Chapter 4

Information about the government's financial position and functions

4.1        This chapter considers some of the material which the amendment requires, at a minimum, be included in a tax receipt. Issues covered include government debt, welfare payments and the other areas of government expenditure specifically listed in the amendment.

Government debt

4.2        The amendments would require that a tax receipt provided with a notice of assessment detail the level of Australian Government net debt at the end of the financial year and at the end of the previous financial year.[1]

Measuring the government's net financial position

4.3        Whether net debt is the most useful assessment of the government's net financial position for taxpayers was queried during the course of this inquiry. In his submission, Professor Quiggin argued that 'net worth is a more relevant measure of the position of the public sector than net debt'.[2]

4.4        Some of the different measures of the government's financial position, and the meaning and utility of each measure, have been discussed in government publications. Budget Paper No. 1 2010–11 includes a commentary on the uses of the terms net debt, net financial worth and net worth:

Net debt is a commonly quoted measure of a government’s financial strength. Historically, this was the only available stock measure for governments that were recording financial information in a cash-based accounting system. Net debt provides a useful measure for international comparisons, given most OECD countries report on it.

Net financial worth is used by the Government as the primary indicator of balance sheet sustainability because it provides a more effective and intuitive indicator of the sustainability of the Government’s finances. It is a broader measure than net debt as it includes government borrowing, superannuation and all financial assets, but is narrower than net worth since it excludes non-financial assets. There are advantages to excluding non‑financial assets since they are often illiquid and cannot easily be drawn upon to meet the Government’s financing needs.[3]

4.5        An issue which may arise with the use of net debt on a tax receipt is whether there is the likelihood of confusion during periods when the government is not in debt. During these periods, a double-negative would occur as the figure given under net debt would have to be preceded by a negative sign—at a quick glance this may be confusing as to whether the government was actually in debt.

4.6        However, net debt appears to remain the most commonly quoted measure of the government's financial position. It is also likely that net debt is a concept more widely and easily understood by taxpayers. At the time the 2010–11 Budget was announced, figures and forecasts associated with net debt were prominently reported and discussed in the Budget Overview, and used in the Treasurer's Budget speech. In contrast, information about the other measures of the government's financial position is confined to the Budget papers.

Calculating a taxpayer's share of net debt

4.7        The amendments also require that a taxpayer’s share of the Australian Government net debt for the financial year be represented on a tax receipt. The amendments state that this figure is to be calculated by dividing the Australian Government net debt by the number of individual taxpayers.[4]

4.8        In addition to revenue from income tax, the government has a number of other sources of taxation and non-taxation revenue. In the 2010–11 Budget, total taxation and non-taxation revenue was estimated at about $303 billion, of which just over $140 billion was comprised of individuals' taxation revenue. In his submission to the committee, Professor Quiggin observed that a pro-rata calculation could be used to reflect this:

It would be desirable to present this information in a way that is comprehensible. One possibility would be to use a pro-rata measure, imputing to each taxpayer a share of net debt/net worth in proportion to their tax payments as a share of total revenue.[5]

4.9        As income tax is only one component of government revenue, a benefit of using a pro-rata calculation would be that it allows for the share of government debt that would be supported by other taxes, such as company tax, to be shown.

4.10      However, an individual's share of the net debt is not a function of the taxpayer's contribution to total revenue (which in any case will vary from year to year).  Rather, any debt acquired by a government is on behalf of its taxpayers and is simply a function of their existence as an Australian taxpayer.

4.11      A practical issue requiring consideration is how to determine the number of taxpayers. In their evidence to the committee, officials from the ATO noted that there are a number of factors which create difficulties in this area:

It is some time after the current financial year when the actual number of taxpayers would be known. Taxpayers lodge over a long period of time and someone can be a taxpayer and not lodge but they are still a taxpayer. There are taxpayers who may lodge as non-taxable. We might assess them as owing a very large amount of money which they might never pay. If there were a proposal that was framed around the assessment amount raised rather than the amount paid, that would create a problem for us as to what information we provided.[6]

4.12      To address this issue, an option may be to use the most recently available figure for the number of taxpayers. However, it is not clear that such figures are available. In response to a question on notice received after 2006–07 Budget estimates, the ATO stated:

Taxation Statistics reveal that for the 2004 income year, 10,819,176 individuals lodged income tax returns. However, it is not known exactly how many individuals “pay” income tax in Australia. Generally, income tax is collected during the year from individuals via Pay As You Go (PAYG) withholding and instalments; but for various reasons, not everyone in the PAYG system during a year will lodge an income tax return at the end of that year.[7]

