. Victoria, which remained in surplus in the crisis years, still managed a $574m turnaround in its budget balance because of Mr Brumby's negotiating prowess.

Queensland Premier Anna Bligh is not facing the voters for some time. Her more pressing task is to meet the service and infrastructure needs of a rapidly growing state, while Mr Fraser is focused on fiscal consolidation.

Like NSW, Canberra was kind to Queensland. Commonwealth grants in the coming year are now tipped to be $1.447bn higher than a year ago. Not only is Queensland storing its Rudd dollars, it is saving an additional $240m from its own 10.6 per cent rise in revenue.

But business has become the source of the state's bounty. Queensland was once a low-tax haven for companies. Now, taxation as a percentage of gross state product is 3.64 per cent; the weighted average of the other states is 4.14 per cent and falling. Boom state Western Australia, lauded for its tax-friendly environment, has a ratio of 3.24 per cent while NSW's is 4.44 per cent.