Example 7: The difference between a budget costing and a tax expenditure The diagram below shows the difference between a tax expenditures estimate and a revenue estimate for the budget. The axes of the chart are the tax base and the tax rate and the areas shown in the chart represent tax revenue. If in period 0 an activity is subject to a non concessional effective tax rate t0 and at that tax rate the tax base is b0 then revenue from this tax is equal to the area A + B. If a tax concession is provided for this activity that reduces the effective tax rate to t1 and as a result activity increases to a new level of b1, the total revenue collected will now be equal to area A + D. In this example the budget impact of the measure would be the difference in revenue collected (A + D) (A + B) = (D B). — — On the other hand, for measuring tax expenditures, the benchmark effective tax rate is t0, so before the tax change there is no tax expenditure. When the effective tax rate is reduced to t1, a tax expenditure is created equal to the difference between the benchmark tax rate and the new tax rate (that is, t0 t1) times the new tax base — (that is, b1). This is equal to area B + C in the diagram. B: The following are standard conventions for the preparation of fiscal costings: Costings will focus on the effect of a policy on the Australian Government’s key Budget aggregates (both cash and accruals). They will be produced in a manner consistent with normal Budget costing methodologies. Economic data and forecasts used in the preparation of costings will be consistent with the preelection economic and fiscal outlook report. Costings will be on a current price basis. Costs will be on a June financial year basis and costings will be provided for the current financial year and the following three financial years. Full year, part year and one off effects (the steady full year cost will be made clear) will be distinguished. Costings will generally be best point estimates. However, in some cases the Secretaries may consider it appropriate to report ranges rather than point estimates.
Example 7: The difference between a budget costing and a tax expenditure The diagram below shows the difference between a tax expenditures estimate and a revenue estimate for the budget. The axes of the chart are the tax base and the tax rate and the areas shown in the chart represent tax revenue. If in period 0 an activity is subject to a non concessional effective tax rate t0 and at that tax rate the tax base is b0 then revenue from this tax is equal to the area A + B. If a tax concession is provided for this activity that reduces the effective tax rate to t1 and as a result activity increases to a new level of b1, the total revenue collected will now be equal to area A + D. In this example the budget impact of the measure would be the difference in revenue collected (A + D) — (A + B) = (D — B). On the other hand, for measuring tax expenditures, the benchmark effective tax rate is t0, so before the tax change there is no tax expenditure. When the effective tax rate is reduced to t1, a tax expenditure is created equal to the difference between the benchmark tax rate and the new tax rate (that is, t0 — t1) times the new tax base (that is, b1). This is equal to area B + C in the diagram. B: The following are standard conventions for the preparation of fiscal costings: Costings will focus on the effect of a policy on the Australian Government’s key Budget aggregates (both cash and accruals). They will be produced in a manner consistent with normal Budget costing methodologies. Economic data and forecasts used in the preparation of costings will be consistent with the preelection economic and fiscal outlook report. Costings will be on a current price basis. Costs will be on a June financial year basis and costings will be provided for the current financial year and the following three financial years. Full year, part year and one off effects (the steady full year cost will be made clear) will be distinguished. Costings will generally be best point estimates. However, in some cases the Secretaries may consider it appropriate to report ranges rather than point estimates.
Charter_of_Budget_honesty_2012.docx