Reports warn budget shortfall to hit $80 billion in four years, as Liberals pledge welfare crackdown

Federal budget revenue will be between $60 billion to $80 billion lower than expected in the next four years, as tax collections are expected to decline, according to the latest reports regarding the budget.

The reports come as in-fighting within the Liberal Party has continued over comments made by backbenchers regarding Tony Abbott’s paid parental scheme – some MPs have labelled the scheme as too generous.

Shadow treasurer Joe Hockey said in a speech yesterday while the parental leave scheme will remain, middle-class welfare will be targeted to create a “culture of self-reliance”.

The Australian Financial Review reported this morning next Tuesday’s federal budget is expected to reveal a write-down in tax collections of $17 billion this financial year and this is likely to increase to $20 billion in 2013-2014.

Last week, Prime Minister Julia Gillard announced a $12 billion budget shortfall, signalling tougher measures could be on the table, even measures which had previously been ruled out.

New reports indicate rules regarding company debt deduction could be amended in order to raise new revenue.

But tax experts have warned against making any hasty changes to these debt deduction rules, as any shift could potentially hurt businesses.

CPA Australia head of business and investment policy, Paul Drum, told SmartCompany changes to thin capitalisation were recommended by a Board of Taxation working group, but only if there was to be a cut in the company tax rate.

Last week it was reported the government was considering changing the thin capitalisation ratio from 3:1 to 1.5:1.

A cut in the company tax rate has since been taken off the cards.

“Back last year when the Board of Taxation was undertaking a project for the Treasury to look at how the corporate tax rate could be reduced and how it would be funded, one of the suggestions put forward was that thin capitalisation was probably one area where there would be opportunities to wind it back.

“But we couldn’t be emphatic about it and had no data to support it, and said the Treasury would need to do substantial work to confirm it would not harm business,” Drum says.

Drum says this suggestion was only made because the government was looking at reducing the company tax rate.

“These are tighter economic times and it’s harder to raise finances. It would be plausible, but only as a trade-off for a lower corporate tax rate.”

“What we’re very concerned about is this same report is now being used as a hit list to look at how they can pare back concessions,” he says.

Drum says if the government chooses to make this change, there needs to be a transitional period.

“Businesses will need time to transition from heavily debt-laden to be equity backed or to pay off debt. It should be a two or three-year transitional period if they go ahead with this,” he says.

Australian Chamber of Commerce and Industry economics director Greg Evans previously told SmartCompany changes to debt reduction rules were a way for the government to “hit business to help fill significant budget revenue holes”.

This, Evans says, will impact upon the competitiveness of Australian businesses.

As the Labor Party is facing criticisms over its crackdown on businesses to raise much needed budget revenue, the Liberal Party is facing internal tensions over Abbott’s paid parental leave scheme, with shadow treasurer Joe Hockey signalling drastic welfare cuts.

In a speech to the Institute of Public Affairs in Melbourne yesterday, Hockey said under a Coalition government there will be a “reinvigoration of a culture of self-reliance”, as he targets welfare payments.

Hockey also said “attacking spending” would be necessary to bring the budget back to surplus and re-affirmed the Coalition’s pledge to undertake an audit of the government’s accounts.