4.13      During the course of this inquiry, the ATO provided their most recent figures on the number of tax returns in a financial year, advising that 12.3 million returns related to the 2008–09 financial year were processed between 1 July 2009 and 31 October 2010.[8]

Committee view

4.14      To address issues about the total number of taxpayers being unknown during the assessment process, the committee considers that in determining the taxpayer's share of government debt, the most recently available figure for, or estimate of, the number of taxpayers should be used. This could be based on the number of tax returns lodged in a previous financial year, if a more accurate method is not available. The committee is of the view that variations in the total number of taxpayers between financial years would not substantially affect the outcome of representations of government debt represented on this basis.

Recommendation 1

4.15      The committee recommends that the proposal be amended to allow the most recently available figure or estimate of the total number of taxpayers to be used to calculate an individual taxpayer's share of government debt.

Relationship between taxpayers and the government

4.16      As a result of the various functions and services the government provides, it is clear that individuals have different financial relationships with the government. During their evidence to the committee, officials from Treasury noted that these varying relationships would not be captured by the tax receipt proposal:

Mr Parker—...If you just focus for example on someone who is paying $1,000 tax but they are in receipt of $10,000 of FTB and you say to them, ‘Your $1,000 of tax was spent on the range of issues which is required to be said,’ is that actually an accurate reflection when they are in net receipt of money?

CHAIR—It probably is to the extent that they are paying tax. As recipients of the government benefit, they would be aware that they receive government benefits. The same argument that you use could be used for yourself. As a taxpayer, your salary is paid ultimately by taxes but you pay tax as well.

Mr Parker—Yes.

CHAIR—That said, a measure that is presented once a year to you—although I imagine you would probably have a pretty good grasp of it anyway—showing the way that the taxes you have paid have roughly been divided up by government spending and allowing you to compare how that looks from year to year and build up a picture over a number of years may well be quite useful for you if you did not have the inherent knowledge that you do. Even though it may not accurately reflect the transfer of payments between yourself as a taxpayer and the government in full, it gives you a picture and an understanding to some extent of how government is taking the taxes you pay and how they are applying them in the business they go about from day to day.

Mr Parker—Yes, sure; I am not dissenting from that at all. I am simply making the point that, if you choose to describe someone’s financial relationship with the government in one respect, it is essentially arbitrary when there are other financial relationships there.

4.17      In situations where an individual's income tax payment was less than what they received in government payments during the year, on a theoretical basis it may be reasonable to conclude that their income tax payment would not be allocated to a number of different areas of government expenditure, but instead would have been returned to them. Given that all income taxation revenue automatically contributes to the Consolidated Revenue Fund, however, distinguishing between tax payments in this way is likely to be conceptually problematic in practice. Further, issues would arise regarding individuals who received government payments throughout the financial year that equalled a significant proportion of their tax payment, but less than the total amount paid in income tax. As a tax receipt would essentially act as a way for taxpayers to compare levels of government expenditure in different areas, if an individual's taxation payment was reported as directly contributing to the government payments the individual received, there is a risk that the proportion of the government's expenditure on items where it makes payments would be overstated on many tax receipts.

Tax expenditures

4.18      A tax expenditure is a concession, benefit, incentive or charge provided through the tax system to taxpayers by the government. Usually tax expenditures provide a benefit to a specified activity or class of taxpayer that is concessional compared to the tax treatment that would otherwise apply. A relevant example is the Education Tax Refund scheme, under which eligible taxpayers can claim a refundable tax offset for 50 per cent of eligible education expenses incurred as a result of a student undertaking primary or secondary school studies, up to a maximum amount.

4.19      Treasury reports that measured tax expenditures as a proportion of GDP peaked in 2007–08 at 10.6 per cent of GDP, and were 8.8 per cent in 2009–10. In dollar terms, total measured tax expenditures in 2009–10 are estimated at around $113 billion (approximately $47 billion if housing and superannuation tax expenditures are excluded).[9]

4.20      During their evidence to the committee, officials from Treasury queried whether tax expenditures should be included as expenditure on a tax receipt.[10]

4.21      A tax receipt will provide a means for taxpayers to compare a government's commitment to certain functions, however, as tax expenditures result in revenue forgone by the government it is unlikely that they would be accounted for on a tax receipt. This may understate the government's activities in certain areas. Tax receipts may also encourage governments to make use of tax expenditures to avoid scrutiny of certain expenditure items.

