Senate Economics Legislation Committee, , 8:34:12 to 8:45:14
Senator McDonald questions Treasury on how net zero transformation and fossil fuel export declines are factored into long-term revenue projections.
Topics: Climate change, Emissions reduction
Speakers: Senator Susan McDonald, Dr Shane Johnson, Katrina Di Marco, Unknown Speaker, Senator Lisa Darmanin
Uh I want to turn back to modelling that we discussed earlier today. Um Treasury Group uh told me at the last estimates to uh to the updated intergenerational report, which, as we discussed earlier, had not been released. Umce that was released, it claimed that the Treasury model modelling for the Australia's net zero plan uh was the source of the modelling. Uh given the discussion we had this morning around the ASEAN uh report, the new data we've got on the tripling of coal requirements by 2060. Uh will you be updating the modelling for uh Treasury? Will the revenue group be doing that?
Senator, I might start very briefly and then hand over to Dr. Johnson. Um these are the projections contained in the IGR are very long-run projections. These projections are not built off export individual export categories or individual individual sectors. We model these based on uh forecasts from our macroeconomic group around GDP and around components of GDP. There are particular heads of revenue, which Dr. Johnson can talk through that we where we have outlined particular impacts, fuel excise obviously being the most uh the most obvious of those, but we do not model export revenue or expected tax receipts from any particular sector. I might hand over to Dr. Johnson to add to that.
Just before you move to that, Dr. Johnson. But the uh sorry, I'm just looking for the correct name of it again. Um Australia's net zero transformation treasury modelling and analysis very specifically does do exactly that and models fossil fuel exports and green exports and the decline of fossil fuels and the rise of green exports. Given that that would inform the revenue that Australia would expect to receive over the next period, and I think we we walk through the one 1.2 trillion dollars shortfall that that would, if your modelling was correct, that that would result in. Um I'm just not sure that aligns with your comments just then about not modelling specific uh revenue types and commodity groups.
Yes, Senator. There is a difference between how you think about how you model these things at a macro in in at a macroeconomic level and then how you translate that into revenue. What I'm saying is that I'm happy to pass over to Dr. Johnson is that when we model the revenue, when we model the revenue estimates, we do so off macroeconomic aggregates. So we do it off nominal GDP compensation of employees in the in case of wage and labour income, we don't do it based on specific exports or specific industries. And so to the extent to which macroeconomic group has taken account of those projections that you talked about around different export categories, and that feeds into the aggregates that we use for revenue forecasting, it will be incorporated into that. But we don't do a bottoms-up accounting of how revenue is going to change over time in terms of corporate taxation. But I'll hand over to Dr. Johnson.
So just one further clarification before you speak, Dr. Johnson. Is given given Australia's success in the resources sector and the income generated from the resources sector, and given that the net zero transition and that modelling forecasts the demise of two of our biggest import generators. I'm just seeking to understand how Treasury stands behind that or with that, those kind of assumptions, because that should then also result in a significant decrease in future forecast revenues because of the categories, the size, the dollar value, as opposed to the macro. I understand what you're saying, the macro forecasts around the replacement industry.
Do you want to so uh Shane Johnson, First Assistant Secretary, tax analysis division? Um as Mr. Marco mentioned, um the way we do the uh projections in the intergenerational report is we well and as we do uh any forecast, we take the parameters from our economic parameters and then we map them through to revenue. Um in the IGR, um, because we go to a projection period, we're going out you know, 50-50 odd years. Um what we do as well is we also make a technical assumption that the tax to GDP ratio um hits a particular captain stays down. We do that because that I mean that's been consistent all the way through. From fuel is certainly one. And so what we see over the over the course over the IGR is that we see a reduction in that particular one. But what we don't do is we don't go through a bottoms-up process looking at every single sector. We take the aggregates, we then put a put a cap and then we try we look at what might happen to in particular revenue heads, knowing where future trends are likely to go.
I appreciate that commentary, but given that we have since discovered that the net zero report and the intergenerational report has not been updated for the most recent ASEAN report that speaks to and and partially funded by the Australian government that speaks to the tripling of demand for coal in this South East Asia sector by 2060.
So again, we will do the IGR. I think the IGR, the government has a commitment to do it every three years. I think it's there's a legislative requirement to do it every five years. In terms of those projections, again we we don't typically go through or we don't go through and look at uh individual sector by sector approaches. We take macroeconomic agri. Now, to the extent that those um uh those uh changes in the future around demand for uh exports are factored into the economic uh parameters they will feed through.
Say coal and gas, it's not a dirty word.
Oh coal coal and gas, I don't mind saying it, it's no issue. Like it to the extent that they uh feed through to the economic parameters, then it will then feed through to our forecasts and our projections.
All right. So my suggestion is the um proposition that I'm putting forward is that the net zero uh modelling and the uh IGR modelling is out of date already. And so I'm just you you're saying to me now there will be three years before you you reforecast or you remodel um future future export demand because as it sits at the moment in 2032, coal and gas exports uh will be uh exceeded by green exports, and to date we know that we're not on a trajectory for that to happen.
So i it if if if the um if we end up seeing an increase in demand for coal gas and those those price and that comes through in his higher tax revenue, we still have an underlying assumption within the IGR with the NGO framework that we still hit a cap. So it may change the composition of the of tax revenue, but it won't change the level because we always come back to a cap in the meeting in uh after the medium term into a projection period.
Right.
So I would say that uh the makeup may change, and you know we might get new information between now and the three years, the makeup might may change, but the tip that approach to doing the revenue projections in the IGR is that we take the media, we take the um we take the uh forward estimates and then at some point we'll hit a uh technical assumption where we have a constant tax to GDP ratio, and that's how held constant now. The makeup underneath that may change, but the level is not going to.
So I appreciate that, but Treasury's September 2025 modeling uh that I referred to at the beginning, was used by the Treasurer to warn that a disorderly transition to net zero could leave Australia's economy up to two trillion dollars worse off by 2050. How could they come to this conclusion if you don't look at different commodity classes?
Senator, again that modelling relates to the macro, like in revenue group, our job is to translate that macroeconomic aggregate into a revenue forecast. And I think Dr. Johnson has explained how we go about doing that task. How the how the sort of what you're talking through translates to those macroeconomic outlook is is a question from macroeconomic group, and I think um Dr. Grant actually addressed a lot of that this morning.
All right, well, I I what I would take away from that is that the treasurer's assumptions are now quite dangerously misinformed, and the the updated Treasury model will be an important to revenue group will be an important part of reinforming his.
Senator, I'm not I'm not sure that is the right takeout. I think what we're trying to say is that from a revenue perspective, there'll be a range of things. Should should the outcome that you're talking about transpire, there'll be a range of other things that occur in the economy. From a revenue perspective, and when we're looking at these projections, tax there is a technical assumption about a cap to tax to GDP. That means that revenue is not growing infinitely into the future. And what Dr. Johnson is saying is that should what you're talking about transpire, the composition of where that revenue comes from may change, but it doesn't affect the overall outlook in terms of the revenue story, in terms of total revenue.