Size of Tax Cuts

Okay there will be tax cuts in the 2007 budget (which is good), but how significant will they be?

Dr Cullen makes the point that a surplus is historical and the forecast surplus guides you as to what you can afford. This is basically correct.

However one needs to figure in the propoensity for actual surpluses to be much much larger than official projections. Let’s take the last three years as an example.

The actual combined OBERAC surplus for the 2003/04, 04/05 and 05/06 FYs was $24.2b. Absolutely massive.

Now what were these forecast to be? Well the first time all these years were forecast was in the 2001 DEFU. And the combined OBERAC forecast was $10.4b. So the actual surplus was 131% higher than forecast. And this is not a one off in one year, but over an entire three year cycle.

Now looking at the 2006 BEFU, what are the combined surpluses for 07/08, 08/09 and 09/10? They are $13.3b. Now if these forecasts turn out the same way as the last three years (131% higher than forecast), then the actual surpluses could turn out to be as high as $30.8b.

Oh and let us not forget there is currently $19.1b of contingency expenditure in the forecasts for those three years. Yes seriously.

There is room for massive tax cuts. The key restriction on how big they are would probably be monetary policy, not fiscal policy.

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