Committee view

4.22      The committee acknowledges that the amendments, as currently drafted, would not result in a tax receipt that completely demonstrates an individual's net financial relationship with the government. However, the committee is of the view that it would likely be difficult to prepare a tax receipt that includes this information with complete accuracy, and which remains simple and meaningful to individual taxpayers. The committee considers that the benefits associated with providing taxpayers with an indication of how taxation revenue is spent, and the increased transparency that will result, outweigh concerns about capturing an individual taxpayer's entire financial relationship with the government.

Areas of government expenditure

4.23      The proposed tax receipts would be required to demonstrate an income taxpayer's contribution to a number of specified government functions and other areas of expenditure. The table below outlines these expenses using the labels expressed in the amendments.

Table 4.1: Government expenses by function (as described by the tax receipt proposal)

Function	2009–10 outcome ($m)	Proportion of total expenditure
Welfare*	109 197	32.2%
Health	51 426	15.2%
Education	34 889	10.3%
Defence	20 150	5.9%
Foreign affairs and economic aid	4 869	1.4%
Recreation and culture	3 280	1.0%
Housing and community services*	9 029	2.7%
Industry assistance and fuel subsidies*	8 473	2.5%
Public order*	3 593	1.1%
Transport and communications	6 641	2.0%
Labour and industrial relations*	4 694	1.4%
Transfers to the states, territories and local government authorities	47 157	13.9%
Servicing public debt interest	6 303	1.9%
Other public services†	29 538	8.7%
Total expenses	339 239	100%

* The descriptions of these functions do not match with the titles used in the Budget papers. To prepare this table, the figures for the functions in the Budget papers which appear to most closely match the functions in the above table have been used. For example, figures for "industry assistance and fuel subsidies" have been taken from the "fuel and energy" function in the Budget papers. This issue is discussed in more detail on the following page of this report.

† This figure has been calculated by subtracting the figures for each individual function listed in the table from the total expenses.

Source: Final Budget Outcome 2009-10, p. 5.

4.24      In addition to the taxpayer's share of the total expended on the welfare function being shown, their contribution to a number of specific welfare entitlements—aged pensions, disability pensions, family benefits and unemployment and sickness benefit entitlements—is also required to be demonstrated.

4.25      The amendments allow for an "other welfare benefits category". A significant amount of welfare entitlements would fall into this vaguely defined category. These entitlements include benefits to veterans' and dependents ($6.9 billion in 2009–10 according to the 2009–10 Final Budget Outcome) and Aboriginal advancement ($1.3 billion in 2009–10).

4.26      If the total expended on the welfare function is included on a tax receipt, administration costs associated with welfare ($3.2 billion in 2009–10) may be included in the total figure, but as the sub-categories refer explicitly to entitlements, they are unlikely to be broken down into each of the sub-categories. If this is the case, the sub-categories will not add up to the total amount expended on welfare. This will be a noticeable discrepancy—the reason for which may be unclear to the recipient of the tax receipt.

4.27      The remaining government functions which the amendment requires to be included cover most other areas of government expenditure. Some exceptions are readily apparent, such as costs associated with general government administration and costs related to immigration. These programs would need to be included in the "other public services" category.

4.28      There are also some slight differences apparent between the functions described in the amendments and the terminology used in the Budget papers. For example, "public order and safety" is the title of a function of general government sector expense in the Budget papers, however "public order" is used in the amendments.

4.29      It is possible that these differences may cause some difficulties for the ATO in determining which programmes should be included in each category. This may result in further programmes being included in the "other public services" function, resulting in the category appearing large on a taxpayer's tax receipt, without useful information being imparted to the taxpayer.

Committee view

4.30      The committee is aware that the proposal simplified some of the titles given to government functions and other areas of expenditure in order to clarify what each function is, as well as to ensure there is sufficient space on the tax receipt. However, to minimise uncertainty for the ATO in preparing these receipts, as well as the ability for government programmes to be buried in the "other" category, the committee considers that the titles of the categories that do not match with how the general government sector expenses are described in the Budget papers should be amended to reflect more closely the titles used in the Budget papers. If necessary, explanatory notes could be used to describe what is included in a function if the title used in the Budget papers is not clear.

4.31      The committee also notes that the amendments prescribe a minimum list of functions for which details need to be provided. To help taxpayers further understand how their taxation payments are spent, the inclusion of further categories or detail could be considered during the development and design process, at the discretion of the ATO.

Recommendation 2

4.32      The committee recommends that consideration be given to modifying the amendments so that the names given to the functions of government expenditure correspond with those used in the documents published during the Budget process.

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