Sustainability, revenue and productivity: How will the South Australia budget fare?
As government debt levels rise, a legitimate question regarding sustainability must be addressed.
While government debt, in and of itself, is a complex issue, concern can stem from two areas. The first is what the government spend its money on.
If the government goes into debt to spend on consumption items, such as things that won’t last or help generate growth and an improved living standard over time, then we need to be concerned.
The second is when debt levels become so large, servicing that debt in the form of interest payments becomes a major share of government revenue.
Here the word ‘share’ is important. If the debt is incurred for items that cause revenue to rise, then the share of interest would be a constant or even declining share of revenue and that’s a good thing. If, however, revenue remains flat or even starts to fall, then we enter a potentially vicious cycle of borrowing to payback past borrowing.
So what’s important for the South Australian budget is not so much the size of the debt, but the revenue sources and their potential growth.
Where is the government getting its revenue?
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If we look at the projected revenue sources for the State, 30 per cent comes from GST.
That means the government is expecting that spending will continue to rise and maintain its contribution to revenue. This will, of course, depend on the state of the SA economy and overall business and household spending.
So far, SA households have maintained a healthy spending level. But GST is also a function of a formula determined in Canberra, so the government would want to ensure a reliable source of revenue beyond this. Indeed, the Grants Commission specifically states that it is their responsibility “… to ensure each state can provide comparable services, if they all make a similar effort to raise revenue from their own taxes”.
So, it is also a clear responsibility of the state government to ensure it has a stable, growing tax base outside of GST.
A close second source of revenue for the state budget is “other” at 27 per cent.
This is mainly energy relief and Whyalla payments from the federal government and will not fund the day-to-day or even unexpected needs that occur.
The real mainstay of the government revenue is taxes, contributing 24 per cent of total revenue.
The majority of this tax revenue comes from payroll tax, rising from 28 per cent of tax revenue to about 30 per cent by 2029. Other tax revenue, such as stamp duty and land taxes, are more or less, expected to maintain their share as a revenue source.
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Like GST, payroll taxes depend on a growing state economy, and the key to a growing economy is productivity.
While much of the focus has been on labour productivity, less time has been spent on capital productivity, which is in a much more dire state. According to the SA Productivity Commission, South Australia’s productivity growth has been among the poorest in the country over the past two decades, and this has been an important factor in the state’s weak economic growth over that same period.
If the state government wants to ensure it has a sustainable budget, it needs to rely on taxes from a growing business base. Supporting a growing business sector not only safeguards a steady tax base, it also provides jobs for the community and allows recent graduates to find meaningful and challenging work in South Australia, enticing more to stay local.
Business investment as a share of GDP is at its lowest level since the 1990’s. While there are many explanations for this, an important factor that is very relevant to South Australia is business size.
Studies have shown that large businesses tend to invest more in maintaining market share than in the kind of innovative new capital that boosts productivity. At the same time, small firms tend not to invest in innovative procedures or new capital equipment due to tight margins and limited internal resources.
Indeed, recent work by CEDA shows that a key driver to limited productivity growth in the construction sector is that it is dominated by very small firms.
Simply lowering taxes is not the solution
Taxes charged at different rates based on firm size can discourage productive firms from growing. This is especially true of payroll tax, SA’s main source of tax revenue.
For example, CEDA shows that in South Australia, when the tax-free threshold for payroll tax was raised from $600,000 to $1.5 million in 2019, firms adjusted their behaviour to remain just under this tax-free threshold.
Corporations often attribute the lack of investment to what they deem to be high corporate tax rates. However, a study out of the Australian National University looked at the impact of the 2015 and 2016 corporate tax cuts for small businesses and found that while it did help those already making investments, there was no evidence it enticed firms that had not been investing to start doing so.
The way forward needs to be a simplification of the regulatory structure faced by businesses and a tax system that encourages both growth and investment in innovative capital. Simply cutting taxes is not the answer.
To ensure the state has a solid, growing tax base, consistent tax reform and a regulatory structure that encourages firms to increase investment and attain scale is needed. Working with the business community to identify meaningful ways forward would help ensure such reform is effective.
Dr Susan Stone is the Credit Union SA Chair of Economics at UniSA
